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You're Watching the iTunes Network

With a few happy exceptions, my favorite TV shows have one thing in common: They get canceled. Firefly? Dead. Farscape? Axed. Arrested Development and Veronica Mars? Struggling for life. That's why Wednesday's announcement that Apple (Nasdaq: AAPL  ) was offering a handful of ad-free TV shows for download via its increasingly inaccurately named iTunes Music Store piqued my interest. iTunes has the potential to radically change TV's business model, saving beloved shows from early cancellation -- so long as fans like me are willing to pay up.

Apple's initial iTunes video offerings are underwhelming. Only five shows from Disney (NYSE: DIS  ) are available for download, although they include Lost and Desperate Housewives, two of TV's most-watched series. And though $2 a pop to download an episode the day after it airs doesn't sound too unreasonable, paying $35 for the entire first season of Lost is only slightly cheaper than buying the feature-filled DVD version.

But though that might sound disappointing, think of it this way: Apple just created a direct conduit between the folks who create TV shows and their loyal viewers. Rather than relying on multiple layers of middlemen -- TV networks, advertisers, local affiliates -- viewers can now fund their most beloved shows directly.

Suppose Fox does cancel the low-rated, critically beloved Arrested Development, which had 3.19 million households watching its most recent episode (according to Nielsen ratings). The producers have already shelled out about $1.5 million per episode to produce, but they can then take their show to iTunes and offer fans the chance to preorder an entire new season for $35. Even if Apple takes 33% of all revenues for iTunes video downloads -- its reported cut on the music files it sells -- just 2 million viewers at $35 each would leave the Arrested folks with $2.13 million per episode for a full 22-episode season, an after-cost profit of $632,000 per episode. The show would be profitable before fans saw a single frame of new footage; ad revenues from TV airings, high-quality DVD sets, and future downloads by new fans would just be additional gravy.

An iTunes video future won't be rosy for everyone. If the technology gets big enough, ABC itself -- and every other network on the air -- could conceivably suffer ratings declines as viewers download series directly from the studios producing them.

That's a big if. The relatively low picture quality, small selection, and high price of iTunes' current offerings may fail to excite viewers, and it's possible (though unlikely) that the video iPod will flop with consumers. Even if downloading video does catch on, Apple may not ultimately be the biggest beneficiary; the recent success of the iPod and iTunes Music Store aside, the company has a history of pioneering great technologies, only to watch rivals capitalize on them. Still, it's an exciting possibility -- one that should have loyal couch potatoes crossing their fingers, and TV networks quaking in their boots.

Further iFoolishness:

Fool online editor Nathan Alderman has probably spent too much time thinking about this sort of thing. He's the proud owner of an iBook and a newly obsolete iMac (sigh) but holds no financial position in any companies mentioned above. The Fool has a disclosure policy.

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