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By Carl Howe

Walt Mossberg yesterday praised the Apple (AAPL) TV device yesterday in his Wall Street Journal Column, while David Pogue raved about its simplicity in yesterday's New York Times. One of the reasons that Walt liked the device so much was its simple-minded utility:

Like the iPod before it, Apple TV isn't the first gadget in its category. Several other companies have made set-top boxes or even TV sets and game consoles that could link the TV to the digital content that people have on their computers. But none has found a mass audience for this functionality, mainly because they tend to be hard to set up and confusing to use. Apple is hoping that, just as the iPod trumped earlier, but geekier, rivals, Apple TV can do the same by making a complex task really simple.

Part of the secret of Apple TV is that, like most of Apple's products, it doesn't try to do everything and thus become a mess of complexity. It can't receive or record cable or satellite TV, so it isn't meant as a replacement for your cable or satellite box, or for a digital video recorder like a TiVo (TIVO). It can't play DVDs, so it doesn't replace your DVD player. Its sole function is to bring to the TV digital content stored on your computer or drawn from the Internet. Like a DVD player, it uses its own separate input on your TV set, and you have to change inputs using your TV remote to use it.

Technically, the Apple TV may be simple, but its effect on the TV industry will be anything but. Why? Because TV business models that have thrived for the past thirty to fifty years that relied on:

  • Advertising-supported TV. From Kraft Theater and the Hallmark Hall of Fame in the 1950s to Mobil-sponsored Masterpiece Theater in the 1980s and 90s, advertisers, not consumers, have always been the ones who paid for broadcasts. That meant that they determined what consumers got to see -- and what got left on the cutting room floor.
  • Prime-time programming. Broadcasters place the best shows in 9 and 10 pm prime-time slots, hoping to get consumers to schedule their lives around the next episode of Lost or American Idol. But this also means that what good content a TV network offers is scheduled at the same time as other networks' prime content. Appointment-based TV also conflicts with real-world consumer activities like business dinners and PTA meetings.
  • Bundled content. Cable companies (and now telcos like ATT (T) and Verizon (VZ)) have been able to charge high monthly prices by pointing at the value of hundreds of channels for one price. Never mind that 50% of those channels are running infomercials that deliver revenue to the cable operator or 75% of the audience will never watch a single show on the Golf Channel. Rather than miss the opportunity to watch an occasional program of Iron Chef on the Food Channel, consumers have just accepted content bundles as the way things are.
  • Apple TV is about to attack the fundamental assumptions underpinning the TV business just as the iPod cut the legs out from under CDs and radio stations. How? Because with Apple TV combining the flexibility of the Internet with a living-room, big-screen experience, consumers now will:

  • Vote for programming with consumer dollars. When a consumer buys an episode of Grey's Anatomy from the iTunes Store, that revenue flows directly to the distributor of the program. Who cares whether Proctor & Gamble liked the show and felt it was worthy of their sponsorship -- iTunes cuts out the middleman and let's the consumer's voice speak in the language of business: in cash. A side benefit of actually paying for programming is that the consumer buys time as well; an hour show like Studio 60 plays back on Apple TV in just 44 minutes, with no need to skip commercials as they would on a TiVO.
  • Watch what they want, when and where they want it. Want to watch American Idol on Wednesdays at 6 pm? Apple TV makes that just as easy as watching on Monday nights. Want to watch both Battlestar Galactica
    and Desperate Housewives, despite the fact they are both scheduled for Sunday nights? Just buy both shows and watch them whenever you want. Viewers can even take them to work to watch over lunch on their iPods if they want. Try that with a TiVO show.
  • Enjoy TV programming a la carte. With Apple TV and iTunes, senior citizens don't pay for Disney movies and families don't pay for R-rated movies when Apple TV makes every show a conscious purchase. Does this mean a lot of niche channels will see subscriptions drop? Absolutely. But that just means their cable subscription numbers weren't real anyway -- customers who won't actually pay for a product aren't really customers.
  • In my view, cable companies like Comcast and Time Warner and TV-deploying telcos like Verizon and AT&T are going to be hurt the most by this Apple's new entry into the living room. Their entire business models are predicated on ever-rising average revenues per subscriber (ARPUs). But with average cable bills rising past the $100 mark and actual TV watching declining due to the flood of too many channels, consumers will defect to Apple's a la carte pricing model where they can control their monthly bill. That trend will call into question the returns on investment expected for $200 billion fiber rollouts.

    Will we see these business changes overnight? Not a chance. The iPod took five years before it was an international phenomenon. I expect Apple TV to have a similarly long gestation period before it becomes a icon in living rooms and a part of the American consumer lifestyle. But in the process, we will see time-strapped consumers move away from today's bundled TV models that waste their time and toward Apple's pay-for-what-you-get model. Apple and iTunes will become what I predicted it would 18 months ago: a new pay-TV network for the consumer, including both free video podcasts and pay TV shows and movies.

    Apple TV may be a simple consumer electronics device, but it is one that will, nonetheless change the TV business. Today, Apple ads contrast "I'm a Mac" with "I'm a PC". In five years, they will compare "I have Apple TV" and "I have cable TV". Cable and telco executives will be asking themselves, "How did we let this happen?" The answer to that is simple: they gave the customer everything they could think of, while Apple TV gave customers what they wanted. And in business, that's a huge difference.

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    Source: Apple TV: Arriving Just in Time to Give Consumers What They Want