Some time later this month, Apple will start shipping Apple TV, its new set-top designed to enable iTunes Store (ITS) video and audio content to be easily played on high-definition TVs and their accompanying surround sound systems (here is the official product page). In our note about this year's Macworld Conference and Expo we pointed out that while the iPhone received most of the media and blogger attention, the set-top box and the announcement of 50 million TV shows and 1.3 million movies sold at the ITS deserved more industry and consumer attention (see this previous note; here's the Apple TV release).

Apple TV and the PC-TV divide 

The Apple TV set-top will help bridge the traditional divide between the PC and the TV -- in this case, the divide between computer-centric Apple iTunes video content and the consumer electronics world of TVs and surround sound audio systems. Previously, iTunes users could cobble together solutions using Apple (Airport Express, Mac mini, etc.) or third party products, but it was not a simple, seamless out-of-the-box experience. But with the imminent arrival of the $299 set-top, Apple is finally offering its Mac and Windows customers an easy way to bridge the PC and CE divide.

Not usually the first, but usually compelling 

It's important to remember that it just does not matter that Apple TV is not the first product to help play PC-based video and audio content on TVs and surround sound systems. The iPod was not the first portable audio player the and Mac operating system interface was not the first graphical desktop, but both redefined the digital audio player and PC markets, respectively. This new set-top box will succeed because it allows Apple to excel at what it does best -- solving difficult technology usage problems in a way that reduces or hides the complexity of the task. Naysayers and those who dislike Apple can argue all they want about the fact that the Apple TV is not new or not innovative or is too expensive for their tastes, but those same arguments could be made for many other successful Apple products, such as the iMac, the iPod, and ITS audio and video content. All that matters in the end is consumer adoption -- not the approval of posters at technology community sites.

Besides interest, customers will need the right software, networks, and TVs

What will define the potential market size for the Apple TV? Consumers first and foremost must have the desire to view or hear ITS content on CE devices. They must also be willing to spend $299 on an additional set-top (they most likely have a cable or satellite box, and maybe a personal video recorder). And last but not least, they will need all of the following:

• A Mac or Windows PC with iTunes. iTunes software (version 7 or later) is a free download and available on both Mac OS X and Microsoft Windows XP computers (a future update will support Windows Vista).
  
  
• A high-speed wireless or wired home network. Most discussions of the set-top revolve around its wireless networking capability (using 802.11b/g/n), but the product will also work with a wired network (10/100 Base-T Ethernet). See this Apple page for more technical details.
  
  
• A modern TV. Apple product literature says that consumers using the set-top will need a "widescreen (16:9) enhanced definition or high definition television with an HDMI, DVI, or component video input."
  
  Enhanced definition TV, sometimes called EDTV, can be as "low" as 480p (it is not 480i, the standard definition for analog TV in the US). The sweet spot of the high definition (HD) TV market these days in terms of quality and price is a 720p-capable set (that can down convert 1080i signals if necessary), with high-end products supporting 1080i and 1080p. Apple TV product literature notes that the set-top supports current ITS video with a resolution of 640x480, as well as video with a resolution of 1280x720 (720p).
  
  
• iTunes video and audio content. Apple-centric consumers have been able to hook their computers up to their surround sound system with the Airport Express since June of 2004 (see this release), but previously there has been no Apple-branded solution for simplifying the computer to TV connection. With Apple TV, ITS video and audio will be both synced (cached on an internal 40 GB hard drive) and streamed to the set-top from the various PCs in the home.
  

The Apple TV launch is a perfect time to move to HD ITS video

Currently, Apple does not sell high definition video on the ITS (it does offer some movie trailers in HD, in either 480p, 720p, or 1080p formats). But many potential Apple TV customers are receiving HD content on their TV today from a variety of competitors. Microsoft sells or rents high definition video at the Xbox Live Marketplace (not all content is 720p HD video; some is standard definition 480p content). Cable and satellite TV providers offer numerous HD channels and on demand movies, usually in the 720p or the 1080i format. In addition, next-generation DVD players (HD DVD and Blu-ray), including the optical drive in the Sony Playstation 3, support video content that is generally in the 1080p format.

The official release of the Apple TV will allow the vendor to do the inevitable today -- improve its video quality. In October 2005, Apple first announced it would offer video in the iTunes Music Store, and the content it sold -- mainly music videos and some TV shows -- was formatted at the very low resolution of 320x240, which looked fine on the new video-capable iPods but provided a poor viewing experience on progressive screen PC monitors (PC monitors and HD TVs are almost identical) and even standard analog TVs. Last September, Apple announced it would sell full-length movies and that all video sold on the renamed iTunes Store would be delivered at a resolution of 640x 480 -- what it called "near-DVD quality." However, audio was still stereo only, not 5.1 surround sound compatible as on most standard definition DVDs.

It's 720p with surround sound this month ... or sometime soon 

With the release of Apple TV, the company should upgrade its video resolution to high definition quality. Why? Because Apple TV and the current resolution of ITS video will look substandard on HD TVs. The vendor needs to bump up the resolution to 1280x720 (that is, to the 720p format), a high definition standard that will make the video content look appreciably better on the intended TVs. Apple should also deliver support for surround sound in place of its current stereo support. These two enhancements would blunt the impact of competitive HD video offerings and further justify the investment in the set-top.

Could Apple hold off on this migration? Yes, it could avoid a February upgrade. But moving to HD is inevitable, as the Apple TV will create the expectation of high quality video and HD video competitors like Microsoft and the cable companies will market their resolution advantage if Apple does not enhance its own offerings. Besides, for a company that prides itself on innovation and leading technology, delivering Apple TV without HD content would seem -- in the words of typical blogging commentators -- lame.

The downside of going HD 

On the surface, the move to HD video seems like a major benefit to consumers and even to Apple. But of course, there are some negatives for enhancing content resolution. These include:

• Bandwidth and storage issues for customers and Apple. Enhanced resolution content means video files will be much larger (see the above graphic). Not only will consumers have to wait longer to complete downloads (and to start watching a video during the download), but they will also need more storage capacity for the files. For consumers who have broadband providers with monthly download caps, multiple movie downloads could fill up their quota relatively quickly.
  
  For Apple, the larger file sizes will require more storage capacity, and they will require increased bandwidth to support individual purchases and peak download periods (for example, when a popular new movie is available).
  
  
• Complaints from previous ITS video customers. Customers who purchased Cars or School of Rock at 640x480 and in stereo will not be happy when new buyers get the same title for the same price, but this time in HD and with surround sound. Apple has weathered this storm before with its previous resolution upgrade, but it can't avoid the wrath of annoyed users who will saturate the blog posts and comment pages of sites like Engadget and slashdot.
  

By: Tom Rhinelander, NRG Analyst