With all of the hype of the past week focused on the release of the new Samsung Galaxy S4 and its potential impact on Apple's (AAPL +0.01%) iPhone sales, little attention has been paid to developments in Apple TV. While in most respects these two events couldn't be less related -- the Galaxy S4 is the flagship smartphone from Apple's biggest rival, and Cupertino itself refers to Apple TV as a "hobby" -- there's one unifying feature that couldn't be more important. The commonality is the centralization of media in a captive platform specifically designed to improve user retention integrity -- that means both companies want to keep all your media stuff in one place so you'll stay loyal.
The concept of an ecosystem pioneered by Apple is, on its face, a method by which multiple devices can interact for improved efficiency, ease of use and convenience. From the companies' perspectives, however, the ecosystem is a means by which to make a given user more and more reliant on one platform for all of his or her needs. This is what's commonly referred to as creating a "sticky" user experience. Apple's little pet project, which has actually been available since 2007, is one more attempt to up the stakes in making iOS more sticky; with Samsung rolling out its own Media Hub, the current upgrade to Apple TV is very well timed.
What does Apple TV do?
As much as we may all have heard of Apple TV, being aware of the device and having a clear understanding of its purpose are hardly the same thing. The small square device hooks up to both your TV and you Internet connection to allow you to network your TV into the Apple ecosystem. That means the content you have in iTunes -- including both music and videos -- can be played on your TV. You can also rent videos directly from iTunes and display photos that are in iPhoto. The final piece of the basic functionality is the ability to turn your TV into an auxiliary monitor for an iOS or current Apple OS.
In addition to these basic features, certain premium services are available through Apple TV. Hulu just announced that its Plus service has received a major facelift to make it more functional in the Apple TV format. Each of these premium services requires additional subscriptions, and, hence cost, but can supplement the overall experience. To put some of this in context, Apple shipped 5 million devices last year. While this represents less revenue sitting in the change jar in Cupertino -- remember that the company has come under attack for not returning more of its $137 billion in cash to investors -- the device is slowly gaining in popularity.
Why Apple TV might matter
Since we can clearly rule out, at least for now, revenue enhancement as a reason Apple TV might make a difference, you might wonder why the device matters. The two reasons it's worth following the progress of this little device are the sticky user experience and the chance that it might be a signal of things to come in other product segments. As a hint for the latter topic, in its current version, Apple TV got a new single core version of the A5 chip that isn't being used in any other device at present.
In terms of creating a sticky user experience, this is both a draw and major holdback of the device. If you're already fully immersed in the Apple ecosystem, the little set-top box is a great addition because it seamlessly communicates with other Apple devices. On the other hand, if you work in a Windows or Android environment, compatibility issues will be a major concern. In these other formats, videos won't play through Apple TV, meaning you'll need to translate your videos to make them compatible. While not a terribly difficult process, given the available alternatives to Apple TV, I'm not sure I'd spend $100 to buy myself a lot more work.
The interesting spinoff potential for Apple TV comes from the new chip, which is the upgrade to the device for 2013. While the upgrade will help Apple control costs for the device, the availability of a new lower-cost prompts questions about the company's plans for a lower-end iPhone. This would seem like a logical use for the chip, but it still doesn't answer whether Apple will choose to alter its premium image by going low-end. The cheap phone approach is what has allowed Samsung to become the highest-volume phone manufacturer in the world.
Regardless of the alternative uses Apple may envision for the device or its components, Apple TV makes the company's ecosystem an even stickier experience for those who use it. As more and more TVs come equipped with network capability, Apple must stay in the fight to influence that network experience. Apple investors should follow this development, because it represents a significant opportunity for the company.
