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Apple's HD Streaming Gamble

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Given Apple's late announcement of the live stream, posted as a media alert the night before, as well as its choice to use HTTP Live Streaming, which eliminated the ability for global viewers on the platform of choice for 97% of the world's computers-Microsoft Windows-to view the stream live, my money's on delivery of approximately 107,000 live streams, with the rest of the HTTP page views coming from people who were interested in the news viewed popular Apple news websites such as Engadget and TUAW, since they either didn't know about the stream, chose not to watch it, or couldn't watch it (if they were on Windows).The bump in HTTP page views could easily be accounted for in the number of non-Apple viewers checking Apple's website and other Apple news sites powered, in part, by Akamai.

The Implications
Here's Apple's bigger gamble, though: with the advent of the new Apple TV everything viewed on the device is going to be streamed, and almost everything streamed on it is geared toward HD streaming.

"We have one more thing," Jobs said, late in the event, pointing toward the screen where thing was scratched out and replaced by hobby. "Actually it's one more hobby. We've had Apple TV for two years, and we've received lots of feedback."

"We've heard that Apple TV users want Hollywood movies and TV shows, they don't want amateur hour," Jobs continued, with obvious reference to the majority of user-generated content that Apple eschews in favor of premium content. "We've also heard they want lower prices for content, and they don't want to think about managing storage."

Jobs then revealed the slimmed down Apple TV, at less than 25% the size of the original, a form factor that eliminates any form of storage in return for the much smaller size.

"The new Apple TV delivers HD first-run movies in streaming, no synching required," said Jobs. "Apple TV is all about movies, TV shows, and music, all in HD where the content is available. We want everything in HD."

Consider the conundrum for a moment, though, where Apple eliminates buying content to store on the Apple TV and instead rents first-run HD movies, on the day and date they come out on DVD, for $4.99 each.

If Apple faces an issue delivering a smooth live event to 100,000 people on the CDN with arguably the broadest reach in the business, what are the implications of Apple serving up ten times that many HTTP on-demand streams to Apple TV users on the day that, say, Inception becomes available?

Granted, Roku's been at the HD delivery game with Netflix and over-the-top content for quite some time, and plans to add 1080p streaming as a software update to its suddenly lower-priced boxes later this year, but Apple's marketing machine means the new Apple TV may bring a huge spike in HD streaming content, at a time when the industry still may not be set to handle scalability of said HD delivery.

Even if Apple had been able to power only half of these HD streams from its almost-completed data center in North Carolina, the demand curve for simultaneous viewing of on-demand HD videos may force Apple to rely more heavily on CDNs at a time when its stated goal, like Microsoft before it, is to bring a majority of its traffic in-house.

Add to this the fact that a recent FCC report notes that consumers are only getting half the data rates advertised by most internet service providers, and that the average speed is hovering below HD streaming levels, and one begins to wonder what Apple TV viewers will get for that $4.99 rental amount.

In other words, what if the HTTP streaming quality drops, along with network congestion, down to a data rate that's below HD delivery? Will consumers face intermittent glitches and pauses like the ones faced during yesterday's live event, or will they be paying for HD and only watching SD versions?

The answer on SD viewing may be "yes" based on the Iron Man 2 clip shown during yesterday's event; several times within the 12-second clip, the video appeared to falter.

While Apple provides 24 hours in which to watch a rented movie or TV episode, the inability to guarantee HD delivery at the time a consumer wants to view the content is a potential trouble spot.

To counteract this, Apple will continue to sell TV shows in the new iTunes 10 store for the same $2.99 per episode rate, alongside the HD rentals of TV shows for $.99 per episode.

"Apple TV users don't want a computer on their TV," said Jobs, "and they don't want to synch to a computer, even if they want to pull videos off their computer."

For all the talk about eliminating synching between computers and Apple TV, the company is hedging its bets on the ability to view downloaded content with a feature called AirPlay. AirPlay replaces AirTunes in iTunes 10 and, while AirTunes allowed iTunes users to stream their audio to one of several Airport Express wireless access points, AirPlay allows iTunes-equipped computers-and iPads-to stream their content directly to an Apple TV device. 

The iPad streaming to the Apple TV is interesting, given the fact that the iPad isn't capable of viewing HD content. It's also unknown whether an update to QuickTime X, which will be available as part of the OS X 10.6.5 operating system update, will allow HD content creation for the iPad (the current version of QuickTime X allows HD content output for computers, not iPads).

Still, for all the uncertainty, Apple does offer one more option for viewing HD versions of first-run movies on the day they are released: tucked inside the Apple TV user interface, alongside the rental button, is a Wal-Mart button. Jobs didn't mention the button at all, but one can surmise it's for buying the physical disc, not for streaming. 

In other words, the company is going to make money on the sale of physical DVDs, even while it convinces users to switch to HD streaming.

Like so many other Apple strategies, this is a phased approach: Offer the future, but only in small increments. In keeping with that strategy, the iTunes 10 update is available today, but all iPod and Apple TV hardware updates will be available later this month.

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