Apple still hasn't quite cracked the smart TV equation

The perennial rumors that Apple, Inc. (AAPL) is preparing to launch a "smart" LCD TV or more advanced set-top box have been dealt a blow by Bloomberg, which cites multiple sources as saying the project has stalled on Apple's inability to cut a deal with content providers.

I. Building a Better Box

The news service reports that Apple engineers have been working since 2005 to make a super set-top box. Inspired by TiVo, Inc.'s (TIVO) eponymous recording hardware and other smaller players like Roku, Apple aimed to beat perennial rivals Amazon.com, Inc. (AMZN) and Google Inc. (GOOG) to expand the role of the digital TV.

Today Apple is selling, according to a (calendar) Q1 2012 earnings call, 1.4 million units of its AppleTV. That may sound okay, but compared to the distribution deals TiVo owns, and sales of other Apple products it's pretty abysmal.

The problem is that Apple's current product -- in its third generation -- lacks many features, while actually regressing in some ways on others. Early models had hard drives (40/160 GB first gen.), but Apple ditched the mildly useful feature for streaming only -- a cut it justified by a price drop from $229 to $99 USD.

AppleTV is smaller and sleeker, but now lacks a hard-drive.

The device also lacks a built-in browser or useful apps other than select service portals from a handful of partners like Netflix, Inc. (NFLX) and Google Inc.'s (GOOG) YouTube. And those services are also offered via TiVos and Rokus.

But Apple's vision for its better box began and remains with a much more ambitious dream than the cheap but currently model. Apple envisioned an advanced device that could double as a game console, receive live content (over the internet), from television networks ( think Hulu ), record shows via a built in hard drive, play pictures/songs, surf the web, and watch internet videos. More recently it even planned to use its iPhone smartphone and iPad tablet as controllers, taking advantage of the devices' built-in Bluetooth capabilities.

II. Content Providers -- a Tall Hurdle to Jump Over

To make this dream device Apple has to come together with television content producers to allow streaming shows and recording. While TiVo can essentially do what it wants, the TV content creators have a degree of leverage over Apple. As the largest digital distributor of music and TV show episodes on a purchase basis, Apple must avoid the wrath of its business partners in those ventures.

But its never-ending thirst for profits has met its match in the similar profit motives of the big media content producers, yielding a stalemate. Eddy Cue, iTunes SVP, has been unable to break the deadlock.

In July Tim Cook commented, "We continue to pull the string to see where it takes us, and we are not one to keep around projects that we don’t believe in and so there are a lot of people here that are believers in Apple TV."

Apple's attempts to court content providers on a live TV offering have been rebuffed.

Comcast Corp. (CMCSA), according to Bloomberg, rejected an invitation into Apple's would-be TV "walled garden" back in 2007 when it realized the extent of control Apple wanted over its content. Apple received similar feedback from CBS Corp. (CBS). And Viacom, Inc. (VIA) is also lukewarm on the prospect.

Walter Price, an investor in RCM Capital, a major Apple stakeholder which owns $1.9B USD shares says that in a recent meeting Apple executives said the roadblock was content providers being set in their traditional business models. The content providers are reportedly afraid of putting Apple in the driver's seat. This is not surprising; many content makers long ago grew frustrated at Apple's rigid iTunes pricing rule, and today regret helping the media market rise to its current dominant position.

If Apple can't cut a deal with content providers, it's next best bet is to try to approach the middle man -- the networks that distribute them. According to Bloomberg, its strongest hope lies with AT&T, Inc. AT&T is a fresh face on the broadband scene and is looking to rapidly expand its Uverse cable network to challenge Comcast and Time Warner Cable's offerings. Plus AT&T already enjoyed a successful union with Apple, during the period of iPhone exclusivity.