From credible reports, Apple is trying to enter the TV market in some fashion or the other that is different from the current $100 set top device they currently sell. Rumors have abounded for over a year from multiple credible hardware partners and it’s basically now a fait accompli that Apple will make an actual TV set and sell it to customers. The only question that remains is what form will this TV take and what will be its business model – what content will people be able to watch? And how will they pay for it? How will they acquire it?
While El Jobs was alive, there was this sense that Apple would try to itunify the TV industry (I’m not sure why this was the case given that the man was just a really successful dude and not a serial hypnotist able to cow hard bitten cable operator chiefs to do his bidding with nothing but a penetrating stare). The problem with this formulation of course is legion – a) The TV industry is not in great
decline and not
searching for a new business model to save it b) The TV industry is much more consolidated than the music industry’s more fragmented patchwork of studios, producers and publishers. It’s even much more consolidated than the mobile operator industry. c)The content and cable companies are spending freely on R&D, getting content on Hulu, mobile devices and doing smart things like cable user account login (you have to have cable before watching TV on your iPad). So they’re adapting to the available technology while smartly keeping an eye on controlling access to their customers d) Smart executives are loathe to let apple into their industry in any way that disintermediates them from their customers. It’s not rational at this juncture to let that happen (see a above).
They key thing to note is this: Cable controls access to customers and buys content to fill this distribution pipe. The content is bought from the content guys – cable writes big checks to ABC, AMC, etc. Cable also dominates the distribution pipe fairly comprehensively; the standards, the access equipment and the regulation is all squarely under the thumb of the industry. There is little risk of disruption at this juncture in history as has been evinced by the repelling of would be insurgents like YouTube, Tivo, Boxee, Netflix and more. What this boils down to is that content owners will not jeopardize their revenue streams by doing something that Cable does not like. Not to talk about them trying to make sure they keep control of their crown jewels. This makes disruptive content deals directly to content producers unlikely.
So what is on tap with this Apple TV anyhow?
Likely key capabilities of Apple TV and the value proposition for users
Supposedly, apple will make a full on TV Device. But the real value is the following: Apple branded electronics + Content (iTunes or iTunes like with relatively current episodic and movie content) + a mobile device ecosystem (iPhone + iPad + iCloud + AirPlay) that allows roaming content anywhere. Few companies can deliver this kind of compelling value yet. Amazon is a real competitor but will be very late to TV (it’s not clear if this is their actual strategy). Microsoft has all the pieces on the board but has no presence in mobile devices. Google has only mobile but barely controls that market because of the power of the carriers and its own business model design. Apple has the trifecta.
What is the value of disrupting Cable for content providers?
Plausibly because of its strong value proposition of its device ecosystem, Apple will likely try to match the Cable value proposition i.e. provide value to content providers and Advertiser at a scale comparable to Cable. This could reflect in a new business model for Apple TV and content that will be iTunes+. This might take the form of an annuity fee (like Microsoft’s Xbox) or bundles of content paid for a la carte. Content providers might take a gamble on this (although low likelihood) given that their cable arrangements are renewable after a term i.e. strike a deal with a long lead time before cable renewal is due to prevent immediate sanctions by Cable companies1. That term gives some room for the rapid adoption of the new Apple device and business model to help wean the content companies off Cable Co dollars. Bottom-line, I think the value to Content providers is weak even for Apple – Content providers have to believe that either the world that is, will change quickly into the world that Apple offers, or that that Apple’s approach simply offers higher structural profits. I don’t believe that case can be made convincingly.
How do you deal with Cable Operators?
Apple provides little value to Cable Operators (COs) today except as a tablet OS platform. One way to get in bed with them is to structure a model that drives a lot of customers into COs hands. One plausible example would be to create a special Apple-CO bundle with the Apple TV. This means to get the TV, you need to sign up for the bundle. It needn’t be expensive but it will allow COs to have an entry point to market triple play offers to many new customers who want to buy into the Apple ecosystem. If Apple has a strong value proposition to COs, they are far more able to strike a deal with the content providers with Cable on the same side of the negotiating table. Also COs would be open to a deal that does keep their control over the standards. However the benefits of this deal would be touch to articulate because COs already have some options with their triple play strategies using applications on IOS, Android, etc. These native strategies might be more attractive than any Apple TV driven deal.
What is the likely nature of the agreement between Apple and key content providers and network operators?
“We’ll deliver a ton more cable customers without perturbing the existing base (and preserving the revenue stream of content providers).”
Bottom-line, Apple will need to go to market with the Cable Operators if it wants to align with the current value chain. It’s their strongest play. This week confirmation of this reality has started to leak, but even these “talks” are not certain to lead to a slam dunk. No one wants to invite the fox into the hen house even when it comes bearing gifts.
1In contract, Google has no market power and has bad partnership reputation, so does not have a real chance at providing value to content providers. Also they have the stigma of YouTube which content providers do not like; any comprehensive deal would need to change the nature of YouTube which Google has an incentive to resist.
