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For Apple TV’s future, more questions than answers

Steve Jobs, Apple's late chief executive, announcing a new version of Apple TV in September 2010.Steve Jobs, Apple's late chief executive, announcing a new version of Apple TV in September 2010.
Steve Jobs, Apple's late chief executive, announcing a new version of Apple TV in September 2010.Ryan Anson/AFP/Getty Images

By now, the Apple (AAPL) product launch process is all too well-known: Announce new product. Release new product. Enjoy enormous sales and reap profit. Repeat.

But one item has eluded that halo of success: Apple TV. Though sales of its set-top box topped $1 billion last year—the company has sold more than 20 million units to date—the product has never received the same level of promotion or support as Apple’s more high-profile offerings. (When is the last time you saw a billboard ad for Apple TV? I’ll wait.)

Perhaps part of the reason Apple has been reluctant to go all out with Apple TV is that the company does not appear to believe in the current TV business model and does not have a clear path to changing it as it has been able to do with iTunes and the recorded music industry. Something compelled the company to release Apple TV in 2007 and continue to develop it despite that outlook; the question is whether, years later, the environment has become sufficiently agreeable to accelerate the effort.

Speaking at the Code Conference in Rancho Palos Verdes, Calif. on Wednesday, Apple’s head of Internet Software and Services, Eddy Cue, said today’s “TV experience sucks,” and added that most set-top boxes are little more than “glorified VCRs.” The biggest improvement for these devices is that people don’t have to reset the clock should the power go out, he said.

But Cue offered no details on Apple’s plans for the market, except to suggest that Apple would continue to evolve its offering, as it has done for seven years and counting. (Apple will hold its Worldwide Developer’s Conference this week in San Francisco; though it has traditionally introduced new versions of Apple TV in September, it often uses WWDC to introduce new versions of the software found in its products.)

“You’d expect someone who doesn’t have a huge market share in the set-top box sector to say that,” said Jonathan Gaw, a research manager at IDC. “Right now it seems that everyone is trying to get into the TV business in one way or another, but right now it is tightly controlled by the cable and satellite guys. Those are the ones that are controlling the large majority of the TV experience.”

Apple has seen steady growth in Apple TV sales, despite limited promotion, and could see even more if it decided to push the product into the limelight, said Greg Scoblete, a researcher for set-top box devices at Digital Tech Consulting.

“I would push back on the premise that they need to do a lot more with it from a marketing point of view,” Scoblete said. “While 20 million units in the universe of iOS devices it isn’t that huge, in the set-top box space it puts it in the top two or three spots and that isn’t all that bad of a place to be in the market.”

The problem? Thin margins. With stiff competition and a fuzzy path to more profitability, Apple has resisted emphasizing the minor moneymaker in its otherwise strong product portfolio.

“The universe that Apple TV plays in is one that is very different from tablets and smartphones. It is one of low margins and low dollar figure items,” Gaw told Fortune. “Google is practically giving away its Chromecast device while Roku (with its set-top box) is just scraping by. In Roku’s case they’re doing well, but not making a ton of money from it. Then there is the fact that everyone on their uncle has put streaming capabilities into smart TVs and Blu-ray players. How can Apple TV compete with all that?”

One way: Go heavy on the features that the other players aren’t providing. Apple has shown in the past that it has a knack for taking on established players—as it did in the portable digital audio market when it released in the iPod in 2001—and for reinventing categories that were underserved, as with tablets and the iPad in 2010.

To date, Apple has not been able to demonstrate that it has improved or refined upon what is already available, making Apple TV a harder sell.

“Right now Apple TV is not light years ahead of what Roku or TiVo are doing,” Scoblete said. “There has been talk about a hardware refresh that could add Siri integration, gaming and apps, but we haven’t seen it. With a set-top box it goes way beyond how good Apple could make the user interface.”

For that reason, “Apple has to go all-in on enabling third party apps via its App Store on Apple TV,” said Joel Espelien, senior analyst at The Diffusion Group. “They have done amazingly well with this product, considering it’s basically crippled and doesn’t do what consumers want it to do. If you give consumers the complete Apple ecosystem and UX that they expect in a $99 box that can hook up to the TV consumers already have, these things will fly off the shelves. Once that happens, the ecosystem just feeds on itself. A product like this can become much bigger than they have to date.”

Content is also a concern. Critics say Apple has not provided enough of it, particularly live TV.

“Before Time Warner Cable started the merger talks with Comcast there was this talk that Time Warner Cable would offer some channels through Apple TV,” Scoblete said. “That is what these devices really need to do to take off. People still want to watch more than just streamed [archival] content.”

But that kind of content costs money—quite a bit of it, as evidenced by recent showdowns between content producers and pay-TV services, such as last summer’s battle between Time Warner Cable (TWC) and CBS (CBS). Apple is a company with deep pockets, but it isn’t clear if it would be willing to dig deep—or at least deep enough—to pony up the money to launch a truly successful pay-TV venture without a sense that margins would significantly improve.

“This is not a cheap endeavor,” Gaw said. “If Apple can come up with a deal with content producers that could give [those producers] the same revenue as the pay-TV guys through Apple TV, then maybe there is something there.”

The challenges that Apple faces are much different than those faced by Google (GOOG) and its $35 Chromecast, which has a different business model.

“Everything Google does is really about managing and dissecting data from all of its devices and then trying to sell advertising,” Gaw said. “That is the prism which is how we should view Google. Google is already trying to get the TV makers like LG, Panasonic, and Toshiba to integrate Chromecast directly into the devices. What they released last year was just to show how easily it can be integrated.”

Meanwhile, Apple’s efforts should be viewed in the context of selling more iOS devices, Gaw said.

“Revenue for Apple really comes from its iOS devices including iPhones and iPads,” he stressed. “If they can create and Apple TV that integrates with iOS devices and sells more devices, then they could sell more of those devices and that is keeping with their overall strategy. And it allows them to maintain their closed ecosystem, which has been a key to all of Apple’s devices.”