Apple’s iTV and the implications of what Steve said

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).

    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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