Apple TV: Changing the Channel? (Update 3)

Updated from August 16 to provide additional detail in the fifth and sixth paragraphs.

NEW YORK ( TheStreet) --Just when you thought it was safe to say news about Apple's ( AAPL) television strategy was slow, think again. This time, it looks like Apple might be changing the channel in its approach.

The Wall Street Journal reports that the Cupertino, Calif.-based firm is in talks with U.S. cable operators about building an Apple set-top box for live television.

Apple has been trying its damnedest to get into the living room, and many thought an actual television set would be at the heart of its strategy, particularly given former CEO Steve Jobs' comments about creating one. "It will have the simplest user interface you could imagine," Jobs told biographer Walter Isaacson. "I finally cracked it."

Apple already has a set-top box, Apple TV, but the device hasn't really taken off. It provides content from places like Netflix ( NFLX), Hulu Plus, YouTube and others, but it doesn't offer live channels from the cable companies. Perhaps this is why CEO Tim Cook thinks Apple can do more in this space.

The Wall Street Journal shared more detail about Apple's rumored plans, which include several new features for Apple's existing set-top box. It would let users start a show at any time, including a few minutes after it has started airing, similar to what Time Warner Cable ( TWC) does with its Start Over feature. The box would include an interface similar to the iPhone and iPad, but with more icons than the current Apple TV. This detail has been rumored for months.

Users would also be able to get the entire season of a show on demand while it's ongoing, as opposed to just the few episodes which are currently available. Sharing content would also be a major feature of the box. Users could share what they are watching on Twitter or Facebook ( FB). Apple recently announced Facebook integration as part of iOS 6, Apple's mobile operating system. Twitter is already integrated into the mobile OS.

In the past, Cook has said, "Apple doesn't do hobbies as a general rule," when speaking about Apple's existing set-top box. He followed that up by saying that the company "always thought there was something there, and that if we kept following our intuition and kept pulling that string, we might find something larger." Apple sold 1.3 million Apple TVs in its most recent quarter.

Why Apple TV Could be Bigger Than You Think.

It's unclear at this point if Apple is abandoning its television set plans, or if this will be an add-on to the existing Apple TV. There's also the potential for the technology to be put into an actual television, The Journal said, citing two people briefed on the matter. Credit Suisse analyst Stefan Anninger wrote "the traditional pay TV bundle may be more change-resistant than some of us, and Silicon Valley, had expected."

JP Morgan analyst Mark Moskowitz views this as not a change in strategy, but a "safe stepping stone" to get into the market eventually. He believes Apple could achieve the same result in keeping users engaged, without having a lower margin product, such as an actual television.

"It is still early as relates to Apple pursuing the TV market. While the ultra-bulls on Apple have been incorporating a full-fledged TV into their longer-term estimates, we think the prospect of a set-top box is not a setback," Moskowitz wrote in a research note. "We think it is better to see how the set-top box is received first, as the set-top box could accomplish the construction of another pillar to Apple's digital hub approach." He rates Apple "overweight" with a $675 price target.

This may also signal a change in strategy, Atlantic Equities analyst Chris Watts said in a research note. "What is significant is that AAPL appears to have decided to try and work within the PayTV ecosystem than outside it," Watts wrote in a research note. "While several indicators were already pointing in this direction (nine unsuccessful months talking to content providers, the complexity associated with replicating content deals on a global basis, and the decision by peers such as MSFT to follow similar routes), this makes a direct-to-consumer OTT solution from Apple look even less likely in the near term." He rates Apple "overweight" with a $760 price target.

OTT, or Over The Top, refers to services that are not offered via a traditional network operator.

Apple working with the cable companies is nothing new. Rumors have flown around that Apple was working with Rogers Communications ( RGC) and BCE ( BCE) in Canada. If Apple is indeed working with companies such as Verizon ( VZ), AT&T ( T) and Time Warner Cable ( TWC), then this may signal a shift in strategy by allowing the cable and media companies to own the content, the way it does with iTunes.

Jobs and Apple had reportedly discussed building a set-top box for the cable companies more than two years ago, but Jobs ultimately decided against the deal because the cable companies operated in regions and didn't have national scale, like the major wireless carriers do.

If Apple is indeed changing its television strategy from the oft-rumored television set to a more sophisticated set-top box with a television, then this appears to be a shift in Apple's relationship with content owners.

Just when you thought it was safe to keep the channel on mute, Apple might be turning up the volume.

Apple could not be immediately reached for comment.

Interested in more on Apple? See TheStreet Ratings' report card for this stock.

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-- Written by Chris Ciaccia in New York

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