By Philip Elmer-DeWitt
February 1, 2012

The hardware is the easy part. The trick is to get Hollywood on board

“Apple enters markets to reinvent them,” wrote Piper Jaffray’s Gene Munster in a note to clients Tuesday reiterating his oft-repeated conviction that Apple’s (AAPL) next big thing is an Apple-branded television set.

To be sure, Munster has scaled back his expectations since he predicted that the company would sell 6.6 million Apple TV set-top boxes in 2009 and launch a full-blown TV set in 2011. By fiscal 2011, Apple was still selling fewer than 3 million Apple TVs a year, and calendar 2011 came and went without the television set whose drum Munster has been beating for nearly four years.

The new data point in his Tuesday note is a conversation Munster had last month with a “major TV component supplier” who said it had been contacted by Apple “regarding┬ávarious capabilities of their television display components.” Putting this together with reports last year that Apple was investing heavily in manufacturing facilities to build 50-inch LCD screens and that prototypes of an Apple television were in the works, Munster remains confident that Apple is poised to enter the so-called connected TV market, targeting a late 2012 launch.

But the timing, he concedes, “remains uncertain.”

“We believe that Apple only enters mature markets with the goal of revolutionizing them, as it did with the smartphone,” he writes, adding: “Without a revamped TV content solution, we do not think Apple enters the TV market.”

What might a revamped TV content solution look like? Munster offers three scenarios: (I quote)

1. Apple could simply enable its television to manage a consumer’s live TV service from within a unified interface much like TiVo does, partnering with MSOs [i.e. the cable companies]. As Apple was developing the iPhone many investors expected the company to become an MVNO (Mobile Virtual Network Operator). Instead, the company partnered with AT&T (then Cingular) to bring the iPhone to market in the U.S. Similarly, Apple could choose to avoid the cost and effort of entering the live TV services business and simply partner with MSOs to deliver live, cable TV to the Apple Television. While this would be the easiest and most likely option, it would also be the least revolutionary. Technically, this option would function much like TiVo does today: partnering with MSOs and offering a unified DVR/guidance software interface to make search and discovery easier for the viewer. In some ways, a connected TV’s software is the biggest differentiator that Apple can bring to the table, so this option could still result in a new and fresh product for the television market. Apple could also supplement this with its iTunes Movie rental and purchase service directly on the television.

2. Apple could offer access to live TV from network channels in combination with other web-based video services. One middle-of-the-road option could be for Apple to deliver live TV from network channels (either over the internet or over the air) to the Apple Television. Apple could then leverage a new App Store for the Apple Television to supplement the basic live TV features with Netflix, Hulu Plus, or any content provider that chooses to build an app for the television. In this instance, Apple would also likely continue to offer its iTunes movie and TV content through the iTunes store to the Apple Television.

3. Apple could offer monthly subscriptions, on an a-la-carte basis, for live TV packages with content from content providers. Clearly the most challenging option, if Apple truly wanted to control the entire television experience – which, again, the company chose not to do when entering the smartphone market – it would have to become a virtual MSO (Multiple Services Provider) and offer monthly subscriptions for live TV services. Such an offering would be unlikely given existing licensing arrangements between content providers and service providers as well as the fact that it lies outside of Apple’s core competencies, even in media. That said, it would enable the company to control the entire experience and possibly deliver new features that are currently unavailable through existing television service providers and CE device makers.

Our take? Anybody can build a TV set, although Apple may have bought itself access to better screen technologies. Fixing TV’s broken user interface is right in Apple’s wheel house. Apple’s iCloud and iTunes store might give it an edge, but TV viewers so far haven’t seemed terribly eager to buy TV shows a la carte. The biggest unknown is whether Tim Cook or Eddy Cue can talk Hollywood into signing the kind of content deals Steve Jobs was never, in his lifetime, able to get.

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