February 10, 2010
Say iWant a Revolution: Two Ways for Apple to Crack the Small Screen

Last week I posted about why Apple hasn't been able to revolutionize the television business. Alex then chimed in with a post about Apple's iPad representing a shift toward entertainment in the consumer electronics sector. Apple's plan seems to be a contradiction in terms: they're an increasingly entertainment-focused company that hasn't made an impact on the most popular entertainment of all--TV. In this post, I'll explore two tactics Apple could use to aggressively enter the television market. Steve Jobs himself has said that Apple TV is just a "hobby," so maybe he's looking for suggestions.


Strategy #1: Beat 'em

Apple could revolutionize the TV industry by becoming a real alternative to cable or satellite TV service.

In effect, Apple has been trying to make itself into a Multichannel video program distributor (MVPD means cable companies, satellite companies, and telco TV providers) by offering TV content in the iTunes store and by urging TV programmers to provide content for an affordable Apple-branded subscription TV service. Apple has had trouble offering competitively priced alternatives to pay TV because both MVPDs and TV programmers don't want to jeopardize their current business models: MVPDs are reluctant to let third-party devices (like Apple TV) interface with their content delivery system because they don't want to lose revenue from renting set-top boxes/DVRs; and programmers are hesitant to license too much content to Apple because they fear cannibalizing the subscriber fees they collect from MVPDs. To compete with the variety of programming on pay TV, Apple would need to broker aggressive deals with programmers.

Apple also would also need to incorporate support for live TV if they hope to compete as a television provider. As last week's Super Bowl showed us, people still watch live TV on occasion--award shows, sports, and political speeches have significant cultural value when watched live. They aren't as relevant when downloaded or time-shifted. (Who would host a Super Bowl party in the middle of April--or even a few days after the Super Bowl airs?) Apple TV is currently all about downloads--it doesn't support live television. There are rumors of an Apple patent that would put tuners in portable devices, allowing people to watch live TV on their iPhones, iPads, or Apple TVs, but without the support of networks and MVPDs, Apple may have trouble making that patent a reality.

Apple could bypass the MVPD system if they could get enough programmer buy-in to introduce the affordable web-based TV subscription model they've allegedly been developing. Right now, users can buy season passes of shows on the iTunes store, but they are typically as expensive (or more expensive) than DVD boxed sets. People have been calling for a la carte TV, but many critics--like James Surowiecki in the New Yorker -- note that the current MVPD bundling models keep prices low by reducing transaction costs. Further, I agree with Surowiecki's claim that people may be willing to pay a bit more for the channels they don't watch because of the option value, meaning viewers will pay for the ability to watch a lot of channels even if they never actually tune them all in.

Between the benefits of bundling and the reluctance of programmers, Apple may have trouble trying to beat MVPDs at their own game. What if Apple were to play by the rules instead?

Strategy #2: If you can't beat 'em, join 'em

Apple could partner with MVPDs to make the Apple TV, iPods, iPads, iPhones, and Macs, compatible with MVPD television content.

Apple isn't averse to working with phone companies--they still have an exclusive deal with AT&T for the iPhone--so why not go the same route cable companies? Apple TV could become the iPhone of cable boxes. Imagine lightening-fast Apple hardware running a clean, user-friendly Apple interface on your TV. Apple could use its expertise in user experience design to make killer program guides, video-on-demand menus, and DVR interfaces. They could even integrate the rumored Apple TV Subscription service and the iTunes store for good measure.

This solution would also benefit MVPDs, who are struggling to be more than dumb pipes. MVPDs aren't averse to interfacing with third party technology as long as they keep the upper hand: TiVo was once just a third party DVR, but MVPDs have begun distributing and renting TiVo set-top boxes to customers. The MPVD version of TiVo has the slick interface without the hassle of having to rent a tuner card. The TiVo/MVPD partnership hasn't been extremely successful yet, but Apple's large band of loyal followers might make a joint venture more lucrative.

Apple could also alleviate anxiety about "cord cutters," viewers who cancel their pay TV subscriptions and watch everything on free, streaming TV sites. Being able to offer an Apple DVR to subscribers would probably incentivize even cord-cutting Apple fans to sign up with whichever MPVD was offering Apple service.

Of course partnering with MVPDs has it limitations. Apple could risk being seen as a white label DVR manufacturer for the likes of Comcast Xfinity or DirecTV. Apple would probably not get a share of MVPD local ad revenues and they would risk cannibalizing iTunes downloads and potential Apple TV subscription revenues. Though MPVD monopolies are discouraged under the Telecommunications Act of 1996, many MVPDs still have market power in regional markets, meaning they still effectively have monopoly power because high barriers to entry discourage competition. Cable options have also been limited in most markets due to franchising agreements. Accordingly, Apple would have to go through the hassle of striking deals with multiple cable providers if they wanted to make Apple TV available to MVPD customers across major markets. Apple could avoid dealing with the MSOs by partnering with satellite providers, but they'd reach fewer customers since satellites only account for a small percentage of MVPD subscriptions.

Microsoft may also beat Apple to the TV punch. At CES earlier this year, Microsoft unveiled plans for Media Center 2.0, software that runs on an MPVD set-top-box and allows users to stream TV content to any Windows 7 PC with no additional tuner card required. Microsoft's system currently works on AT&T's U-Verse service.

Apple clearly has some decisions to make if they want to be a relevant competitor in the TV business. I've only outlined two possible strategies here, but there are certainly more. What do you think? Could either of these approaches work for Apple? What am I forgetting? Let me know in the comments or tweet @shelila.



How do you see the trend of internet connected TVs figuring in? Next to 3D, this looks like their next big thing. What innovation is possible from that front?


Great point. I think Internet-connected TVs could be a game-changer, but they run into the same issues that over-the-top connected devices do. If you recall, NBC/Newscorp/ABC made content unavailable through the Boxee for fear that Boxee would cannibalize revenues. Exactly which revenues--I can't say because Boxee would still serve Hulu ads. If programmers and networks don't provide the support and encoding for Internet connected TVs, then the technology isn't as cool or useful as it has the potential to be.

Still, TV and Internet delivery are converging. I think that we're getting really close to the point where both kinds of content will be delivered using the same protocols. It's just an issue of bandwidth and hardware. Once that happens, it's going to be much harder for MVPDs and programmers to restrict access to any kind of connected device.

Instead of trying to restrict content to these devices, I think networks and MVPDs need to play in the space, figure out what works, and get some first mover advantage.