December 13th, 2012
Today’s WSJ piece on Apple talking with TV suppliers seems like the most solid evidence we’ve had that there might actually be an Apple TV coming down the tracks at some point. Yet I’ve been reasonably persuaded by many of the Apple TV skeptics that an actual television set doesn’t really jibe with APPL’s economics. I’d be very interested to hear someone smart (like Megan McArdle) walk through the various business challenges the TV market would represent to APPL. The rough list, to my mind, goes something like this:
* Most of APPL’s products are intended to be replaced on a semi-regular cycle. They want you to buy a new iPhone (and iPad) every 12 to 24 months and new laptop/desktops every 24 to 36 months. To that end, they have an aggressive product refresh cycle adding new features and designs every year or so. And they’re able to do this in large part because APPL customers are able to take advantage of a brisk secondary market for used products which defrays the cost of upgrade. You can afford to buy the iPhone 5 because someone on eBay will give you a few hundred bucks for your iPhone 4s.
I wonder what the typical TV replacement cycle is for an American household. My guess–and it’s nothing more than a guess–is that it’s a good bit longer than 36 months. If APPL jumped into the TV market, could they make the economics work on a longer product cycle? Or are they dependent on needing repeat buyers to help lower their manufacture and R&D costs? Or would they try to lure consumers into replacing their TV sets as often as they do their cell phones?
* How would consumers react to an Apple TV set if it was going to be refreshed and improved annually? Would they take to replacing their TVs more regularly, or would it prompt them to postpone purchase because they’re afraid of missing a key feature set in the next iteration?
* Would their be a secondary market for older Apple TVs, or does shipping large-screen panels make this a less attractive option for secondary buyers?
* Those are the hardware questions. From a “software” perspective, the biggest challenge would seem to be untangling broadcast rights. If the Holy Grail of an Apple TV is making channels and/or individual programs something like apps, which you purchase and then consume as you go (and this is a giant assumption), I can’t see how APPL achieves that without unbundling TV packages.
* A la carte channel subscriptions have been The Dream for a long, long time. But instead of moving toward an a la carte system over the years, we’ve actually moved further away from it. Sure, you’d rather only get the 30 channels you really want from Comcast–even if you had to pay almost the same amount you’re now paying for 500 channels that you don’t want. But from Comcast’s perspective (and the perspective of the media companies which own all of those channels) they’d much rather force you to buy the bundle. Their entire business model is based on bundling–forcing you to buy the little-watched networks if you’re going to get the most-watched networks–because it gives them more platforms and space for advertising. Time-Warner, Disney, Viacom, et al, know their business. It’s not clear what APPL could possibly offer them to make them begin to abandon it in favor of a model which would primarily benefit APPL.
* And if an Apple TV didn’t break up the bundling model, then what could it really offer consumers that the Apple set-top box doesn’t already give them? A better UI? TIVO on steroids? A TV panel that does Facetime? I’m not sure how much value there is to be added if the underlying economic systems of cable and advertising stay in place. In a strange way, the xBox is basically doing all of this stuff already. APPL could almost certainly do it better. But they don’t really need to actually be selling the panel if that’s the scope of their ambition.
Like I said, I’d be really interested in smart thoughts about this.
Agreed that an Apple TV only creates value to the extent that it can seamlessly integrate the viewing experience. They can already do this to their heart’s content w iTunes store content (which they control) and Netflix (which lets client-side do whatever you want with its API) but the hard part is getting more premium content into these ecosystems. This is something that requires the cooperation of the cable companies and/or the content providers but that’s not likely to come precisely because it would be disruptive (I agree w your broad strokes but I’ve discussed this at length here and here). So this only works if they manage to get the content. I see two possible scenarios where this could work:
1) The Cablevision precedent gets extended, most notably Aereo wins its attempt to create an unlicensed cloud-based DVR for broadcast content. Apple then applies this precedent to build streaming broadcast content into its own tv, or at least threatens to do so in order to get a relatively favorable license (this is how they got iTunes Match). However this all assumes that Aereo wins and given that Zediva lost its attempt to apply Cablevision to DVDs, I’m not optimistic.
2) The basic cable model destroys itself (perhaps w a nudge from Apple and Amazon). Under this model, carriage fee inflation gets truly ridiculous and you start seeing cord-cutting going beyond just those people I happen to know personally. In response you see more aggressive price negotiations between MSOs and content providers and one of the MSOs (probably Dish) offers a really cheap cable package that drops the high carriage fee content (i.e., ESPN). This then creates a death spiral for basic cable as people who don’t like sports switch to the discount MSO (at least assuming the leagues are too stubborn to rapidly cut their demands). At this point there’s a pull factor as Apple or Amazon offers a truckload of money to content providers willing to defect and let their content into iTunes or Amazon Instant. This is initially attractive to the studios as in the short-run it’s double-dipping for the one who does it but in the long-run it means killing basic cable for all of them. Thus there’s a prisoners dilemma among the content providers and eventually one of them takes the bait. This scenario also has some implausibilities. First, even if it does happen it will take longer to play out than needed for Apple’s time scale. Second, to date luxury TVs have been driven by sports fans and this scenario probably means the Apple TV has everything but sports. There’s also the question of how strategic will the studios be about keeping cable going. Comcast-Universal is obviously gung ho behind basic cable and I would have said Disney is too since they own ESPN but Disney just licensed its film library to Netflix which means either they’re dumber or smarter than I think.
I think content is really the key issue but I agree that there are other problems. Notably it’s not clear why it would have added value over a set-top Roku or AppleTV. Also agreed that a set-top device makes a lot more sense with a rapid update cycle. I can see replacing a 4 cubic inch box of ARM chips for $99 every year or two, but a couple square yards of flat-screen display for $1000? No way, no how, I’ll just upgrade the user interface controller and keep the display thank you very much. (I’m extremely happy with my set-up of a $400 tv and a $80 Roku w content from Amazon + Netflix).
iTube. Ultimate PPV.
My first television set (4:3) lasted from 1995 to at 2008. We replaced it because a) it was at that point obsolete and b) I could afford a bigger screen). We subsequently replaced my wife’s 1995 set in 2010. After moving this year, we purchased a third for an additional room in our new house. They all have ‘Apple TV’s’ which we use due to our large digital library.
We anticipate keeping these TVs for quite some time. Therefore, my question regarding the economics of an Apple TV set, is not only the cycle life, like you address, but what’s going to make me replace these great sets I already possess.
Additionally, the newest was bought to fit into a hutch in our living room, so size is a factor as well.