Apple needs a new version of AirPlay, not new TV hardware

There’s been a few rumors about a possible refresh of Apple’s (S AAPL) TV set-top-box ahead of the company’s press event on Tuesday, but I would argue that it’s not the hardware that needs an update. Instead, it is time for Apple to improve AirPlay.

Ever since the launch of the iPad, AirPlay has been Apple TV’s killer app. The ability to shift media from the tablet (or an iPhone for that matter) to the TV screen has been one of the primary reasons people buy Apple TV hardware. That trend hasn’t been lost on some of Apple’s competitors, and the industry is now catching up quickly.

Apple gets out-innovated by Google

Case in point: Google’s (S GOOG) Chromecast, which the company launched in July, has taken some obvious cues from AirPlay. The device makes it possible to initiate streams straight from a mobile device or mirror content straight from your computer. Most importantly, it just works, requiring no complicated pairing after an initial setup. Just like AirPlay, one might say.

Except Chromecast goes beyond what AirPlay currently offers. The device makes it easy to share content between users that are logged into different accounts, meaning that your friends can select a video on their phone and beam it to your Chromecast without the need to do any further authentication.

Chromecast also frees up the mobile device to do other things, allowing users to close their Netflix (S NFLX) or YouTube app after they pressed the play button. Control can even be handed over from one device to another: Beam some Netflix movie from your phone to your TV, then pick up your iPad to pause playback, and resume it with a Kindle (S AMZN) Fire.

The rest of the industry isn’t waiting around

We don’t know how many Chromecast devices Google has sold so far. Even with the initial excitement around the product, it’s very unlikely that Chromecast will catch up with Apple’s 13 million sold Apple TVs any time soon. But this isn’t just about Chromecast.

Chromecast is based on a multiscreen technology dubbed DIAL that has been jointly developed by Google and Netflix. DIAL was first unveiled at CES this year, and has quickly been adopted by a number of industry players, including Sony, (S SNE) LG, Panasonic and most recently TiVo. (S TIVO) Other CE vendors are getting ready to announce support as well, and chances are that the majority of new connected TV sets, Blu-ray players and streaming boxes sold next year will be DIAL-compatible.

This doesn’t mean that all of them will offer everything that Chromecast, or AirPlay for that matter, have to offer. But consumers will be able to use their phone or tablet to control many key apps, including Netflix, YouTube, and soon also Pandora.

What’s more, DIAL leaves it up to individual developers to decide what a mobile app should do once it has launched a corresponding app on a TV device. The functionality isn’t just limited to playback and mirroring, and developers can build their own interactive mutliscreen applications. This could include real-life parties, interactive games that correspond to what’s happening on the TV screen and much more.

If Apple wants to stay competitive in this landscape, it has to beef up AirPlay to teach its Apple TV some new tricks. The company knows that, and is reportedly now looking to make it easier to share content across accounts — something that Chromecast and other DIAL devices are already capable of.

But that can’t be enough. Apple has to come out with something truly innovative to lead the charge in multiscreen media — or its Apple TV will soon look like just another box.