We may have dodged the Comcast/Time Warner bullet but we’re still far from getting rid of the antiquated set-top boxes and cable modems that only exist to protect juicy old business models.
On August 15th, The Wall Street Journal published yet another story about Apple’s imminent invasion of the TV business. According to people who are “familiar with the matter”, the Cupertino company is…
…in talks with some of the biggest U.S. cable operators about letting consumers use an Apple device as a set-top box for live television and other content…
The article has triggered an explosion of comments, speculation, purported leaks, and ”channel checks”. After the enormous success of the iPhone and the iPad, is TV going to be Apple’s Next Big Thing?
(If you Google “Apple iTV”, you get about 32M hits; “Apple TV” yields 700M. Curiously, Microsoft’s Bing gives you only 11M and 250M. I don’t know what to make of the disparity between the Google and Bing numbers, but a cursory look shows more useful results on Bing. As we know, this now depends on who’s asking and when.)
The topic excites writers and readers alike for good reason: We’re all frustrated with TV as it is, and we have a vague, hopeful sense that a disruptor such as Apple (or Google) could break through the obstacles that have been constructed by operators (cable/satellite) and content owners (studios).
Wouldn’t it be nice to get What we want, When we want it, Where we want it, on the device we like without having to deal with brain-dead set-top box program guides and channel bundle rip-offs?
The precedent has been set: CBS Interactive offers the excellent $4.99 60 Minutes iPad app. NBC, ABC, and other networks have an array of separate apps for news, sports, and entertainment. But this is sliced and diced content, carefully picked and edited, not the real What When Where thing.
For example, where can I get the Olympics opening ceremony? I missed it, I hear it was TV Worth Watching. NBC’s site? No. I even checked the NBC Olympics Live Extra app… no joy. YouTube has a few snippets here and there, but I want the whole thing, beginning to end, the excess and the embarrassment. I’ll sit through an ad or two, if need be, or, better yet, offer me a one-click payment so I can skip the ads.
Why is this so difficult?
First, there’s the fear factor: Having seen how Steve Jobs dominated the music distribution industry, TV studios and operators aren’t eager to let Apple hop into the driver’s seat. The major players foresee a significant drop in ARPU (Average Revenue Per User) if viewers are allowed to unbundle channels, if we can go ”à la carte”, if we can point, click, and pay our way into the TV universe. The impression that Apple “destroyed” the music industry conveniently omits what pirates were doing when iTunes came onto the scene and provided a clean, well-lighted distribution channel, but the fear remains.
Then there’s the complexity: Today’s TV revenue stream, the money sucked out of our pockets, divides into a maze of rivulets that flow to operators, distributors, content owners, and producers. Music is relatively simple compared to TV…but even so, remember how long it took for the Beatles to become available on iTunes? Nine years.
And is it even worth it to Apple? Although Apple TV sales keep growing — +170% year-to-year for the last quarter — the numbers are still relatively small, only 4 million units for FY 2012 so far. At $100 apiece, such volume doesn’t “move the needle”, it’s immaterial when compared to iPhone and iPad revenue and profit.
Still, are these persistent Apple TV rumors totally unfounded?
The answer lies in Apple’s one and only business model: hardware revenue.
Everything else Apple does — software, iTunes, Genius Bars — only exists to push up hardware sales and profits.
With this in mind, today’s Apple TV does more than just deliver Netflix and iTunes movies: It’s a neat part of the ecosystem, it makes Macs (now with AirPlay), iPhones, and iPads more valuable. Your iPhone vacation pictures will show quite nicely on the family TV. Go to a conference room equipped with Apple TV and make your Keynote presentation from your iPhone, iPad, or Mac, no cable required. (PowerPoint doesn’t run on iPads, but a PDF output works just as well.) With the latest 10.8 rev (Mountain Lion) of OS X, all content available on the Web can now appear on your TV.
There’s another, longer term strategy at work: At some point, the growing Apple TV installed base will gain enough mass to become a viable distribution channel. (The same would apply to a successful Google TV effort.) When this happens, someone will crack. ESPN will offer its fare as apps — some free with ads, some paid-for without intrusions — and the others will follow.
It’s a nice theory, it plays into Apple’s ability to deploy the iOS platform more fully on Apple TV, to offer a UI miles ahead of today’s set-top boxes. But in order to matter, the product line will eventually have to reach revenue in the $100B range. What sort of numbers can an Apple TV bring in?
Let’s start with a modest $100/month cable bill. What portion does Apple want? We see the 30% number bandied around, I’m skeptical such a percentage would fly but let’s go with that for the order of magnintude experiment. If we look into a distant future, a time when Apple has 100 million TV subscribers (today, in the US, we have about 50M cable and 35M satellite TV customers), that’s $3B/month, about $40B per year in recurring revenue. If we assume that the new-fangled Apple TV hardware fetches $300 per box, we get an additional yield of $30B — stretched over the number of years needed to reach 100M customers.
This leaves us with difficult questions: How fast can Apple get to 100 million Apple TV-equipped homes? Will operators and content owners/distributors “give” Apple a $30 ARPU? How often will customers be willing to upgrade their TVs (certainly not as often as the iPhone/iPad)? Can Apple broaden its business model to include content and services?
I hope so, I’d love to throw away my ugly set-top box, but I have trouble seeing a path to that happy event. Apple might just continue to improve the black puck, open it to iOS app developers and, in Tim Cook’s words, see where it leads the company.
As for a full-fledged 50″ TV set…I don’t think so. The computer inside would be obsolete well before the display goes dim. This seems to favor a separate Apple TV box.
Who knows, all this agitation might scare TV providers into providing us with better hardware and services…
Behold Netflix. This really is a special company, one that was long adored by its customers for its DVD rental service by mail. Success made the company one of the largest if not the largest US Postal Service customer.
Then — and this is where the “really special” part comes in — Netflix managed to “pivot”, as Valley argot now demands we say. Netflix turned to the Internet and became the VOD (Video On Demand) leader, delivering movies directly to our homes through our laptops. Such a change of medium sounds obvious — retroactively. But ask Blockbuster. Once the retail king of VHS tapes and DVD rentals, it never managed to move its business to the Internet and went bankrupt, only to be picked up by Dish Network, another giant in trouble.
Netflix decided to change everything: business model, infrastructure, people. Such sweeping moves are risky, they often fail. As Netflix successfully managed the transition, Wall Street took notice of the Netflix exception:
As a result, Netflix is now the biggest consumer of Internet bandwidth:
Silicon Insider comes up with an even more interesting chart:
Netflix now has slightly more subscribers than Comcast (which now calls itself Xfinity) and keeps growing while the “cable guy” is bleeding.
I’m happy for Netflix, a well-run, customer-oriented company. And I’m happy Comcast is losing: They’re expensive, their customer service is terrible, they make you feel like you work for them and not the other way around. And their tricky channel bundle pricing ought to be illegal. Forget triple-play (TV + Internet Access + phone service) for a moment. Just for cable TV service, can a normal consumer easily figure out how much the Comcast bill will be?
Netflix, on the other hand, is easy on the mind and the wallet: $7.99/month, all you can watch, on all your devices (TV, PC, smartphone, tablet), cancel anytime. Furthermore, Netflix is making us honest consumers of Internet video. We all remember the lament of content owners: BitTorrent is killing us! Why bother with time-consuming downloads (and the malware they bring with them) when you can stream instantly for a mere eight bucks a month?
Of course, ISPs, Comcast among them, claim that Netflix makes money on their backs, that VOD “abuses” their infrastructure. This leads to bandwidth caps, a normal consequence of the Tragedy of the Commons: If a commodity is free, it’ll be overused and, in some cases, it might disappear. Metered Internet bandwidth isn’t evil in itself, but in the hands of a Comcast… Let’s remember this is the company that managed to convince Congress to let it buy NBC, the equivalent of movie studios buying theater chains. A lovely way to level the landscape.
The ascent of Netflix signals a broader shift in the way we consume television. For example, “news” programs aren’t really news in that they aren’t fresh, they’re already reheated when we watch them at 6 or 11. Many TV programs, from John Stewarts’s Daily Show to PBS Nightly News, can be watched on a PC when we — not they — are available. Tomorrow, we’ll get all of them (minus NBC, perhaps) on Netflix or one of its competitors.
But what about “really live” events: NBA finals, Wimbledon, the Superbowl, Indy 500 (or Formula 1 races for us degenerate Europeans)? Today, we have choices, we can use the DVR to time-shift and get rid of annoying ads, or we get the show in real time, with ads. This is changing rapidly: NBA (basketball) and MLB (baseball) games are available live on Apple TV through the Internet, not cable TV. For the time being, Netflix doesn’t offer such events, just movies and TV series.
This is Internet TV, but is it IPTV?
What we have today is a digitized video stream chopped up and stuffed into dumb IP packets. Here, dumb means little or no metadata, little or no upstream information or interactivity. IPTV means TV endowed with roughly the intelligence of a PC browser. More specifically, IPTV provides targeted ads, multiple windows, interactive commerce, games, Facebook and Twitter engagement, instant messaging to friends: ‘Quick, get on Channel 36!’
This will lead to unforeseen but retroactively obvious usage modes, giving us a truly new medium, not just a shovelware version of an old one.
So what about Apple TV and Google TV? It’s not clear yet when and how they’ll replace the set-top box. Today, the set-top box occupies the privileged “Input 1,” it’s an unavoidable gateway, all TV content flows through it. Apple TV and Google TV are accessories, they’re not the main device. And as long as they’re accessories, they won’t really soar because the set-top box, meaning the cable operator, remains in control.
That’s why Netflix’ ascendance is so encouraging: It bypasses and eliminates the set-top box. It isn’t difficult to see where this is heading. Just as wireless carriers are destined to become wireless ISPs, cable operators such as Comcast are bound to ISP land.
Once this shift happens, the move from TV on dumb IP packets to real IPTV can begin.