Monday Note

It’s the rumor that refuses to die and the myth that keeps on giving…pageviews. Serial Apple-rumorist Gene Munster is at it again: In a 15 minute Bloomberg Radio program (obligingly summarized here by Business Insider’s Henry Blodget and here by 9to5Mac) the PiperJaffray analyst issues his umpteenth version of the prediction:

Apple’s TV is real. It will be ‘The Biggest Thing In Consumer Electronics Since The Smartphone’.

As if this weren’t bold enough, Munster also predicts that Apple’s TV set will be announced this year and will ‘freeze the market for five months’. Naturally, the design will be bold: ‘… just a sheet of glass, no edges or bevels’.

Let’s start with a bow to the power of desire and the company’s reputation: Wouldn’t it be grand to have a magical TV-done-right? A Jony Ive hardware design, a UI purified of the ugliness and complexity foisted upon us by operators (cable or satellite) and set-top designers (Motorola, General Instruments), iOS-based, controlled via Siri, fed by a completely remodeled iTunes and App Store…

Apple keeps barging into existing markets it didn’t invent — MP3 players, smartphones, tablets — and manages to go home with a big share of the game. It does this by skillfully rethinking the device, inside and out. With the iPod, the iPhone, and the iPad, Apple offered sleek, elegant, cohesive form factors…and it did more: It provided a new ecosystem. The process started with iTunes (selling separate songs and micro-payments), which provided a debugged foundation that made the iPhone the first ‘‘app-phone’’ and paved the way for the iPad.

Why can’t Apple do something similar for its hypothetical TV set? Is it just a lovely, comforting fantasy?

Today’s TV experience is far from magical. A few weeks ago, I bought a 47” LG Smart 3D HDTV on post-Xmas sale at Fry’s. At $990, the thin, easy-to-install, internet-connected TV sounded good.

WiFi set-up isn’t too hard:

Using the Web browser is another story (although, to be fair, in a world of smartphones and tablets, why would you browse the Web on your TV?):

Still, there are plenty of embedded applications…

…and the “management’’ UI is cheerful, if a little disorganized:

For the Skype application circled above, you can buy a dedicated webcam. I did, it’s expensive — it adds 15% to the TV’s price — but its really Plug-and-Play, no software added.

All the parts are there…but a $49 or $79 Roku, a $179 Boxee Box, a $179 Xbox, or the $99 Apple TV offers more content, flexibility, and modularity, to say nothing of a more accessible UI.

Does this make a case for yet another category reinvention by Apple?

Not so fast.

As discussed in previous Monday Notes (here and here), there’s one strong, clear reason to bet against an integrated or smart Apple TV set: To perform the expected magic, a computer must inhabit the otherwise “dumb” TV. Very quickly, in a year or two, Moore’s Law will obsolete that computer. To get a new computer — more powerful, more fun –  you’ll need a whole new TV set. We might be willing to buy a new phone, tablet, or laptop every other year, but not a new 47” HDTV.

I believe Apple TV’s magic will be performed by a separate box, a descendant of today’s $99 Apple TV black puck, perhaps in combination with a new version of Time Capsule. This will enable the no-longer-a-hobby Apple TV to bring its magic to the millions of HDTVs already in homes all over the world — and to be replaced with better/faster hardware without drama.

(While we wait for the grand new Apple TV, we’re likely to get an updated version of today’s black puck Real Soon Now: The vintage 2010 model is no longer available online at Amazon, Best Buy, or Radio Shack — I just checked. If, as I hope, the upgrade outputs real 1080p HD — 1920 by 1080, versus today’s 720p — 1280 by 720, it’ll be an easy sell. Especially as an AirPlay companion to something like an iPad HD with twice the linear resolution of today’s tablet, 2048 by 1536 versus the original 1024 by 768.)

So, no grand integrated device…but the next-gen Apple TV, the next black puck, will certainly have that iOS/Apple Store magic, right? With three success stories in the books, the process of writing and distributing iOS apps is well understood, billions of dollars have changed hands through the App Store, developers and customers are standing by!

Again, not so fast.

Most of what we do with our PCs, smartphones, and tablets is related, it’s one form or another of personal computing. Yes, we also play games on our phones, but our posture is primarily ‘‘lean-forward’’: productivity, communication, organization, learning.

A TV, even when running iOS, isn’t a personal computer. We won’t be typing The Great American Novel or answering email, but we will play games, tune into channels-as-apps, video-chat with our friends and families running Skype or FaceTime. The TV is entertainment, it’s a ‘‘lean-back’’ experience. As one wag put it, the PC helps us think; the TV relieves us from our thoughts.

To gain acceptance, the Apple TV ecosystem will have to offer a library of entertainment apps tailored for TV. The company has made inroads in the genre – see the 60 Minutes iPad app, or MLB.tv for Apple TV (a great boon for naturalized fans who occasionally spend time in repatriation). But most entertainment content providers – TV networks, event producers, movie studios – are proceeding with caution. They know the history: Steve Jobs managed to convince music ‘‘majors’’ to let Apple distribute the content. Over time, the content distributor became more important than the content owner, giving sharper meaning to the old Hollywood saying, “If content is king, distribution is King Kong.”

No one knows if, when, and how Apple will succeed in building an Apple TV App Store that will have enough content to displace the old set-top box, its bundles, and its “lovely” navigation.

But can we, at least, hope for a separate, “dumb” TV set from Apple, elegance we can hang on the wall?

Here we run into the business model question. For Apple, only hardware margins matter. Everything else — software, content, stores — is there to serve the topmost goal. It’s doubtful that Apple can “maintain the hardware lifestyle to which it is accustomed” with such a product.

Today, the TV hardware business shows signs of desperation with its gimmickry and price wars. Even at the high end where Bang & Olufsen makes “exclusive” sets that sell for 3 to 4 times as much as technically comparable Samsung devices, life isn’t too comfortable. Take a look at B&O’s latest investor presentation and you’ll see that TV sales make up less than half of their $500M revenue, and show a slight decrease year-to-year. Operating profit is a modest 4% or so.

With this in mind, could Apple achieve its ‘‘customary’’ 37% Operating Profit selling a “dumb” TV? For help in answering the question, let’s compare the price of Apple’s 27” Thunderbolt Display to its competition. The Thunderbolt is “more than HD” (2560 by 1440) and has some features that aren’t found on other monitors — power to another device; extra USB, Ethernet, Firewire, and Thunderbolt ports; an integrated 720p camera — but at $999 it’s selling in middling quantities even though it demands a significant premium. At Amazon, a Samsung 27” (1920 by 1080) monitor sells for $329. Some competitors go as low as $250.

Now imagine a 47” or 55” 1080p TV set version of the Thunderbolt Display with fewer ports and better sound, perhaps. Today, Samsung’s top-of-the line 46” sets sell for $1,800; the 55” model is $2,000. Would Apple get a 50% premium over those prices?

But even more than price and margins, there’s volume. Going back to Gene Munster’s ‘Biggest Thing In Consumer Electronics Since The Smartphone’ claim, would Apple’s elegant, slightly better connected, webcam equipped, but nonetheless dumb set sell in iPhone or iPad quantities? I seriously doubt it.

If Apple succeeds in building the right content-and-apps ecosystem around a next-gen Apple TV box, the new device will be in a position to eclipse today’s ungainly set-top boxes, it will have a chance to sell in large quantities at good margins — and thus stop being a ‘‘hobby.” Then, yes, Apple might also sell a few (almost) dumb but definitely elegant sets on the side — as a recreation.

JLG@mondaynote.com

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