Can Apple save Apple TV?

There might just be a market for a $99 iPhone (without the phone bill) that plugs into your TV

I tried to live with Apple TV for a couple months last year, but our relationship never quite clicked.

Maybe it was my fault. Other people seem to like the thing (although it has all-but disappeared since then from Apple's online store).

In any event, I found the movie and TV selection limited, the prices too high and menu system a total disaster -- the worst user-interface out of Cupertino since the Apple II.

So I read with interest Joshua Topolsky's report in Engadget Friday that Apple (AAPL) may be rethinking Steve Jobs' "hobby" and recasting as an iPhone without a screen -- or a phone.

Here are the specs, according to Topolsky's sources:

• iPhone OS (as opposed to Mac OS X)
• A4 CPU (like the iPad)
• 16 GB Flash storage (rather than a 160 GB hard drive)
• Full 1080 HD
• $99 (as opposed to $229)

The idea, I gather, is that the new Apple TV would grab its content from the cloud (or wirelessly from your computer) and might, as a member of the iPhone/iPad family, also have access to a couple hundred thousand iPhone and iPad apps.

With a fistful of low-cost games re-sized for the really big screen, free apps from the likes of ABC and CBS, and easy access to my Netflix account, I could start to see the appeal.

Was this in the works before Google (GOOG) unveiled its own plans for Google TV? Did it take the hot breath of competition to light a fire under Apple? We've heard both, and they may both be true.

[Follow Philip Elmer-DeWitt on Twitter @philiped]