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By Carl Howe

John Falcone over at CNet's Crave blog asks the question, "Is the Apple TV officially a flop?". Coincidentally, Leander Kahney over at Wired recently asked me a variant of the same question in a recent email. My answer to both: I believe Apple TV is selling according to Apple's (NASDAQ:AAPL) expectations at present, which is somewhat north of 100,000 units sold this year. Why so few? Because Apple hasn't yet introduced all the content and services that fulfill its vision for the product.

I believe that Apple has three features that will fulfill Steve Jobs claim that the Apple TV is destined to be "the new DVD player" for consumers:

  1. Movie rentals. Unless you are a movie connoisseur, you don't buy movies; you rent them. Apple plans to add $2.99 movie rentals to the iTunes store that allow unlimited viewing for 30 days as soon as the movie studios sign off on the deal (which, admittedly, could be never). By undercutting your local Blockbuster and cable on-demand movies and providing a longer period of time to view the movie, we believe that this offer, when available, will rapidly become the second largest source of revenue for the iTunes Store.

  2. High-definition content The Apple TV has often been criticized for not having high-definition movies available, especially given that the device only offers high-definition composite and HDMI outputs. Again, Apple has high-definition movies prepared and ready for sale from the iTunes store, just as Microsoft has done with its XBox movie service. But Apple, noting the challenges with distributing six to ten gigabyte high-def movie files, has kept this offer in its back pocket until the last piece of the puzzle is ready, namely:

  3. Encrypted peer-to-peer (P2P) Internet distribution. Despite Apple's long-standing relationship with Akamai and its new high-definition video distribution system, we believe that Apple has built an encrypted BitTorrent-like distribution system into Leopard, Apple's new operating system scheduled to be released this month. While any consumer will be able to download high-definition movies, Apple users with Leopard or an Apple TV device will be able to opt-in and redistribute those movies to other users in exchange for iTunes credits. In essence, Apple's customers will become a secondary distribution channel for iTunes and will save Apple millions in bandwidth charges to boot. But to guarantee the security and safety of this system, consumers will need Leopard as their platform.

Why are we so bullish on Apple TV rather than joining the chorus claiming it's just a losing product? It's simple: unlike most of Apple's products, Apple TV revenue is being deferred over 24 months to allow for software upgrades, just as the iPhone is. If it were just a product that missed the mark (unlikely, but always possible), Apple never would never have planned to defer the revenue from selling it; it would have treated it like an iPod and recorded the one-time revenue. But the 24-month amortization of the revenue indicates that Apple plans at least two years of enhancements and upgrades to the device. Judging the device to be a flop without knowing its targeted feature set seems at best premature.

At Walt Mossberg's D conference, Steve Jobs called Apple TV "a hobby." We think that was simple misdirection. Apple TV is a hobby when all the pieces of the product aren't available. But when Apple actually fleshes out the full offer, Blackfriars projects that that hobby will pull in more than $1.8 billion in fiscal 2009. And that would make me call that hobby a business -- a big business.

Source: Much More In Store For Apple TV