Recently, Forbes Magazine posted an article entitled “The iFlop”…

The article by Scott Woolley looks at Apple’s AppleTV device – and it doesn’t have much good to say about it or Apple:

Six months later iTV is a flat-out iFlop. Renamed Apple TV upon launch, the ballyhooed box has sold perhaps 250,000 units–far behind the 1 million sold for the iPhone, which was priced twice as high and has been on the market less than half as long. Apple … provides detailed sales data for the iPod and other digital wonders but won’t reveal any numbers for Apple TV; apparently the truth is too humiliating. A company spokesman declined to respond to written questions.

By even the most generous of metrics, this is a scathing article. Woolley pulls no punches – and he throws a lot of them throughout the article. That said, I am not convinced that the article presents anything more than negative conjecture. It isn’t clear where the 250,000 unit sales figure Woolley quoted – a centerpiece of his argument that the device is a flop – came from. It clearly states it wasn’t from Apple, and no alternate source is cited.

But even if what Woolley claims in the article turns out to be factual, I think he simply misses the point. Unlike the iPod, Apple TV isn’t about near term revenue. Its one step in a longer term media based ecosystem that Apple is working to develop. It is a necessary component that I believe will evolve into a something more complex and important than an iPod for your media center.

Lets take stock – good and bad – of where Apple stands with it…

The Content Picture:

Music: Without question, Apple has more music available than any other digital venue. DRM free music is starting to appear, but it is really slow in coming. (That’s an issue with the studios – not Apple) The only other issue on the music front is that oft repeated call for a subscription service. I’m not sure if there is a big enough demographic for a music subscription model to really take off and become mainstream, but I believe there would be enough people willing to opt-in to one that it would be economically viable for Apple to implement it.

Television Shows: Apple has struck deals for a broad range of video programming assets. They have 550 different television programs from 58 networks. It’s a good number, but the universe here is pretty large, so Apple has some room to grow. There are a couple of downsides here, however. The versions of the programs being offered by Apple are poorly encoded, and only have stereo sound. The metadata system surrounding them is weak as well (better suited to music than video). Both of these need to be addressed.

Movies: This is where Apple is clearly weakest. iTunes offers just over 550 movies, and they are available for purchase only. That number is not impressive, and only having a purchase option limits their appeal. Like the television programs offered on Itunes, the movies are also poorly encoded, lack surround sound, and have weak metadata. Encoding flaws are an even bigger negative for movies, as they are more often viewed in a large screen environment than on the iPod itself. On a positive note, Apple does seem poised to release a movie rental service soon, and that chould change the number of available movies significantly. In short, Apple will need to deliver on a rental option, improve encoding quality, and look at offering HD quality to make their movie service stand out.

Long Tail: Quality media today isn’t only found on broadcast televisions and at the movies. It’s also available on the web. The current version of AppleTV has direct support for YouTube videos, though its lack of support for Flash has limited availability to just those video Google chooses to convert to h.264 – the encoding standard AppleTV understands. And while the video quality of most of these is pretty low, some are quite entertaining and worth watching.

Beyond YouTube, iTunes has great support for podcasts and videocasts. These programs are often exceptionally well produced, and some are provided in full HD resolution. (For a list of some interesting ones, see this post from Jeff Pulver’s blog as well as this Apple TV showcase on iTunes. You can also check out my favorite web show Wallstrip which is available on iTunes.) Apple is doing everything well here – perhaps too well. Unfortunately, itunes isn’t optimized for navigating the incredible amount of web content they have available here, and a new approach to browsing it would really be helpful. Simplicity is key.

The Software Picture:

Software, as usual, is where Apple is setting themselves apart. iTunes has become a ubiquitous media tool, living on both Mac’s and Windows PC’s (Unfortunately, no Linux version is available yet). It has given Apple a desktop reach that is rivaled probably only by Microsoft’s own Windows OS. Though far from the best media player/manager available, its integration of asset management, device syncing, and the iTunes store have created a compelling combination that would be hard for anyone else to match. The biggest problem I have with iTunes is with the store – I should be able to see everything I have purchased online, and re-download any items as required. This “buy-it and back-it-up” approach they suggest is a poor alternative. Amazon does it right with this aspect of Unbox, and Apple should copy them. The other aspect of iTunes which will need to adapt to a subscription-like model is the creation of a more personal and useful home page/media guide. People need an easier way to manage their subscriptions and see what’s on (downloaded), what’s new (unwatched), and what’s interesting (unsubscribed but relevant). Developing this functionality/navigation will be increasingly important for Apple as they take on a bigger role as a personal media hub.

But the software framework doesn’t end with iTunes. Apple also has an application suite called iLife that appears to be taking on a growing role in this ecosystem as well. iLife gives people the tools to create and publish media. The latest version of the suite contains a video application – iMovie ’08 – that lets people easily import video from a digital camera, apply simple edits, and publish it directly to either their own ‘Web Gallery’ on ‘.MAC’, or directly to YouTube. Using the latest iLife, I can record an event – even in HD -and make it available – also in HD – to the whole world, or to just my family and friends. (a .MAC subscription is required for permissioned access) And most importantly, it can happen with very little effort, and no real technical knowledge. I expect a PC version of iLife to be released at some point as well, though for now it’s a good sales differentiator between Mac’s and PC’s.

I believe both of these tools – iTunes (for purchase, subscription,management and playback) and iLife (for capture, creation, and publication) will continue to evolve, and see them as key components of Apple’s longer term strategy. We live in a Web 2.0 world where producing content is as important as consuming it. To support this model, I see iTunes becoming a gateway to uploading content as well as downloading it. It could let you keep track of what you have published as well as what you’ve subscribed to. It would be able to route a video you make to either .MAC or YouTube for publication. It could potentially let you upload songs or videos to the iTunes store if you had an agreement in place to sell them there. From the iLife side, I believe editing and publishing will continue to become simpler. This workflow could even extend to the professional space by adding a sophisticated publication module as a component of Apple’s professional video suite, Final Cut Studio.

Software is the place where I expect to see the most significant changes from Apple- and where the most excitement (and market disruption) will come from.

The Economics Picture:

At the end of the day, the only economics that matter here are those surrounding access to content. And that is the one area Apple has the least direct control over. But they do have considerable influence. I see a lot of press about how Steve Jobs is a monopolist tyrant telling media companies how to price their products and run their businesses. And while Jobs is no choirboy, this characterization is really unfair. Unlike the major media companies, Jobs does have a clear vision of how to move forward in this space and has a track record to back it up. The track record of the media companies – without exception – is one of total failure. For video and movies, the only pricing consideration the media companies have is making sure they protect the DVD packages they sell at Walmart and Best Buy. And that is a sure way to kill the digital business. The video available on iTunes, and everywhere else online for that matter is technically inferior to that found on the DVD’s. It is also encumbered by DRM, that limits how people can use it. It comes without any of the extras found with the DVD’s you buy – not commentaries, cut scenes, or even the case and booklets. And in some cases, it can cost more:

This is what the media companies are able to do today on iTunes with even the limited flexibility they have over pricing. Imagine what it would be like if they could do whatever they wanted.

Despite the criticism being dished out for the “hardass/stare them down” approach Jobs has been taking around pricing, I believe that this strategy is necessary for the long term health of the online media business – both music and video. It’s already clear to everyone but the record executives that produce them that CD’s are way overpriced. And while closer to reality in terms of packaging (I can just buy the songs I want), even $.99 downloads don’t really make sense. People would buy music in bulk if it were priced correctly, and the same is probably true of video content. The producers of programming need to ‘think different’ about their pricing.

If a season of shows were $9.99 instead of $35.99, how many more people would buy it? If every show NBC produced during a season was available for $69.99, would that generate a lot more revenue? (I personally would be willing to pay some premium to free – the cost to me of viewing the broadcast show – for both the convenience factor I’d get from the download, and to have an archive I can go back to from time to time. But for me, it isn’t worth what’s being charged now.) If Apple were to allow ‘flexible pricing’, I would expect to see prices go up significantly, and would expect sales to drop sharply. Of course, the studios would throw up their hands and say “There’s just no market for buying videos online.” And that would be exactly what they said about selling music online before iTunes came along. And if that happens, the only winners will be the P2P networks.

Tying it all together:

So how does this all come together? Apple needs to ‘close the loop’ for this strategy to work. I see the final model looking something like the following diagram:

(click to enlarge)

This model offers a simple way for people to produce, publish, subscribe, distribute, and access content. Some of the content in this ecosystem may be narrowcast for a limited audience, but one fully invested in watching it (e.g. – video clips of the grandkids playing). Some will be re-purposed content from broadcast media (TV and Movies). The rest will be created directly for the web and packaged in an accessible way.

I expect AppleTV to play a bigger role in this media ecosystem. It already has access to YouTube, and will no doubt get the ability to access the iTunes store directly. I also believe it will get tied in tightly to .MAC as well. In this model of the ecosystem, YouTube, .MAC, and the iTunes store become the ‘media cloud’ that links everyone together – content consumer, and both professional and personal content publishers. It’s possible that Apple TV will evolve into the role of gateway for this cloud.

I recognize that I have made some significant conjectures in putting this together, but I believe it is consistent with the moves Apple has made to date, and what is clearly in their interests moving forward.

Time will tell on the details, but it’s clear to me Apple gets it…