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Apple's iTV and the implications of what Steve said

Why the rumors about Apple building a television are wrong.

If I accept conventional wisdom, Apple is getting into the TV-making business because:

  1. The living room is the last consumer segment that Apple has yet to completely remake in its image.
  2. Apple creates new markets where none exist, and it isn’t satisfied with merely improving upon existing ones.
  3. Steve Jobs allegedly said that he’d cracked the code for creating an integrated TV set.
  4. If the iPad is really “just” a big iPod Touch, and has already sold 55 million units, then a TV that is “just” a big iPad could do gonzo business.
  5. The business of making TVs is broken, and Apple has to fix it.
  6. Cable and satellite providers are evil, and Apple has to liberate consumers.
  7. Tim Cook “needs” a hit.

As I stated in my last post following Apple’s gaudy earnings numbers, I don’t accept conventional wisdom because conventional wisdom is dead! Apple killed it.

Most fundamentally, all assumptions about Apple seem to stem from a misunderstanding of how differently Apple thinks and operates from everyone else.

For starters, Apple doesn’t chase markets just because they’re there. Nor do they get sucked into market share battles just so they can say they sold the most units (see: iOS vs. Android).

Further, neither the aggrandizement of the CEO’s ego nor the altruistic care-taking of the consumer drive Apple’s product strategy.

Rather, Apple pursues markets purely and vigorously based upon a simple logic. Do they believe that their integrated hardware + software + service approach can be applied in a leveraged fashion to create a differentiated offering that delights consumers, appeals to the masses, and can be sold at high margins at a predictable run rate?

If the answer is “yes,” then game on. If the answer is “no,” then leave it as a hobby (such as the current Apple TV), or avoid the market altogether.

This is the backdrop for understanding the rumors about Apple building a new-fangled television set. Rumors and whispers notwithstanding, in the words of Dr. Hannibal Lecter, the obvious question is:

“Of each particular thing, ask: What is it in itself? What is its nature?”

Apple TV matrix
Top layer = iOS devices; Middle layer = Core device functions; Bottom layer = Noteworthy hardware subsystems.

In the case of a serious living room play, if you check out the above graphic, what stands out most about the Apple TV in its current incarnation is its lack of apps, web, and communications support. These elements are the three biggest game changers that propelled the iPhone, iPod Touch and iPad beyond the impressive media foundation that marked the pre-iOS iPod.

What is also lacking is the mainstream television programming (HBO, ESPN, ABC) that the typical consumer demands. A ‘purdy’ new TV doesn’t remedy that problem, now does it?

But, remember, Apple is long removed from their anti-establishment days, whereby for the company to succeed the incumbent had to fail. Hence, the rebirth of the Mac was predicated on getting into bed with Microsoft; the rise of the iPod was predicated on getting into bed with the music industry; and the rise of the iPhone was predicated on getting into bed with mobile carriers.

When framed that way, who hasn’t Apple gotten into bed with yet that they need to get in bed with to succeed in a mainstream way?

You guessed it; the cable and satellite providers. Why? Because as noted venture capitalist Bill Gurley sagely pointed out, “When it Comes to Television Content, Affiliate Fees Make the World Go ‘Round.”

In other words, for an Apple TV to be free-flowing with first-tier TV content in the same way that an iPod flows with first-tier music, Apple will need DIRECTV and/or Comcast to bless it.

ESPN, after all, earns $4.69 per subscriber household in affiliate fees on each and every cable subscriber. Apple’s good friend, Disney, owns ESPN, ABC, Disney Channel and a slew of other channels. Disney simply isn’t going to throw billions of dollars away in affiliate fees just so they can help Apple. All of the major TV content players view the world similarly.

So where does that get you when you connect the dots? I’ll tell you where it doesn’t get you … to a television-like device that:

  1. Is priced 2-4X the cost of an iPad.
  2. Has sales cycles of one device every 5-10 years.
  3. Has bad margins.
  4. Has a serviceable form factor that for many people is good enough. (Apple challenges industries where the baseline experience is terrible. Television hardware wouldn’t seem to qualify.)

Conversely, what if you could buy a set-top box that plugged into your modern, big-screen TV, and:

  1. It just worked.
  2. Had every channel you currently get on cable.
  3. You could run those same channels as apps on your other iOS devices.
  4. Your TV could be controlled by any of those same iOS devices.
  5. You could upgrade to the newest version of the set-top box every 2-3 years (on a carrier-subsidized basis).
    1. Who wouldn’t buy this device? And why wouldn’t the cable and satellite providers be all over this? After all, does anyone seriously like their set-top box?

      As a sanity check, a carrier subsidy on a sub-$500 device is meaningful, whereas a carrier subsidy on a $1,500+ device like a TV set is nothing.

      Wait! But, didn’t Steve Jobs say that he’d like to make an integrated TV set?

      Even if he did say that, do you really think that in his final official act as Apple spokesman, Jobs would telegraph to the world his company’s grand intentions in the living room?

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  • Gar

    I wonder if Steve was just getting everyone to spend money, similar to what Apple does with Patents that never become reality. How many companies will spend the money to beat Apple to the enhanced TV market, spending down their dollars only to find out Apple is doing something else.

    And… the world does need a much better UI to all of the TV offerings now, could it be that ‘simple’? The AppleTV2 UI is not much better than what comes in current provider cable boxes so it will need to be more than that.

  • DavidS

    This is a very good post. Your comments about the set-top are well-considered.

    The fact of the matter is that the UX of linear TV is very good to begin with. You turn it on and it works, and the signal is clean and clear.

    If you can have that same thing, available anytime you like, with no other “improvements” or dubious features, and nothing new that the consumer must learn, you’ve got a big hit (Hulu/Netflix).

    Google in particular, likely for cultural reasons, simply does not get it. If you need to search to find something to watch, you have a bad UX that doesn’t satisfy the consumer’s needs.

    People want to watch what’s already on TV, and want to watch shows and movies (and listen to artists and songs) that they *already* know. That’s all there is to it.

    (p.s. I’ve worked in this space, both on the tech side and the content side, for nearly 10 years).

  • Fanfoot

    Agree with most of what you posted here.

    Certainly a lot of the discussion about a possible Apple TV lately has focused on Apple working with the Pay TV carriers. But even then its still been focused on an actual TV with a built-in cable or satellite decoder.

    Which as you say doesn’t make sense in a lot of ways. There’s not that much wrong with a modern TV anyway, at least not if you just treat it like a monitor. Most people (in the US anyway) don’t even know where their TV remote is, since the cable box/satellite box remote can turn it on and off and control its volume.

    A set top box would make more sense. Its much cheaper, has better margins, can be subsidized more easily, etc etc.

    Doesn’t solve the problem that there would be a lot of different versions of the damn thing of course. One for Verizon/Comcast/TW with Cable Card support. One for DirecTV. One for AT&T U-Verse. One for the UK. Another one for Japan. One for the EU as a whole?

    The IP stuff would work everywhere, at least ignoring data speeds and caps. But the local TV angle would be quite different. Different tuners, technologies for decoding the signal/descrambling, etc etc.

    And integrating the DVR function into the “Apple TV” box would make it a full-service hub. Ask Siri to play the most recent episode of “House” and it could do so. Or switch to the channel showing the football game. Or whatever.

    Nicely written.

  • http://www.thenetworkgarden.com Mark Sigal

    @Gar, great point. Could be the ultimate head-fake by SJ. A note aside is that there is a classic section in Michael Lewis’ The New New Thing, a bio on SGI and Netscape founder Jim Clark, where Clark talks up the potential of internet over broadband cable, and all of the gorillas chase that space, figuring a guy like Clark must now. Only, when Clark sees the Mosaic browser he realizes that it’s the Web over IP that the future, and pivots. Lewis calls it the greatest unintentional head fake in tech history.

    @DavidS @Fanfoot, I think that conventional wisdom is that Apple only takes on markets on that they can completely reinvent, whereas I’d argue that more of their genius lies in re-factoring of component pieces, workflow optimization and superior presentation, and how that integrates with their iTunes + App Store Platform and Marketplace.

    If you look at what they’ve done in Media, they didn’t reinvent the concept of music and what audio is. They disaggregated the song from the record, and came up with a better pricing, distribution and manageability model. They have continued that path as they’ve augmented their model with TV, Movies and now Books, and while they show some **early** promise in re-inventing the book, it’s not like they or anyone has conceived of a wholly new media experience that obviates the need to get in bed with cable – satellite or simply demands that you build a TV to get into that domain.

    In other words, the pieces don’t logically fit together, and Apple is a logical, reasoned company.