“I think the whole category is still a hobby right now. I don’t think anybody has succeeded at it. And actually the experimentation has slowed down. A lot of the early companies that were trying things have faded away. So I would have to say that given the economic conditions, given the venture capital outlooks and stuff, I continue to believe it will be a hobby in 2009.”

– Apple CEO Steve Jobs, October 2008

“We still consider this a hobby. It is clear that the movie rental business has really helped Apple TV and there are more and more customers that want to try it. And we’re going to continue to invest in it, because we fundamentally believe there is something there for us in the future.”

– Apple COO Tim Cook, January 2009

There’s not much of a business yet in Apple TV, as Apple’s leadership often notes. But there may be soon, with the market for connected TVs evolving as it has been.

In a research note issued this morning, Piper Jaffray analyst Gene Munster says the time is right for Apple to release the next iteration of Apple TV–one that offers DVR capabilities and supports iTunes TV show subscriptions.

“Apple could leverage its deep library of content with many network and cable channel content owners to provide unlimited access to a sub-library of its TV shows for a standard monthly fee ($30 or $40 per month),” Munster writes. “Such a product would effectively replace a consumer’s monthly cable bill (~$85/month) and offer access to current and older episodes of select shows on select channels.”

Further, Munster notes, “The selection would dictate the value, and several tiers could be offered, but we see this as one way for Apple to leverage its large iTunes content library as well as its unique Apple TV hardware in order to get digital video to the TV for a price significantly less than the average cable or satellite TV bill.”

Makes great sense. And if Apple (AAPL) were to launch these services in concert with App Store support, as Munster has suggested in the past, it would be a pretty compelling proposition. And it would set the stage for the next evolution of the platform, the Apple Television, an Internet-connected TV with onboard DVR and media center functionality.

Says Munster:

“Beyond new hardware with DVR or iTunes video subscription features, we believe the 2-5 year roadmap for the Apple TV product lineup is robust. To begin with, Internet-connected TVs with interactive features will likely gain popularity in the next several years. Apple could differentiate itself in this market as a seasoned software developer competing largely with television hardware manufacturers that do not excel in the software arena. The device could also bring iPhone games, a relatively new segment for Apple, to the television.

“While this is unlikely in the near term,” Munster continues, “we believe the iPhone will succeed as a portable gaming platform and Apple may consider bringing higher quality games developed on a similar platform to the TV. The iPhone app developer community is already robust, and Apple could leverage those developers to enter the gaming arena on the TV. In fact, the iPhone or iPod touch could itself operate as a touchscreen gaming control for a game-centric Apple TV.”

Again, this makes great sense, though TV hardware is not an easy business–just ask Sony (SNE). But, as Munster aptly notes, it might be quite a bit less difficult if Apple were to “change the rules of the game,” something it’s done in a number of markets already.

That said, as Media Memo’s Peter Kafka just reminded me, the cable companies are working very closely with Hollywood to make sure it’s difficult for people to replace their cable service. They’d almost certainly attempt to sack an initiative like one Munster describes above.

Why? A few reasons. First, there’s the government’s “cash for clunkers” program, which will likely stimulate new car sales and new Sirius subscriptions thanks to the satellite radio trials often packaged with new cars.

Then there are rumors of new iPod-related hardware that may or may not debut at the company’s holiday gift-guide event next week. Scheduled for Wednesday, that gathering promises “a new line-up of accessories…for the home, office, vehicle and beyond.” This has led some folks to speculate that we’ll soon see a Sirius dock for the iPod/iPhone.

From XMFan, which claims to have insider details on the device.

The XM SkyDock is a docking station for your iPod Touch or iPhone that turns it into a SATELLITE XM Radio receiver! Included is an XM antenna, power cord (also featuring the new transmitter technology), and docking station that turns your iPod/iPhone into an actual XM Satellite Radio receiver using the SiriusXM app.

XMFan says the dock is expected to retail for under $100 and speculates that it could drive a lot of new subscriptions. I suppose we’ll find out next week–if the device is actually announced.

[Image Credit: XMfan]

The company’s shares spiked, rising about 20 percent to 54 cents on news of the government’s expanded “Cash for Clunkers” program and the positive impact it should have on new car sales and, by extension, new Sirius subscriptions. That analysts had been predicting a second-quarter loss for the satellite radio company, along with the loss of thousands of subscribers, did little to temper enthusiasm. Though it seems to have done so today, now that those predictions have proven true.

Reporting second-quarter earnings this morning, Sirius posted a net loss of $157.3 million, or four cents a share on revenue that rose one percent to $590.8 million. Excluding one-time charges, though, Sirius lost only a penny a share, matching analyst estimates.

As analysts had foreseen, subscriber count slipped again. Sirius ended the quarter with 18.4 million subscribers–a one percent drop from a year ago. All told, the company lost 185,999 net subscribers during the period. And that’s prior to the addition of a $2 royalty fee.

Looking ahead, the satellite radio operator raised its outlook for the year, cautiously optimistic that the car sales that drive subscriptions will pick up in the second half of this year.

“Based on these results we are increasing guidance again and expect to exceed over $400 million in adjusted income from operations during 2009,” CEO Mel Karmazin said in an earnings release. “Growing our revenue in the face of broad declines in the advertising and automotive markets is a remarkable accomplishment, and we are well positioned for a rebound in auto sales.”

Shares in Sirius are trading down 7.41 percent at 50 cents as I write this, which is still 10 times their 52 week low. And, to be fair, they are up almost 10 cents in last 10 trading days and up about 320 percent year-to-date.

“Reaching more than 1 million downloads so quickly is a strong testament to our world-class programming and Sirius XM’s instant brand recognition,” Scott Greenstein, president and chief content officer, said in a release trumpeting the milestone. “Our goal is to give people access to the best audio entertainment wherever they go with what we think is the best music and audio entertainment application available on the App Store.”

The app, which debuted on June 18, quickly became the top free offering in the the App Store’s music category and has held that spot for some time now. So it’s certainly one of the more popular music apps available. That said, it’s also one of the most poorly rated. Sirius XM’s app has an average rating of just two stars out of a possible five. Of its 56,952 user reviews, just 8,822 give it five stars. But 37,818 rate it a single star. And most of those do so citing Stern’s absence as the reason. So while it’s true that Sirius XM Premium Online is the the top free app in the music category, it’s also seems to be its leading disappointment. Makes you wonder how many of those one million downloads were deleted, either after the user noticed Stern’s absence or the $2.99/month subscription fee.

“Chrysler’s bankruptcy and announced factory shut-down will impact second quarter numbers by reducing the number of prepaid bundled subscriptions associated with the production and shipment of new cars,” Jim Meyer, Sirius’s President of Operations and Sales, said during a conference call last week. “There will be a noticeable hit to subscribers in the second quarter, as a result of these production halts.”

A noticeable hit. What does that mean? Sirius didn’t say at the time, but a filing the company made with the SEC today gives us a clearer picture–and it’s not a pretty one. Chrysler sent quite a bit of new business Sirius’s way. From the Risk Factors item in the company’s 10-Q filing:

We do not expect to generate a significant number of new subscribers from Chrysler while its plants are closed. During the year ended December 31, 2008, Chrysler produced approximately 900,000 vehicles which included a satellite radio and a prepaid subscription to our service. These subscribers represented approximately 16% of our gross subscriber additions in 2008.”

 
Now, there’s no telling how long the Chrysler factory shutdown will last, so it’s impossible to know how much of an impact it will have on Sirius. That said, if the company’s bankruptcy proceedings drag on for any length of time, it obviously does not bode well for Sirius, especially since XM is potentially facing a similar scenario with General Motors (GM). Again, from the Sirius 10-Q:

There is also significant uncertainty surrounding General Motors’ future and potential filing for bankruptcy protection. A bankruptcy filing by General Motors could have similar effects on our subsidiary, XM.

And that would be grim news indeed. Because while Sirius has stopped counting on its auto partnerships to drive sales, it hasn’t yet established other means of driving subscriptions.

Sources briefed on the matter say DOJ attorneys have contacted Google (GOOG) as well as the Association of American Publishers and the Authors Guild about the antitrust implications of the agreement. Presumably at issue here are concerns over the settlement’s opt-out terms–authors and publishers who don’t opt out have effectively opted in–and the fate of orphan works, books still in copyright but whose copyright owners are unknown.

Orphan works number in the millions and the fear is that this settlement gives Google a powerful blanket license for them. As Pamela Samuelson, director of the Berkeley Center for Law & Technology, recently noted:

An estimated 70 per cent of the books in the Book Search repository are in-copyright, but out of print. Most of them are, for all practical purposes, “orphan works,” that is, works for which it is virtually impossible to locate the appropriate rights holders to ask for permission to digitize them….The proposed settlement agreement would give Google a monopoly on the largest digital library of books in the world….Google will also be the only service lawfully able to sell orphan books and monetize them through subscriptions….Virtually the only way that Amazon.com, Microsoft, Yahoo!, or the Open Content Alliance could get a comparably broad license as the settlement would give Google would be by starting its own project to scan books. The scanner might then be sued for copyright infringement, as Google was. It would be very costly and very risky to litigate a fair use claim to final judgment given how high copyright damages can be (up to $150,000 per infringed work). Chances are also slim that the plaintiffs in such a lawsuit would be willing or able to settle on equivalent or even similar terms.

Samuelson concludes that the Book Search agreement as written is essentially a major restructuring of the book industry and an anticompetitive one at that. If that is indeed the case–and Google maintains that it is not–it’s worrisome indeed. Certainly, it’s reason enough for the DOJ to give the agreement a good once-over.

“For example if you live in London, for just 2.95 euros a month, you can call your grandmother in Poland, whenever you like, talk for up to six hours at a time, and not worry about how much it’s costing you,” explained Stefan Oberg, VP and GM of telecoms at Skype. “Your grandmother doesn’t need to understand the Internet. You just use your Skype subscription to make the call and she just picks up the phone.”

An interesting move, and one that comes just days after incoming eBay CEO John Donahoe said the company will consider selling Skype at the end of the year if it can’t find ways to use it to support its core business. “What we’re testing this year are the synergies,” Donahoe told the Financial Times. “If the synergies are strong, we’ll keep it in our portfolio. If not, we’ll reassess it.”

While consensus has long held that the synergies to which Donahoe refers are anything but strong, that may be changing. Last week eBay reported earnings, noting that Skype added 33 million subscribers in the first quarter of this year, boosting its total membership to 309 million. Revenue also hit $126 million, up 61% from the same quarter last year.

The RIAA and its online counterpart, the Digital Media Association, have petitioned the Copyright Royalty Board to slash the so-called mechanical royalties paid to musicians and music publishers for digital downloads, subscription music services and ringtones. Seems the RIAA and DiMA feel they’ve suffered unfairly during the transition to digital distribution and they’d like artists to share in their misery.

The National Music Publishers’ Association, noting the favorable economies of digital distribution, asks for a royalty of 15 cents per track for permanent digital downloads. The RIAA argues that a royalty of approximately 5 cents to 5.5 cents per track is more reasonable. The DiMA–which represents Apple, Amazon and RealNetworks, among others–suggests cutting that royalty further still.

Find that astonishing? Just wait; it gets worse. For streaming music services, the NMPA proposes a rate of the greater of 12.5% of revenue, 27.5% of content costs, or a micro-penny calculation based on usage. The RIAA finds 0.58% of revenue more reasonable. And the DiMA says there really shouldn’t be any royalty at all. “Fundamentally, this fragile marketplace is showing signs of promise, but it cannot be saddled with additional, excessive costs,” the DiMA argues. “The board should be careful not to impose a royalty that kills the proverbial goose and deprives songwriters and publishers of their golden egg.”

An interesting choice of metaphor and one in which the DiMA and RIAA might easily figure as the giant at the top of the beanstalk:

Fee! Fie! Foe! Fum!??
I smell the blood of a musician.
Be he ‘live, or be he dead,
I’ll grind his bones to make my bread.”

Grind his bones to make my bread, indeed.

Said Rick Carnes, president of the Songwriters Guild of America: “Our opponents have to recognize that this rate-setting is not a matter of gamesmanship for songwriters, but rather one of survival. As I stated in my testimony, in response to a question from those seeking to cut the mechanical royalty rate in half and to denigrate the importance and contribution of professional songwriters to the music industry, ‘Yes, songs are plentiful, just as rocks are plentiful. But if you want diamonds, you are going to have to pay the miners a living wage.’ ”

This morning the company said it’s exiting the subscription-music market and throwing its support behind Rhapsody America, a joint venture company owned by RealNetworks and Viacom. In the coming months, Yahoo Music Unlimited subscribers will be transitioned over to Rhapsody and Yahoo will begin promoting the new service on its properties.

The deal leaves us with a subscription services market of three: Rhapsody, Napster and Microsoft’s Zune Marketplace. And among those, Rhapsody–with just under 1 million subscribers–will be the leader. “This takes away a competitor, and gives Rhapsody potentially some marketing muscle,” Jupiter analyst David Card told USA Today. “This is good for Rhapsody.”

Indeed. But only if the deal lasts. And there’s good reason to believe it won’t, given Microsoft’s hostile bid for Yahoo. The software giant and Real aren’t exactly old friends.

Announcing the debut of Last.fm’s “unprecedented” on-demand music streaming platform, Jones–in a moment of Zuckerbergian grandiosity–proclaimed:

Today we’re redesigning the music economy.”

Which will no doubt come as a bit of a surprise to Apple, and Real, and Amazon and, above all, Imeem, which announced a similar ad-supported service last month.

To be fair, Last.fm’s free on-demand service seems a bit more compelling. Certainly, the CBS-owned site is the only one among the few to offer access to music from all four major labels and a host of independents to anyone willing to stare at an ad for while. And providing complete album streams on a “try before you buy” basis is truly a nice touch.

Still, Last.fm does have one significant limitation: You can listen to a track no more than three times unless you agree to pay for the subscription version of the service or purchase it from an affiliate. Will that be a deal-breaker for the average music fan or a good reason to buy your music through Last.fm, rather than iTunes? Hard to say. “The free-music-on-demand field has been a tough one, with many announcements but few real entries (consider, for example, the often-delayed Qtrax and vaporous Mashboxx),” notes the Los Angeles Times’s Jon Healey. “With CBS’ backing, Last.fm might be able to search longer for a workable formula than the typical start-up. But at some point, it has to find a way to pay the bills.”

And so this morning, the company began offering prospective iPhone buyers a choice: purchase the device with a two-year T-Mobile service contract for 399 euros ($591) or without a contract for 999 euros ($1,478). And if for some reason you choose the latter, don’t expect your iPhone to be fully functional, because some iPhone services are only available with a T-Mobile subscription. Now which version of the device was it that you were interested in?

Analysts say that the arrival of an unlocked iPhone in the German market will likely signal the end of Apple’s exclusive deals with carriers, though that seems questionable given the unlocked phone’s dizzying price point and hamstrung feature set. Certainly, T-Mobile doesn’t seem too worried. “We have no doubt that the success story of the iPhone from Apple in Germany and T-Mobile will be updated,” T-Mobile Managing Director Philipp Humm said in a poorly translated press release. “The distribution model is correct, only because our customers will benefit from exclusive features and custom tariffs. The proper function of the iPhone in our network was tested for months, only T-Mobile offers data transmission standard EDGE nationwide, which the iPhone for fast Internet communications. No other mobile operator offers more WLAN-HotSpots as T-Mobile. I would like to assure our customers that T-Mobile as exclusive distribution partner of the iPhone continue to be the best package of network quality, service and competitive prices.”