Quick Thoughts: In Search of The Legendary Apple Television Set

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–          After 2 years of speculation, we are still waiting for the mythical Apple iTV.  Recent comments by CEO Cook and reports of tests with Asian suppliers, have proponents pounding the table again.

–          However, revolutionizing TV with easy to access on demand programming would require content deals and streaming infrastructure that Apple does not have and will have a hard time getting.

–          Alternatively, Apple could look to partner with the cable industry for next gen cable boxes that preserve channel bundles and enfranchise TV Everywhere apps on iOS devices.

–          The alternative approach is more viable, but less lucrative, and would position Apple as a champion of a distribution paradigm that may become obsolete with time.

Like the proverbial stopped watch that is correct twice a day, professional pundits are dusting off their Apple television predictions for another go around.  This time, the great and powerful Apple itself is nudging the parlor game forward – CEO Tim Cook acknowledged that TV was an area of “intense interest” in response to Brian Williams’ questioning on NBC’s Rock Center, then Apple’s preferred outlet for official leaks, the Wall Street Journal, published a story asserting that the company has been testing large screen HDTV designs with Asian partners Hon Hai and Sharp.  While the Journal report is clear that Apple has been testing TV prototypes in Cupertino for several years, and that such projects are often dead-ends that do not result in commercial products, most fanboy bloggers did not make it that far before the visions of big screen iTVs were dancing in their cerebral cortices.

The most grandiose of these visions are almost certainly impossible.  The six major media companies that dominate the television network business are resistant in varying degrees to the idea of breaking open their channel bundles, and if they were to do so, they remember how well it worked out for them when Apple revolutionized the music business.  The idea that Apple could cut a deal to get unusual access to television programming without seriously overpaying for it seems beyond remote.  Moreover, Apple is not equipped to handle streaming video on their own, it would have to contract for a massive slug of CDN capacity from someone like Akamai and develop a serious video serving back-end for their fledgling data center operation.  These are not quickly or inexpensively arranged, and Apple has little experience or expertise in the field.

Finally, the concept of a fully integrated Apple big screen HDTV set seems ill advised.  TV margins are razor thin and Apple would appear to have very little to offer on the hardware front.  Fronting the relatively large cost of an LCD panel and the associated electronics to get at the processor and software is a margin tradeoff that would seem anathema to a company used to 35% operating margins.  Moreover, unlike smartphones or even PCs, televisions are on a 5-7 year purchase cycle, meaning that the upgrade mania that builds ahead of new iPhone and iPad introductions is unlikely for an iTV (Exhibit 1-2).

The narrower visions are more plausible.  Apple already has its AppleTV, competing with other adjunct TV boxes, like Roku or Boxee, which manages streaming services for your TV.  The current version of the product sells for $99, has generated relatively little buzz and represents a tiny blip on the Apple sales ledger.  A simple update to AppleTV, perhaps adding HuluPlus, on screen iOS apps, web browsing and better coordination with other iOS devices, would be a welcome advance for consumers but hardly the next leg of a growth story driven by the iPod, iPhone, and iPad.  Without its own video streaming service, the interface for actually selecting on-line programs would be the province of Netflix, YouTube, Hulu and others, within their own proprietary apps.  Furthermore, the cable set-top-box would remain untouched as the interface for channelized television.

One of the many rumors around Apple’s mysterious television experimentation has them negotiating with cable operators for an Apple set-top-box.  An Apple set-top-box could add live TV channels to the mix of content on AppleTV, and rescue consumers from the god-awful remote driven, channel grid organized, user interface that has plagued television watching for nearly 20 years.  Of course, this set of potential partners has no interest in making it easier for consumers to do anything but watch the video channels that they provide.  However, Apple does have some interesting cards to play – perhaps tying their television box to TV Everywhere as an integrated default app on iOS devices, and promoting network-affiliated socialTV and 3rd screen applications as part of a deal.  Still, Apple would need to get both media companies and multi-channel distributors (i.e. cable MSOs) on board before designing the box to their needs, and the addressable market still might be disappointing to bloggers and investors expecting the next iPad (Exhibit 3).

An Apple set-top-box, sold with the full blessing of the cable industry, also establishes Apple as a defender of  the status quo, and thus, an enemy of channel unbundling, a la carte program selection, and everything that is good and light in the world of video.  For the hipster fanboys and the arbitrators of cool, this could be the moment that Apple jumped the shark.  Even the Wall Street Journal might raise an eyebrow at that.

For our full research notes, please visit our published research site.

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