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Summary:

Sterne Agee analyst Shaw Wu thinks Apple needs to get into the content game to make the iTV a winner when it launches. But the bigger opportunity might be where Apple plays best — in allowing content creators to develop their own apps on its iOS platform.

apple-tv

The iTV might be the most anticipated product that Apple has ever yet to launch, and it seems like everyone has an opinion about what’s going to make the device a winning proposition for consumers. The most recent prognostication comes from Sterne Agee analyst Shaw Wu, who believes that Apple needs to get into the content licensing game in order to win over TV buyers. But frankly, I don’t think it’s content deals that will make consumers want to buy the device. Instead, Apple will win in TV the same way it won with the iPhone — by having a compelling platform for app developers.

The case for content

In his research note, Wu argues that it’s not the technology which is holding back Apple from shipping product, but striking content deals that will make an Apple television a more compelling competitor in the smart TV market. In short, Wu argues that whatever content Apple licenses will be key in driving consumer adoption. He even suggests that Apple could truly differentiate its product by offering an a la carte model for choosing packages of shows or channels.

Of course, Wu isn’t alone. We’ve also seen the suggestion floated that Apple could drive hardware sales by pulling a Netflix and jumping into original content creation or exclusive licensing of certain programming.

The reality of the situation

For those waiting for Apple to create its own virtual TV service, or to allow users to pick and choose their favorite channels or TV shows: don’t hold your breath. Apple has reportedly been trying to strike licensing deals that would allow it to roll out its own subscription-based video offering for years, to no avail. And the most obvious reason it’s been unable to make something work is that the economics just don’t make sense.

As for a la carte: There is absolutely no incentive for content creators to unbundle their programming in this way, especially not for an unlaunched, unproven product in the nascent connected TV market. Even if they did, licensing terms for individual subscriptions of certain networks would be egregiously expensive, to the point where it would be difficult for Apple to profitably create such an offering.

And finally, before anyone even thinks about original programming, they have to build audience first. Look at Netflix, or any of the basic cable networks that have started licensing exclusive TV shows. In all cases they were “rerun TV” long before they reached a large enough audience to justify building their own original content.

Where Apple can provide value

If Apple is smart, it won’t set out to disrupt the programming industry by creating a la carte packages of licensed content. Think of it as “If you can’t beat ‘em, join ‘em.” Apple is not going to be able to disrupt the TV industry, so it might as well give the TV industry the tools it needs to improve their offerings for consumers.

Apple should look to content providers as developers, trusting in the strength of its platform to prove compelling enough for them to build differentiated user experiences. In the same way that Apple opened up developer tools for its mobile and tablet platforms, having a software development kit and app store on the iTV (and most likely the Apple TV set-top box) will allow content partners to create their own applications on top of the iOS platform.

What’s more, the timing for such a plan is finally coming together: The TV industry has come to accept that over-the-top apps will be paramount to their success in the future. That’s why you see pay TV operators like Comcast, Verizon, Time Warner Cable and others building applications for game consoles like Microsoft’s Xbox 360 and for connected TVs. That’s why, with the launch of the iTV, Apple won’t necessarily have to appeal to the industry to get on board with where it’s going — networks and operators are already moving toward an app-centric approach to video access and delivery.

Death of the set-top and second-screen opportunities

So why would a content provider build an app for iTV? For one thing, because doing so would allow it to get rid of costly set-top boxes and deliver a dynamic user interface directly for the TV set. I’ve written extensively about the death of the set-top box, so won’t go into too much detail here, but there’s a real opportunity for operators to save big in a world where customers can provide their own equipment for video search and navigation. By building an app for the iTV, for instance, Verizon or any other operator would have one less piece of equipment to provide, and one less need for a truck roll to a customer’s home.

But it goes beyond that: Due to the vast ecosystem of Apple devices, there’s a real opportunity for operators and networks to create compelling cross-device experiences in a living room where users have an iTV, iPhone and iPad all at once. Until now, the second-screen experience has been incredibly fragmented because there are few really compelling ways to sync up what you’re watching on TV with the app you’re using on your iPad. But imagine a world where watching HBO Go on the iTV while having the mobile app open would let the network provide an enhanced experience on the second screen.

In conclusion, let’s face it — striking content deals has never been a core competency for Apple in video. But providing a robust platform for developers to build engaging experiences on has been one of its key differentiators. When launching the iTV, Apple shouldn’t stray from that and try to be something it’s not good at, like a media company. Instead, it should offer up the tools to allow content creators to create compelling reasons for consumers to buy its new product.

  1. “The iTV might be the most anticipated product…”. Dude, were you not here when the iPhone was rolled out? Apart from tech “journalists”, I haven’t heard a lot of wagging tongues about the “iTV” yet. Stay in reality.

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    1. Just like the tech “journalists” in late 2006 who were wagging tongues about a telephone from Apple? Reality turned out to be much greater than the anticipation there. Excellent article and the one that makes the most sense to me by far – except for the name which will almost certainly remain Apple TV.

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  2. Imagine Netflix has to pay 30% to apple like a magazine publisher, it won’t work. Apple can’t manage subscriptions when people expect to have access to services on multiple devices. Really not sure how Apple is going to handle this. Rentals and Purchases come from Apple, but what about subscriptions? Will HBO pay Apple 30%, maybe but they will need to raise their prices. That pricing model won’t work for TV.

    This is a bad play for Apple and I’m not sure how its going to shake out. Apple builds great platforms, but the TV business is very price sensitive and I don’t think Apple will own the market. Apple needs to have a really large market share for this product to be successful.

    Apple’s best Strategy would be to give away Apple TV boxes for free. They are already super cheap, if the costs could be recouped in a few months, that would force content companies to deal with them.

    But the high end market isn’t so big in TVs

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    1. Mathew – Hasn’t Apple already faced this dilemma on other iOS devices? The subscription rules are pretty clear, and have done little to keep developers — including major content providers like HBO or Netflix, or operators like Comcast — from creating apps for those devices. I’m not sure why the same app construct wouldn’t work on a device like a TV set.

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      1. The contracts are all device-specific, not platform-or OS-specific. It would take 12-18 mos of negotiations to make this happen.

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    2. HBO already shares approximately 50% of the retail price with Time Warner or Comcast. Providing 30% to Apple will actually allow HBO to make more money AND have a direct relationship with their subscriber base.

      The difficult part for HBO and other content providers will be making the transition without alienating their current customers – Time Warner and Comcast.

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  3. Think of iTV as HBO. Imagine a show as cool as… Well… Insert your own opinion of what makes you pay $20 per month… Apple will go into the content business (think Pixar, ABC) and the only way to get that most sought-after show?

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    1. If Apple really wanted to be in the content business, it could have done so by now. But it seems pretty clear that Apple is best at creating hardware and software platforms that let others build cool experiences on top of.

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  4. JF Fernandez-Rodz Wednesday, December 28, 2011

    TV Stations should make apps of their channels (e.g. ABC app, History Channel app, HGTV App, etc.) where live streaming of their content is available (also previous programs). Those stations could charge a monthly fee for accessing their content ($1.00 or $1.50), 30% of the cut goes to Apple, we can choose which channels we want to see and the need of Cable Providers is squashed. If I want to see one channel this month I download the App to the Apple TV, and if I don’t like it I retire the subscription next month. Right now channels receive .25 to .50 (cents), ESPN receives $2.50 (it’s the most expensive of all but it includes every ESPN channel [ESPN, ESPN2, ESPN U, etc.]) from cable providers for each household that is subscribed to provider (ex. Time Warner or Choice). I am sure that with this new model channels would receive a bigger cut and would go around the need of cable providers.

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    1. Actually, last I saw, ESPN gets an average of about $4 per sub from pay TV providers. Regardless, there’s still a HUGE gap between the amount of money that could reasonably be made by going direct to consumer, versus what most networks make through their affiliates. And it wouldn’t pay for them to alienate those affiliates in the meantime.

      For a good primer, check out this post, which pretty clearly defines HBO’s position for why it wouldn’t go direct to consumer: http://www.livedigitally.com/2011/12/22/dear-mg-a-note-from-hbo/ (Note: not written by anyone from HBO)

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  5. I’ve had a brillaint media player on my TVs for years, but getting content has been the problem. I DO NOT WANT TO HAVE TO SIGN UP FOR EVERY SINGLE DISTRIBUTERS DRM ON EVERY DAMN DEVICE!!!!
    At the moment, there are three distribution channels widely used, Terrestrial broadcast, Sattelite broadcast and cable. Of these the paid sattelite and cable services licence the free to air content and you only have to have one setup to get mosth things, but then if you want a combo package, you again have to have a settop box for each service.
    If I download everything I need from the internet, I only need one box. I also only need one account, but that distributer has to have access to licence at a fair rate the content from the others.
    I dont want to get Sky TV because of their fabulous service and pretty monthly magazine (soooo 20th century), I just want discovery channel content! It’s going to get recorded anyway, so whynot just let me download it to watch when I want, on whatever I want to watch it on! At the moment they aren’t getting any money from me at all because they are not offering the service I want. When they offer it, I’ll pay. I have cable, but no TV service, only internet.

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    1. Here here!
      I have cable internet but no STB. All content I seek is downloaded/streamed from the internet on my HTPC. Never looked back.

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  6. I disagree with your point about disrupting the TV industry “If Apple is smart, it won’t set out to disrupt the programming industry by creating a la carte packages of licensed content.” At some point Apple will disrupt this business just as they did with retail sales of their computers (Apple stores) and iTunes.

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  8. I think the way things are moving is with the platform being the base (Apple Tv or iTV) and third parties building on this. Imagine your TV like your iphone where you can download apps specific to your user experience. I can see shows taking advantage of this and creating show specific apps where they can push enhanced content to the Apple platform.

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  9. I think the way things are moving is with the platform being the base (Apple Tv or iTV) and third parties building on this. Imagine your TV like your iphone where you can download apps specific to your user experience. I can see shows taking advantage of this and creating show specific apps where they can push enhanced content to the Apple platform.

    Share
  10. There is no way content should be hardware exclusive. This doesn’t make much sense. So yes, no Apple programming on iTV.
    Then, what groundbreaking iTV will bring which will differentiate it from Roku or Google TV? Content-provider specific apps on TV? Roku and GTV already doing that.
    Apple branding, Siri and better UX? Is it enough?

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