Monday Note

You’ll recognize an echo of the August 2009 note: The Jesus Tablet: What For?

This time, we’ll walk around another increasingly popular topic: Apple’s putative entry into television sets, a huge Consumer Electronics segment.

The argument for Apple making TVs is two-pronged: the money and the UI.

For the money, there is the $31B television set market, one where Apple should go next, according to Piper Jaffray’s analyst Gene Munster. The gent is one of the usual suspects, I mean an oft-quoted “industry observer” following Apple. (Oft-quoted and no less often wrong: in February 2009, our Gene predicted Apple TV would get a CableCard and a Digital Video Recorder capability by the end of last year.)
For Apple to continue to grow, the reasoning goes, it must enter new markets. This clearly implies Apple’s existing product categories can’t supply double-digit growth; this no less clearly overlooks the huge growth spurt provided by the smartphone segment. The iPhone is Apple’s fastest-growing and largest and most profitable business. And this with less than 7% of the total worldwide market for smartphones, a market that is going through a huge growth spurt as these devices emerge as “the next PC, only bigger”. So much for the lebensraum, room for growth argument.
Furthermore, getting into a huge commoditized (meaning very low margins) consumer segment as TV sets can also be viewed as we sometimes call the Great Chinese Soft Drink Market Fallacy. ‘Chief, if only each one of these guys buys one can of our newest power drink a month, one billion cans, we’re rrrrich!’ – But they don’t. Fighting the Samsungs and the Sharps of that world on their own ground is a risky bet.

To counter the commodity market giants negative, we have the User Interface argument. Picture, if you will, the back of an Apple television set: two connectors, one coax for the cable signal, one RJ 45 (Ethernet) for the Net connection (if not achieved thru the coax cable). Inside, an embedded computer and hard drive, a WiFi link. Outside, an iPod Touch or iPhone as a remote. Instead of the touchingly antiquated Made in East Germany UI of our Comcast cable box (mine can only display two digits for the hundreds of channels it switches), we get to search TV schedules and movie libraries the way we search the Net or our hard disk. All this is Apple style. (Or Google style, as we’ll discuss in a moment.)

This isn’t a new vision: this is exactly what a friend of mine and real industry insider, a serial entrepreneur, Peter Yared, CEO of Transpond, described in his August 2008 blog post:

Up Next from Apple: Apple TVs

Apple’s next move occurred to me while I was walking by my local Apple store: Apple iTV, which will be:
Wall-mountable 37″, 42″, 50″, 60+” LCD screens
Look cool, with a hip Apple logo
Stream iTunes video and audio content from the web and from your Mac
Have special apps on the appstore that run on your TV (sports scores, etc.)
Cable card compatible so you won’t need a cable box
Wirelessly display your MacBook’s video feed
iPhone-like touch screen remote control
Include a browser controllable by above remote control’s keyboard
Built-in DVR
So a very cool looking TV that is plug-and-play capable of showing video rentals and playing music. This will do to Sharp/Sony/Samsung/Comcast what the iPhone did to the Blackberry and AT&T: cost more, eviscerate the market, and bypass the network operator. Sweeeet.

I know, I’m mixing two threads here. One train of thoughts is the fully integrated television set made (designed) by Apple, the other is the Apple TV external box.

Let’s start with today’s external box, Apple TV, a strange creature that’s neither a set-top box, nor a PVR (a.k.a. DVR), nor an AV receiver for a home theater (home cinéma for Europeans). The hobby is more like a Roku, or a Vudu with expected Apple twists: clean UI and pairing with your iTunes and iPhoto libraries on your PC or Mac. Why hasn’t Apple made the obvious move of extending it by adding a CableCard and a DVR software module?
Regarding the CableCard, this apparently logical product hasn’t met the expected market success. It sounded right: equip new TVs with what is in effect a PC Card slot, insert a CableCard instead of using an ugly set-top box, all the required decoding and authorizing electronics are “easily” embedded on the card. That’s the neat theory. In practice, cable providers prefer an external box, which you’ll need anyway if you want a PVR. If you take a look at what TiVo, the “inventor” of PVR’s, says about CableCards, you’ll realize you’ll need two of these if you want to record two programs at the same time, something a PVR-equipped cable box does without hassle. In general, cable companies will try and discourage you from using a CableCard, when they don’t outright say or pretend they won’t supply or support them, this in spite of the requirements spelled out in the Telecommunications Act of 1996. (There is a theoretical alternative, DCAS, for Downloadable Conditional Access System, it’s still in limbo.) Out goes the CableCard extension for the Apple TV box.
Turning to the DVR software module, see how TiVo sued EchoStar (Dish Network) and cable providers. Some cases are still before the courts, others have been settled into licensing agreements. Which leads us to Apple and its licensing ways: the company hates paying percentage license fees, it will do an outright buy, a fixed sum, but not a variable one. Out goes the DVR capability.
Perhaps to be revisited as TiVo continues to lose money and subscribers and as it’s Hail Mary product, the Premiere, is poorly received. See also Walt Mossberg’s piece here. (TiVo fans, I’m one of yours, I feel your pain. Another nice innovation, another squandered opportunity.)

Moving to the integrated TV set, it would have to first overcome the CableCard and DVR obstacles just discussed. Then, how often do we switch TV sets? Every five to seven years, or more. Yes, lately, there has been a big wave of replacements as we bought relatively inexpensive flat screens. Manufacturers have raced to the bottom, inevitably. You can now buy a 40” Vizio (the devouring Chinese brand) 1080p set for $629 at Costco. Trying to revive margins, manufacturers are now reaching for markitecture frills such as higher image refresh rates, we’re now at 240HZ, 480Hz in sight or, the newest trend, 3D.

Contrast this with PCs and laptops: they’re physically easier to move around, to hand down to family members or eBay buyers as we upgrade every 2 or 3 years. In a related vein, you walk out of a retail store with your new laptop, you don’t with a new TV. For Apple, recently given to calling itself a “the biggest mobile company” in the industry, big-screen TVs would be a real change.

But there are plusses. Look at the back of a modern AV receiver:

Integrating at least some of the interconnections wouldn’t hurt.
Then, think of the remotes. My friends at Logitech make a nice business of selling and supporting “learning” devices called Harmony Remotes. These remotes aim at integrating the 3, 4 or even 5 remotes that come with the TV, the cable box, the DVD player, the AV receiver… A $100M+ business, growing nicely. (The top of the line Harmony 900 or Harmony 1100 will set you back $399, $100 less than the entry-level Wifi iPad…)

As a user, I can attest to both the benefits and the limitations of integrating remotes. The biggest problem is the devices you try and control don’t talk back, they don’t tell you, I mean they don’t tell the remote, what their state is. The remote doesn’t know if the cable box has been successfully turned on or changed channels, forcing remote designers to devise crafty but complicated work-arounds when things don’t quite work as expected.
You’ve noticed the arrow pointing to the Ethernet connector in the picture above. Unfortunately, AV receiver designers haven’t used the IP (Internet Protocols) connection to communicate back the missing state information I was just lamenting, they focused solely on Internet radio, with an atrocious 1970‘s text UI on the TV screen.
Clearly, more integration, moving more function inside the box and a good UI would help. Translated into $$: some customers would pay a premium — as they do for an easier-to-live-with laptop. (See what Peter Yared says at the end of his post above.)

Then, for both the external box and the integrated TV set, we have the Internet and changing viewing habits.

Hulu is an example of things to come, Boxee is another. We have nice laptops or nice monitors, or we can connect them to a TV. Also, the newest TV sets have an Ethernet connector. With the “sample of one” caveat hereby stipulated, I no longer record 60 Minutes or the PBS Newshour, I can watch these online when I feel like it. Even “live” events can now be watched online, as I did for the signing of the HCR bill at the White House. (It’s not just me, see this.) Operators such as Comcast (or, in France, Orange) are very well aware of the Net’s competition, that’s why they buy into content as Comcast just did for NBC.
Still using my own experience, I was shocked when, more than four years ago, I connected a Sharp 1080p HDTV to a Mac Mini. First, the connection configured itself automatically. Then, with a browser in full-screen mode, how do I know I’m watching the Web, as opposed to watching TV?
We’re not into real IP TV yet, into a TV stream that knows it’s me and not you watching this particular program. The “benefits” of individually targeted and interactive advertising are drool-worthy. Imagine ads with a click to buy, or subscribe feature. The move towards Internet TV is irresistible, see this solid Atlantic Monthly piece on the death of cable TV here.

Going back to Apple, will it or won’t it?

The most recent bout of speculation started when an attentive blogger spotted an Apple job posting clearly stating an intent to bring the iPhone OS to “new hardware platforms”. This was last Fall. The job requisition number, 4929592, no longer works; the position must be filled.
What could this new hardware platform be?
Then we have Tim Cook, Apple’s COO, the man who so competently held the fort while Dear Leader was taking care of his health. Tim spoke at a Goldman Sachs Technology Conference on February 23rd, 2010. There, Apple’s COO professed “no interest in going into the TV market. But [we] still think there’s something there. So we continue to invest in this as a hobby.” The H-word again.

We’ll recall how, last year, Steve Jobs dissed reading, quoted in a January 2008 NY Times piece: “It doesn’t matter how good or bad the product is; the fact is that people don’t read anymore,” he said. “Forty percent of the people in the U.S. read one book or less last year.” And the iPad launches next week with an iBook Store.
Before, we’ve had “no video on the iPod”, “the Intel processor is a piece of crˆ&p” and, perhaps most famously, the Summer 2007 statement: “No native apps on the iPhone”.
When Apple says black we tend to hear white.

And, now, we have Google TV, a set-top box running Android, the red rag to the bull, a device that might push Apple to make its own serious move.

Confused? I am, too. But we can cling to one certainty: the answer, an Apple TV box or set, a putative iTV can only be iPod/iPhone/iPad simple, or it won’t be.
Also, given the obstacles, the game$$ cable and content provider play, Dear Leader might have to resort to one more hypnosis session with one of the big contenders. Remember, that’s how he convinced AT&T to let him “run the table”, to abandon any pretense of managing and taxing content sales on the iPhone.

One last thought: to better think about an iTV, let’s watch what happens with video content an new applications on the iPad, we might a clue or two.

[I’ll get two iPads this coming Saturday but won’t report for a couple of weeks so I can see if the dog goes back to the dog food.]

—JLG@mondaynote.com

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