Study: iTunes' Pay TV Model Headed for Extinction

The future of Internet television will be dominated by ad-supported models, according to a report from Forrester Research that raises new questions for the future of Apple's (Nasdaq: AAPL) iTunes-focused and Apple TV video download service.

Even as the report predicts that the market for paid downloads will nearly triple in 2007 to US$279 million, it claims that the paid download market is ultimately a dead end. Media-hungry and tech-savvy individuals, not mainstream viewers, are now feeding the pay-to-download market, the research asserts. The key to reaching mainstream viewers, Forrester predicts, will be through ad-supported models that let consumers easily connect Internet video services to their living room televisions and other devices.

Apple's CEO Steve Jobs rocked the music industry by becoming the dominant seller of online music, and he did it by starting with a killer device -- the iPod. With television, on the other hand, Apple started selling shows before it had a killer device -- the Apple TV. Also, the Apple TV is no iPod. While popular among Apple aficionados, the device, which connects a TV to iTunes running on a Mac or PC, has so far failed to grab the attention of broader tech buyers, not to mention living room viewers.

The Steve Jobs Model

Jobs has consistently fought the music industry for the right to sell music that customers can buy to own, as opposed to renting or subscribing to it. He also fought for years to keep the price at $0.99 per song. At $1.99 for TV shows, though, Apple faces a consumer challenge -- no matter how low the cost, the viewer still has to buy it. Mainstream television viewers are accustomed to watching televisions shows that are free of charge and supported by advertisements.

Most people would prefer to buy and download shows they own forever -- the iTunes model -- but are stymied by the fact they still have to find the budget to pay for them, Phil Leigh, principle analyst for Inside Digital Media, stated.

"The pay-per-view is going to be a niche," Leigh told MacNewsWorld. "It's not the case right now, but there's good reasons to question it."

iTunes Out, Apple TV In?

"I think Apple will change how they deliver TV shows, but not starting with iTunes," James McQuivey, a Forrester analyst, vice president and lead researcher for the report, told MacNewsWorld. Apple TV, he said, is like a great novelty that only a few million people will want when it's tied to iTunes, especially if the same shows are available free online at similar or better quality.

"I expect the Apple TV 2.0 to be an Internet video box capable of streaming video directly off the Web, much the way the iPod will play audio ripped from your CDs that you didn't buy from Apple," McQuivey speculated. "Once you can stream ABC.com on the Apple TV, you won't want to spend extra to buy the episodes unless you're a big fan or want to view back episodes, which you will have to pay to do.

"Sure, Apple will sell fewer downloads per box, but they'll sell twice as many boxes, which earns them a lot more money than the downloads do," he added.

Apple TV has the potential to be huge, but again, not through iTunes, Inside Digital Media's Leigh said.

"I think [television online] will be ad-supported," he said. "The exception is, the movie rental business, which is a multi-billion dollar business. If Apple can get viewers to rent movies like Amazon (Nasdaq: AMZN) is doing with TiVo (Nasdaq: TIVO), that's a big windfall. And in fact, Apple would probably make more money that way than it does selling them for $15 or $20 because the volume will be so much larger."