An article today in the Financial Times mentions how Apple is supposedly pressuring TV networks to cut their episode pricing on iTunes in half, from $1.99 to $1. The price cut indicates that television sales have been lackluster. While exact iTunes sales information isn’t offered, it is known that Apple had accumulated sales of 15 million TV episodes in February 2006, 50 million in January 2007 and 200 million in October 2008. Based on this, in a recent in November 2009 I projected that Apple should have then reached sales of 86 million episodes.

I extrapolated the videos sold at December 2008 and 2008 on the speeds implied between official announcements. For example:

(200MM at Oct 16, 08 - 50MM at Jan 10, 07) = 150MM/645 days = 230K sales/day

50MM at Jan 10, 07 + (230K sales/day x 355 days) = 132.6MM sales at December 31, 2007

Utilizing this information I then calculated the average sales per user. Based on my calculations these average sales have dropped since 2007.

The bottom line is that Apple needs to rework its video strategy. The price cut attempts to address the issue. Why should iTunes customers pay $1.99 for a one-hour TV episode when they can spend the same amount for a game that they can play hours with? Apple understands that iTunes customers make this comparison, and that a TV episode, which is watched perhaps twice or three times, especially when repeat viewing require a user to store the video, taking up half a gigabyte of drive space, resulting yet another deterrent.

It’s also possible that Apple’s current roster of video platforms (iMac, MacBook, iPod Classic, iTouch, iPhone, Apple TV etc.) are simply not “fantastically great” enough for video watching due to portability (in the case of the computers) or screen size (in the case of the portable devices). Tomorrow Apple is presenting a new device, which could turn out to be the perfect device for video watching. It might finally convince iTunes customers to buy more TV episodes. It may also persuade Apple’s TV production partners to go along with the new iTunes pricing plan.

This week’s new iPhone launch piqued my interest again in Apple’s 10-inch touchscreen device, which is rumored to be released before the end of this year.

This device, let’s call it the iTablet iPad (Microsoft has a hold on the “tablet” category name), will be like a larger version of the iTouch. See below for what I estimated the size and shape to be, and how it would relate to Apple’s existing lineup of small electronic devices; from left to right: Shuffle, Nano, iPod, iTouch and iPhone.

The device can be seen as an extension of the iPod family, but what will it do? The iPad will probably have the following features:

• Multi-touch user interface, similar to the iTouch and iPhone.
• Accelerometer, although the functionality of this will be somewhat different given the larger size of the device.
• Rear or side external audio speakers, similar to iTouch.
• Video and audio output, a first for an Apple small device, but necessary in order to support many of the functions I believe this device will fulfill.
• Wifi for web browsing and connecting to iTunes and the App Store.
• Bluetooth for external devices (headset, keyboard, mouse, game controllers) and for peer-to-peer applications.
• Run on the new iPhone OS 3.0, which offers a variety of new functions including direct App Store movie and TV show downloading, In-App purchasing, Peer-to-Peer connectivity, Voice over Internet functions and Push Notification.

Given these features the iPad will transcend all current product categories since it will fill a variety of functions:

• Game Platform: The iPhone and iTouch have clearly demonstrated their ability to compete in the portable gaming market. I believe that Sony’s latest PlayStation Portable (PSP), the 3.8 inch screen PSP Go, revealed last May and releasing in October, is a direct response to Apple’s smaller gaming products. A 10-inch screen will extend Apple’s presence in the gaming market, towards the higher end. Also, since the iPhone OS 3.0 communicates with many accessories, the iPad may probably support Bluetooth gaming controls, which will make the iPad Apple’s first entry into the console game market. There are also rumors of Apple launching a premium game section in the App Store, which might be the direct software component of this strategy.
• E-reader: Clearly the Kindle is a device that has received great reviews and acceptance in the marketplace, but while its black and white digital ink technology facilitates text reading, it is not ideal for color periodicals. Apple is already beginning to cater to this market with iTouch and Iphones Apps like Iceberg Reader which offer both subscription or single pay systems through in-App purchasing. While the Kindle will probably remain the staunch choice for book readers the iPad could take the majority of the color periodical subscription market.
• Multimedia Display: I expect the iPad will become the choice device for multimedia-to-go. It would be much more practical and comfortable for watching movies on trips, instead of carrying around a portable DVD player or a laptop. It could also be shared for viewing between two people unlike an iTouch or iPhone. The new iPhone OS supports direct movie and TV show downloading, signaling where Apple might be going with the iPad.
• Presentation Device: The portable size and touch screen capabilities of this device will make it an innovative device for animated presentations. Just see how much touch screen technology is in vogue now, popping up every day on CNN’s Situation Room and in movies like Quantum of Solace. Salespeople who want show clients some extra pizazz will use the iPad.
• Sporty computer: I also believe that the iPad will be used by many as their ‘second computer.’ I am thinking about businesspeople who already have a company laptop. The iPad will fit that need as their fun computer, for using Facebook, reading Golf Digest online, and watching videos. For all the reasons I listed above, iPad will be the device that they take on vacations. Similar to how some people have two cars; iTablet will be the sporty roadster they use on the weekends.

There are probably a number of other functions I haven’t thought of; I never expected the iPhone to be used a medical device for example. All in all, the new versatile device is sure to overturn many established parameters about electronic device categories, which will appeal to many different consumer segments. If it launches before the Holiday season Apple has another breakout hit on their hands.