Apple’s Next Move

How Steve Jobs can put a hammerlock on digital video.

When Apple released the iPod in October 2001 and launched the iTunes Store a year and a half later, only the company’s most fervent fans would have predicted it would become a force in digital music. Now, all indications are that Apple wants iTunes to become the place for video-on-demand. Within three months of introducing a video iPod, the company has sold more than 3 million videos. Recently it began offering NBC shows like Law and Order and The Tonight Show for $1.99 apiece to complement its collection of ABC/Disney titles like Desperate Housewives.

As it tries to become a major power in the video world, Apple will face far greater obstacles than it did in the music biz. While record companies, fearful of piracy, refused to create an infrastructure to sell digital music, Hollywood has been inking deals with cable companies and technology companies. Last month, CBS and Comcast announced a video-on-demand service that will offer “digital rentals” of CSI and Survivor episodes for 99 cents a pop. NBC and DirecTV have worked out a similar deal. Not to be outdone, TiVo is planning a way for customers to download programs to portable devices. The BBC has been trying out Kontiki, a company that uses peer-to-peer software to allow users to watch movies, TV shows, and music videos on their PCs for up to a week after their original airing.

For Apple to become a major player in the digital video business, two things must happen. First, they’ll have to convince downloaders to pay them $1.99 to own movies and TV shows instead of a dollar less to rent them over cable or satellite. More important, Apple will have to alter course and become more than just a portable-content provider. Music on the go makes sense. You can listen to Johnny Cash while you work out or yank weeds from your garden. But movies require undivided attention. You can’t watch Walk the Line and drive on the expressway.

While the iPod has given Apple a foothold in cars and offices, it has yet to make the move into living rooms. The cable companies have a clear advantage here, as does Microsoft with its Media Center PCs and the enormously popular Xbox. Apple will become a force here on the day when the iPod is expressly designed to plug into your television—not to mention your car stereo and broadband network. If Steve Jobs can make the iPod an entertainment hub, Apple will be the company to beat, a feat it could never accomplish with personal computers.

But that’s a big if. Apple’s attempt to cram the functionality of the iPod into a phone has been a failure, namely because you have to hook it up to your PC to download music. Music and video that sound and look fine on an iPod aren’t necessarily up to snuff on high-end stereos and big-screen TVs, especially as consumers slowly embrace high-definition television. While it takes only a minute or two to download a song from iTunes, it can take hours to download video that looks good on a big screen. That gives set-top boxes a distinct advantage.

The longer the iPod stays anchored to the personal computer, the further behind Apple will fall. Although the engineers in Cupertino have their work cut out for them, untethering the iPod isn’t an insurmountable task. There are already products on the market that do what a wired iPod would—for example, the Motorola E815 is a combination cell phone, MP3 player, and digital camera that can connect to a broadband wireless network. The question is whether Apple will be able to gin up a wireless iPod—perhaps one that downloads shows and beams them to your TV—before it gets lapped by the field.

Apple’s first step should be to create a vast media portal, essentially an for digital downloads that uses its iTunes store as a foundation. Apple already has a profound advantage in that it sells bits and bytes rather than pieces of plastic. There’s no need to set up shipping centers around the world—all it needs is to buff up its servers. The company also can survive on much narrower margins than Amazon, because it doesn’t have to profit from selling content. It uses digital music and video to sell more and more iPods, where the real money is.

The company has already sketched out a description for such a portal in numerous trademark applications. Apple filed three trademark applications in October for something called “Vingle“—what’s described as “telecommunications services, namely, electronic transmission of downloadable audio and video files.” According to the application, Vingle would include online chat rooms, bulletin boards, and community forums that would focus on “entertainment, music, concerts, videos, radio, television, film, news, sports, games and cultural events.” One of the filings mentions a chain of retail stores; the other deals with computer hardware.

The descriptions that go along with Apple’s trademark applications are often vaguely worded. But a shopping supercenter coupled with a wireless iPod that could plug into your TV and stereo would offer a serious value proposition for Apple. A revamped iPod and iTunes makes too much sense not to have crossed the minds of Apple executives. It can be folly to predict Steve Jobs’ next move, but this is one he almost has to make.