it's not about obeying the law, it's about finding the correct economics between "paying for content" or "stealing it"... so content producers need to find the "happy" medium... or they won't make any money.
so the law has nothing to do with it, we are long past that issue, it's now about content producers learning about micro-economics and how data travels through wires... otherwise they're screwed.
Certainly any viable commercial business model for distributing video has to compete with piracy.
The pricing and the use of DRM make iTunes for video less attractive than iTunes for Audio.
So I do think Apple needs to reboot it's video service, and create a new product which is the TV equivalent of the original iPod.
Here's my guess....
Apple will launch an updated version of AppleTV within 18 months.
The product will be tiny; based on the A4 SOC. Imagine an iPod touch, without a screen or a battery - but with an HDMI connector.
The manufacturing cost will be quite low. Low enough for Apple to give away the device with a content subscription. You don't buy a device, you buy a TV package, which guarantees a number of premium TV shows, along with many more advertising supported shows. And the chance to buy VOD movies, games and so on.
The box is tiny enough to be effectively invisible, (tiny enough to be built-into flat screen TVs)
Computers running iTunes on the local network would serve as optional local media caches. The storage on the device itself would be quite limited. This also means most content would also be accessible from your computers, your iPhone your iPad and so on.
The device supports the App store model. So media streaming apps, like iPlayer, Hulu and AirVideo would be immediately supported. 3rd party content providers could sell shows through a custom app.
It is clear that such a device would not satisfy the hardcore videophiles here. (Even if it did deliver 1080p)
But despite that, I could see households where this device would be preferable to cable or satellite subscriptions. And if the pricing of packages and movies were right, it would easily out perform the 1st generation AppleTV.
The main competitor of such a product would not be BluRay, but premium cable packages. Sky TV in the UK, Canal Plus in France etc.
The iPhone shows that technically this is doable.
But the challenge to Apple would be to knit together the content deals, and try to wean advertisers towards much smarter targeted advertising.
It would be the viability of the device to deliver advertising which could really make it a success.
C.