Television viewers fumble with awkward remote controls and crave a richer array of on-demand programming. It’s time for Apple to step in and disrupt the TV business.
Steve Jobs couldn’t hide his frustration. Asked at a
technology conference in 2010 whether Apple might finally turn its
attention to television, he launched into an exasperated critique of TV.
Cable and satellite TV companies make cheap, primitive set-top boxes
that “squash any opportunity for innovation,” he fumed. Viewers are
stuck with “a table full of remotes, a cluster full of boxes, a bunch of
different [interfaces].” It was the kind of technological mess that
cried out for Apple to clean it up with an elegant product. But Jobs
professed to have no idea how his company could transform the TV.
Scarcely
a year later, however, he sounded far more confident. Before he died on
October 5, 2011, he told his biographer, Walter Isaacson, that Apple
wanted to create an “integrated television set that is completely easy
to use.” It would sync with other devices and Apple’s iCloud online
storage service and provide “the simplest user interface you could
imagine.” He added, tantalizingly, “I finally cracked it.”
Precisely
what he cracked remains hidden behind Apple’s shroud of secrecy. Apple
has had only one television-related product—the black, hockey-puck-size
Apple TV device, which streams shows and movies to a TV. For years, Jobs
and Tim Cook, his successor as CEO, called that device a “hobby.” But
under the guise of this hobby, Apple has been steadily building
hardware, software, and services that make it easier for people to watch
shows and movies in whatever way they wish. Already, the company has
more of the pieces for a compelling next-generation TV experience than
people might realize.
And as Apple showed with the iPad and
iPhone, it doesn’t have to invent every aspect of a product in order for
it to be disruptive. Instead, it has become the leader in consumer
electronics by combining existing technologies with some of its own and
packaging them into products that are simple to use. TV seems to be at
that moment now. People crave something better than the fusty, rigidly
controlled cable TV experience, and indeed, the technologies exist for
something better to come along. Speedier broadband connections, mobile
TV apps, and the availability of some shows and movies on demand from
Netflix and Hulu have made it easier to watch TV anytime, anywhere. The
number of U.S. cable and satellite subscribers has been flat since 2010.
TVs could give Apple a way of entering or expanding its role in lines of business that are more profitable.
Apple would not comment. But it’s clear from two dozen interviews
with people close to Apple suppliers and partners, and with people Apple
has spoken to in the TV industry, that television—the medium and the
device—is indeed its next target.
The biggest question is not
whether Apple will take on TV, but when. The company must eventually
come up with another breakthrough product; with annual revenue already
topping $156 billion, it needs something very big to keep growth humming
after the next year or two of the iPad boom. Walter Price, managing
director of Allianz Global Investors, which holds nearly $1 billion in
Apple shares, met with Apple executives in September and came away
convinced that it would be years before Apple could get a significant
share of the $345 billion worldwide market for televisions. But at
$1,000, the bare minimum most analysts expect an Apple television to
cost, such a product would eventually be a significant revenue
generator. “You sell 10 million of those, it can move the needle,” he
says.
Cook, who replaced Jobs as CEO in August 2011, could use a
boost, too. He has presided over missteps such as a flawed iPhone
mapping app that led to a rare apology and a major management departure.
Seen as a peerless operations whiz, Cook still needs a revolutionary
product of his own to cement his place next to Saint Steve. Corey
Ferengul, a principal at the digital media investment firm Apace
Equities and a former executive at Rovi, which provided TV programming
guide services to Apple and other companies, says an Apple TV will be
that product: “This will be Tim Cook’s first ‘holy shit’ innovation.”
What Apple Already Has
Rapt attention would be paid to whatever round-edged piece of
brushed-aluminum hardware Apple produced, but a television set itself
would probably be the least important piece of its television strategy.
In fact, many well-connected people in technology and television, from
TV and online video maven Mark Cuban to venture capitalist and former
Apple executive Jean-Louis Gassée, can’t figure out why Apple would even
bother with the machines.
For one thing, selling televisions is a
low-margin business. No one subsidizes the purchase of a TV the way
your wireless carrier does with the iPhone (an iPhone might cost you
$200, but Apple’s revenue from it is much higher than that). TVs are
also huge and difficult to stock in stores, let alone ship to homes.
Most of all, the upgrade cycle that powers Apple’s iPhone and iPad
profit engine doesn’t apply to television sets—no one replaces them
every year or two.
But even though TVs don’t line up neatly with
the way Apple makes money on other hardware, they are likely to remain
central to people’s ever-increasing consumption of video, games, and
other forms of media. Apple at least initially could sell the screens as
a kind of Trojan horse—a way of entering or expanding its role in lines
of business that are more profitable, such as selling movies, shows,
games, and other Apple hardware.
That’s essentially the
justification for the Apple TV product, the $99 hockey puck that streams
TV shows and movies on demand for $1.99 and up. For most of its six
years on the market, the device hasn’t been a big seller. Nor have many
of the other TV add-ons, such as Google TV (see “
Searching for the Future of Television,”
January/February 2011), or even TiVo. But Cook has upgraded the way he
talks about Apple TV: in October he called it a “beloved” hobby, perhaps
because sales had almost doubled, to five million units, in the
previous fiscal year. One reason it’s more appealing is that in July,
Apple added Hulu Plus to the small list of Apple TV apps. That made it
possible, for $8 a month, to watch current shows on demand the day after
they air on TV.
But selling a TV set could also give Apple a way
to enhance the role iPads and iPhones are playing in living rooms. Apps
ranging from Apple’s own Remote to personalized programming guides such
as NextGuide are turning them into far more capable portals into the TV
than cable remote controls. In fact, Ben Reitzes, an analyst at the
investment bank Barclays, believes that Apple’s TV strategy actually
revolves less around the TV set than around the iPad as universal
remote. He thinks the appeal of an iPad remote would help maintain
Apple’s tablet dominance, especially as the company extends iPads to
become a “central command” for lights, heating systems, and other
features of the digital home.
A potentially much bigger advantage
for Apple is a feature called AirPlay in the latest Mac and mobile iOS
software. It allows whatever is showing on Macs, iPhones, and iPads to
be “mirrored” to a TV set. Although not many iOS television apps support
AirPlay yet, viewers can use Macs sold since mid-2011 to mirror shows
from the free Hulu site, network websites, and even—perish the
thought—pirate video sites. Suddenly, viewers can watch a lot of current
shows on their HDTVs quickly and wirelessly—and, most important,
without a cable subscription.
What Apple Still Needs
But Apple isn’t likely to disrupt the TV business solely by helping
people get around the traditional cable and satellite providers.
Instead, it will try to work with them—and give them an incentive to
come along. Stewart Alsop, a partner in the VC firm Alsop Louie Partners
and a former member of TiVo’s board, says Apple could use a tough-love
approach: “Apple is the one company in the world that’s powerful enough
to take on monopolies and force them to change.”
Making friends
with them has proved to be Apple’s most difficult challenge so far—and a
solution is hard to discern. A few media conglomerates that run cable
and broadcast channels, such as Walt Disney, Time Warner, and Viacom,
remain extremely profitable. TV advertising generates $72 billion
annually in the United States alone. Plus, the cable and satellite
operators that distribute programming to homes gross $103 billion a year
in pay TV subscriptions, sending $28 billion of that back to the media
companies. Pay TV operators such as Comcast are also large Internet
service providers, giving them influence over how far online TV services
can go.
So unlike music labels before them—which were weakened by
piracy and thus were more willing to grant Apple the right to sell
individual songs for 99 cents apiece—they have no need to sell their
content cheap. In particular, producers won’t give Apple access to their
live shows without a guarantee of the same big bucks they get from
cable and satellite operators. The TV companies are wary of even letting
Apple create a new TV user interface for their customers, the key to
making an Apple television something special.
The classic Apple
approach to such a situation would be to come up with a superior, or at
least more elegant, product and force companies in related fields to
play along. But Apple used to do that by having Steve Jobs charm and
cajole recalcitrant partners. Jobs also understood the entertainment
business and knew the players. He built Pixar into one of the world’s
most successful movie studios, then served on Disney’s board after
Disney bought Pixar in 2006. And even he struggled to persuade TV
companies. CBS CEO Leslie Moonves, for one, said he rejected overtures
in 2011 by Jobs himself for an Apple TV subscription service. Today,
Eddy Cue, Apple’s senior vice president of Internet software and
services, is the company’s most important TV dealmaker.
So how can
Apple get more leverage and force the pay TV industry to deal? One
possibility is that the troika of iPads, Apple TV, and the TV set—made
by Apple or not—could bring about even more sweeping changes to make the
television-watching experience more interactive. Google tried to do
something similar two years ago with its Google TV service, but at least
initially the results were too geeky, requiring a keyboard and clunky
navigation. Its recently introduced voice-driven remote control feature,
using Android smartphones and tablets, only underscores the fact that
people want a less brain-taxing experience in the living room.
But
a new generation of “dual-screen” apps could provide the best of both
traditional TV and the Internet, says Jeremy Allaire, chairman of
Brightcove, a provider of online video services. Major League Baseball’s
iPad app, for instance, plays a game on the TV through Apple TV while
you check out relevant stats and chat with friends on your tablet.
Essentially, says Allaire, whose company helps software developers
create these apps, iPads and iPhones serve as the real brains of the TV.
Jobs understood the entertainment business and knew the players, and even he struggled to persuade TV companies.
Apple could also let people use voice-driven commands to find shows
and change channels using Siri, its intelligent personal assistant. You
could toss that annoying cable remote and just tell your TV what you
want to watch. Moreover, Apple’s iCloud storage service could be used as
a digital video recorder in the sky, as Jobs hinted to Isaacson.
Already iCloud can store TV shows bought on iTunes and feed them to any
Apple device.
If such enhancements make Apple TV ever more useful,
then “at some point, the growing Apple TV installed base will gain
enough mass to become a viable distribution channel, an alternative to
traditional cable TV,” suggests onetime Macintosh executive Gassée, now a
general partner at the venture firm Allegis Capital. “When this
happens, someone will crack.” That is, a cable channel such as ESPN will
offer its must-have sports coverage on Apple TV, and others will feel
forced to follow—thus paving the way for a credible Apple television.
Apple
has also explored building a cable set-top box—possibly a souped-up
Apple TV using a CableCard, a small card that plugs into a DVR or other
TV device and allows subscribers to view cable channels without a
separate box. Although it would be working within the current cable
industry model, Apple would provide a more intuitive interface, like the
iPad’s, and users would be able to watch live and on-demand shows
through an Internet-based DVR service.
This might work. Comcast
and Time Warner Cable executives have said they’re open to new program
guide interfaces from Apple and other companies so long as cable
subscribers keep paying them. Cable subscribers could be “authenticated”
through Apple’s set-top box, or eventually a TV, to prove they’re
subscribers—a system like the one HBO uses, for example, with the HBO Go
app that streams its shows to mobile devices.
But Apple may not
have time to wait for them to deal. Competition from Google (which is
experimenting with a pay TV and Internet service in Kansas City), Amazon
(which has a streaming video service and plans to produce original
series), or Microsoft (whose Xbox gaming console is as much a video
delivery device as a game machine) may force Apple to stake out
territory in the living room more forcefully, and soon. Maybe, just
maybe, a sleek Apple-designed flat screen, combined with a more elegant
user interface, iPads serving as slick remotes, Apple’s existing iTunes
library, and shows from outside services such as Netflix and Hulu, would
be compelling enough for consumers while Eddy Cue keeps doing lunch in
Hollywood. “The reality from a consumer standpoint,” says Piper Jaffray
analyst Gene Munster, is that Apple “needs to revolutionize the
interface and the design” before it can reorganize TV content. Munster
expects to see an Apple television this November, at least two years
after he initially predicted. “We don’t need a nuclear event around
content for an Apple television to be successful,” he says.
It’s
worth noting that with its iPads and iPhones, Apple is already selling
the TV screen of choice for a rising number of peripatetic viewers. You
can’t use these devices to watch everything you get on cable, but TV
apps offer shows from CBS and HBO, some free, plus live baseball games
and other programming. More than half of tablet owners under 35 watch TV
on them at least weekly, according to a survey in August by the
consulting firm Altman Vilandrie.
In other words, don’t just think
of an Apple TV as the big screen in the living room, or else you might
miss where Apple really envisions the 75-year-old medium going next:
everywhere. “Whatever it is, it’s not going to be just on that big box,”
says Jeremy Toeman, CEO of Dijit, developer of the TV programming
guide app NextGuide. Before long, he says, “everything you have with a
screen will become a television set.” Jobs may have “cracked”
television, but Apple could blow it wide open.
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