Many rumors suggest Apple is developing a television. Journalists report Apple has held talks to secure content for such a device, that suppliers are getting ready to build it, and that consumers would snap it up (see The Wall Street Journal, Techcrunch, and Wired).
The speculation often suggests that an Apple television set would offer subscription-based, à la carte content delivered over the top of broadband networks (“OTT”). Consumers would pay one bill—to Apple—for all their video content.
Undoubtedly Apple is looking into all the possibilities, but we think the rumor mill has a few things wrong.
An Apple OTT Television is Unlikely
We think an Apple television that gets its content over the top is unlikely because Apple’s reputation is built on producing products that “just work.” Today’s broadband networks are certainly capable of delivering HD video over the public internet in many instances, but that is a far cry from delivering it to nearly 100% of the country, 100% of the time. We don’t think Apple will risk releasing a product that could have significant performance issues. (And this is different than the performance issues AT&T and Apple initially had with iPhone data, as smartphones did not previously have benchmarks for rock-solid performance.)
Imagine a well-off Apple fan who goes to the Apple store and spends, say, $5000 on three new iTVs. He turns off his Comcast video subscription but makes sure he’s got a reasonably fast broadband subscription. Then he hooks up all three of his new iTVs. Assume (generously) that he either has hardwired Ethernet connections to each TV or a very robust WiFi network. One after another, he checks out of his new TVs. Everything is beautiful.
Three days later, he and his wife are watching a movie while his daughter watches a sitcom in another room. His broadband connection starts to struggle, and both TVs suffer from reduced resolution or buffering. The more iTVs he has (and the more money he has spent on them), the more likely this problem becomes. Plus, many facilities-based TV operators have some control over the degree to which the broadband network can deliver IP video, since they also provide consumers’ internet connections. Notwithstanding net neutrality regulations, it is not in their interest to allow Apple to succeed in this way. Overall, this scenario is far from “it just works,” and Apple knows it. We think they will choose to avoid the potential PR and financial disaster.
Even if Apple could somehow manage the above issues, content owners will insist that Apple pay at least as much for the rights to their content as traditional video services. In fact, since Apple has zero monthly video subscribers today and a potentially disruptive business model, it’s very likely content owners would charge Apple more for their content than they charge Comcast and DirecTV, for example, who have about 20 million monthly video subscribers each and pay content owners billions of dollars per year. In addition, even if Apple and consumers might wish otherwise, Apple will not be able to un-bundle networks or channels because it is not in the content owners’ interests to allow them to do so.
Disruption Still Very Possible
Apple may not release a God Box, but can do disruptive things in the television market. There are three things Woodlawn thinks are more likely than an Apple OTT TV:
First, Apple could partner with video operators to offer an integrated solution, much like Apple partners with wireless operators to sell the iPhone. We could even imagine video operators being willing to subsidize an iTV if it meant attracting many new subscribers and effectively locking them in for the life of the television set. While consumers would still be paying monthly bills to a video service provider, they could benefit from Apple’s expertise in user experience. Imagine integrated search across linear TV, a DVR, iTunes, and internet video, all with the polish of an Apple interface.
While this might not be a threat to the multi-channel video industry as a whole, it would be a major threat to any operator who could not offer a comparable experience, just as the lack of an iPhone was a problem for many mobile operators. It’s very possible that many video subscribers would switch from one provider to another to get the Apple television experience. Oddly, we think an Apple television would be good for TiVo, because video operators without the Apple product would find it newly imperative to offer a compelling user interface. This also puts a new spotlight on the importance of operators’ organic efforts to improve their user experiences, such as Comcast’s X1 cloud-based user interface.
Of course, an Apple television would be a major threat to traditional TV manufacturers. As if Sony and Panasonic didn’t have enough trouble already!
Although it would have significantly less revenue impact for Apple, another possibility is that Apple could add a digital over-the-air tuner to its Apple TV supplementary set-top box. While many consumers would not bother to attach an antenna, for some that did the Apple TV could be a potential alternative to traditional cable service. In most metropolitan regions users could receive live ABC, NBC, CBS, and FOX channels, plus access time-shifted content from those and other networks via iTunes. For a significant portion of the population, this “supplementary” device with a fantastic user interface could be good enough to substitute for cable service. That sounds a lot like what Clayton Christensen calls disruptive innovation.
Finally, Apple could offer a subscription-based TV service, but only for traditional Apple devices (such as Macs, iPhones, and iPads). In other words, TV service, but not on a TV. Consumer expectations of the stability of video on non-TV devices are still lower than TVs. We think it’s less likely they’d want to watch three HD streams simultaneously via such a service, and in any event they would be more tolerant of the occasional glitch than if it happened on their living room TV. Apple could possibly convince content owners that customers for this service would either be incremental to traditional video services or that such services would capture people who would not otherwise subscribe to TV service at all. For example, the millennial generation is the group least likely to subscribe to a pay TV package. If Apple could convince content owners that a $20 package for this segment would result in incremental revenue, we could imagine them going along with it.
Much of what we read about an Apple-branded TV is based on assumptions about Apple’s technical capability and consumer desires without consideration for the economics of programming and the power of incumbents. While we agree many consumers would purchase an Apple television that cut out traditional video operators, we think it is far more likely that any Apple television would incorporate a video service from one or more of the traditional providers. Even if they don’t soon produce a TV itself, Apple has several options for products that might be superior in some ways, at lower cost, than conventional TV subscriptions.