Apple TV Will Remain A Hobby Until Someone Shows Apple The Money (Or Apps)

During the Q&A session of their earnings call this week, Apple COO Tim Cook fielded a question that he gets seemingly every earnings call: what’s the deal with Apple TV?

The question is a good one. While Apple is spending plenty of time and money on new products such as the iPad, which at least in part aims to change the way we consume media, Apple has largely neglected the Apple TV (a device, which it seems, would have a similar role). This time, Cook gave a little more insight as to why that is.

It’s still a hobby,” Cook said, repeating the line he and CEO Steve Jobs have used time and time again to describe the device. But he continued on with a bit more. He said that if you look at the markets Apple is in, computers are a 300 million unit a year business (industry-wide), cell phones are a 1.2 billion unit per year business, and even MP3 players are a 100 million unit per year business. “These are enormous markets,” Cook noted. “The market for Apple TV is not, in our view, nearly that large yet. That’s why we classify it as a hobby,” Cook went on.

In other words, Apple isn’t taking it too seriously because they haven’t yet figured out a way to make a lot of money off of the device. And as we all should know by now, Apple loves to make money. It doesn’t make products just to make them. That’s why the Apple TV’s position remains a weird one. For now.

Cook also said that the “hobby” wording was mainly because Apple didn’t want to trick people (presumably investors and analysts), into thinking they were taking the product seriously at this time. You might think that’s just a way to deflect criticism that it hasn’t been a hit product (on the scale of say, the iPhone), but Cook also noted that sales of the device are up 34% year over year.

Further, he went on to say that, “a number of us love the product, and use the product. We continue to think there’s something interesting there.” That can be read as, “we’re not giving up on the product, we’re just waiting for the market to mature.”

Perhaps Cook took this opportunity to expand his thoughts a bit about the Apple TV because he hears this questions over and over again. There are also no shortage of blog posts from Apple TV owners out there (like me) who enjoy the device, but wish Apple would take it more seriously. But what Cook says is undoubtedly true. Just look at Apple’s other businesses. They make billions on the iPhone, billions on Macs, and billions off of iPods. With both Macs and iPods, they make that money off of high margins on the hardware. With the iPhone, it’s largely from the huge subsidy AT&T pays Apple for each device sold.

The Apple TV, at $229, likely has a pretty good margin for Apple, but the problem is that thing is entirely dependent on video content, which Apple simply doesn’t have enough of at a compelling enough price. This is, of course, Hollywood’s fault. When Apple unveiled the Apple TV in 2007, the company probably thought Hollywood would fall inline with its video distribution plans (for both television shows and movies) the same way the music industry had. But Hollywood wasn’t in nearly the position of weakness that the music industry was in (but with those plummeting DVD sales, could be soon), and as such, has been playing hardball with Apple.

For example, it took Apple a while to get the rights to be able to rent movies over iTunes (and the Apple TV) rather than making users buy them outright. Then it took more time to get HD content (which there still isn’t a ton of). And the latest rumors have Hollywood balking at Apple’s attempts to offer television subscription services, rather than making users buy each show. And they’re probably not too keen on the idea of Apple storing content in the cloud and streaming it to users either (at least, not without the ridiculous windowing deals like they have with Netflix).

Just as with music in iTunes, Apple doesn’t care about making money off of the content, but it needs to content to sell the hardware, where it does make the money. (Though, the subscription idea may be different, and may make Apple a nice chunk of change, that’s not clear.) With Hollywood holding back the content, or restricting it to the point where it’s less desirable to the consumer, it’s holding Apple’s plan for living room domination, captive.

But you can bet that Apple is thinking about ways around this. For example, while there isn’t much indication that it will happen yet beyond some vague patents, I would bet (as I have for a while) that Apple will eventually release an App Store for the Apple TV, just as they have for the iPhone and now iPad. It just makes sense. People love playing games on the iPhone and iPad, and they’ll love playing them on their big screen TVs too. The resolution issue (televisions have many different sizes and ratios) may be a bit of an problem to work around, but I still bet it will happen sooner or later.

And when it does, you can probaly expect a Netflix app, an ABC streaming app, and maybe even a Hulu app — three things that will make Apple TV much more attractive to a number of buyers. Those pipelines of content, on top of YouTube (which is already on Apple TV), and iTunes will make people take the Apple TV seriously. And hundreds of thousands of apps that you can use on your TV (perhaps interacting with them from an iPhone or iPad) could very well make the Apple TV a must-own device. You know, the type of device that makes billions of dollars in profit for Apple. In other words, no longer a “hobby.”