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Summary:

Apple set out to reinvent TV, but now it looks like all it is going to end up with is a set-top box with apps that deliver your regular cable bundle. To blame are the broadcasters, whose business model is fundamentally anti innovation.

The latest news on Apple’s plans for the future of television is that the company is in talks with big pay TV operators to carry their live programming. This would turn a future Apple TV product into a kind of set-top box, reported the Wall Street Journal Wednesday. Negotiations with cable companies are ongoing, with no deal in sight, and operators are wary of Apple’s quest for control, according to the paper.

But the sad truth is that even winning a contract like this would be a defeat for Apple. The company originally set out to disrupt the TV space and sell programming directly to consumers. It wanted to unbundle cable much in the same way it unbundled the CD when it started selling single songs on iTunes for $0.99. A move like that would have been truly innovative. But as it looks now, Apple is just going to repackage the good old cable bundle and make it available through yet another device.

If it’s any consolation for Apple, it is not alone with this path. Numerous companies have tried to reinvent TV, only to end up with products that look just like more of the same:

Microsoft’s Xbox 360 is arguably the most innovative living room entertainment device out there. It has gesture control, gaming, access to live TV and over the top video content. And yet, the TV part of the box is as boring as it could be. Redmond initially set out to have its own live programming, and reportedly even negotiated with Conan O’Brien to get him on the Xbox exclusively. Instead, it had to settle for TV Everywhere apps from HBO and EPIX and live feeds from Verizon FIOS, all of which only work if you already have an existing pay TV subscription.

Google TV’s struggles with the broadcasters are well-documented. The search giant tried to appease Hollywood by making a platform that was decidedly pro-cable, and even struck an agreement with DirecTV. Dish. But its vision to unify web video and pay TV didn’t sit well with broadcasters who across the board decided to block Google TV devices from accessing their online content. That’s why it’s no surprise that Google’s latest TV venture – the pay TV component of Google fiber – pretty much looks like your plain old cable bundle.

TiVo also tried its luck at becoming a kind of set-top-box provider, much like Apple is reportedly doing now. And guess what: It may be much less ambitious (and disruptive) than taking on TV with your own content distribution, but it’s not that easy either. Case in point: When TiVo started leasing its boxes through cable operators like Suddenlink, Cox and RCN, customers of those companies suddenly found that they didn’t have access to apps from Netflix or Hulu Plus. Cable operators like Suddenlink actually wanted to have Netflix on these boxes, but Netflix’s and Hulu’s contracts with studios simply don’t allow them to deliver their services to leased pay TV equipment.

So who is killing TV innovation?

The latest retrans fight: Viacom vs. DirecTV

Unbundled programming, access to web content on the TV and apps on a pay TV set-top box: All these issues have something in common. They’re a threat to big broadcast’s newfound love for retransmission fees. Facing the threat of a disruption to their ad revenue, broadcasters and cable TV networks have in recent years massively grown their B2B relationship with cable and satellite operators.

Broadcast channels and their local affiliates increasingly ask pay TV operators to pay up for content that was previously available for next to nothing. Operators unwilling to pay up face blackouts, and routinely cave in after their customers rebel.

Retrans fees are expected to net broadcasters $2 billion this year, up from $1.46 billion in 2011, according to SNL Kagan estimates. And that doesn’t even include what pay TV operators have to shell out for ESPN and other popular cable channels. The flipside of these billion dollar deals is exclusivity. Broadcasters can ask for more money if their content isn’t available to TV viewers through anything but a TV subscription. That’s why TV Everywhere is growing, and why broadcasters like Fox have policies not to allow web video on any connected device.

There is a silver lining

The good news is that there is still room for innovation in the TV space – but it likely won’t happen with the consent of big broadcast. Instead, it’s time to innovate on content delivery outside the world of cable television. Companies like Netflix and Hulu are starting to produce their own content that doesn’t come with the same strings attached as the shows airing on major broadcast networks. YouTube is also massively investing in content that looks more like TV fare without being TV-only.

But the biggest push towards innovation may just come from one of the oldest technologies of the TV business: over-the-air television. Startups like Skitter are redefining what pay TV looks like, delivering live broadcast streams within the existing legal retransmission framework. Aereo is pushing the envelope when it comes to personal over-the-air transmissions. Simple.tv is reinventing the DVR with cord cutting in mind. And Boxee is rumored to have a cloud-based DVR in the works.

All of these efforts bypass negotiations with broadcasters and instead rely existing legal exemptions. It’s a risky strategy, but also one that has worked in the past. Just look at Netflix and how it used the first-sale doctrine, which allows the rental of DVDs without any explicit contracts with Hollywood studios, to build out a giant, postal service-based content delivery network. Of course, Netflix’s DVD business is now fading, and Hollywood is making good money with its streaming business.

Let’s hope that innovative companies are going to pull of the same thing in the TV space. Otherwise, the future of TV may just be a pig with some shiny new lipstick.

Check out my e-book Cut the Cord: All You Need to Know to Drop Cable to learn more about Apple TV, its competitors and the future of television.

Image courtesy of (CC-BY-SA) Flickr user videocrab

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  1. Richard Torcato Thursday, August 16, 2012

    “The problem with innovation in the television industry is the go-to-market strategy – the television industry fundamentally has a subsidized business model that gives everybody a set-top box for free or for ten dollars a month and that pretty much squashes any opportunity for innovation because nobody’s willing to buy a set-top box. Ask TiVo. Ask Replay TV, Ask Roku. Ask Vudu. Ask us. Ask Google in a few months…Sony’s tried as well. Panasonic’s tried. They’ve all failed.” – Steve Jobs at D8

    1. The problem is that people like Jobs and Google, and perhaps you, think the tv guys are going to just hand over url’s to their shows so they can be hijacked so someone else can run JavaScript ads along side of the shows.

      Let the very rich Googles and Apples make their own programming and sell ads, that is the “go to market strategy”, but the computer guys don’t really want to get into the entertainment biz. They are just chicken to enter the biz… Plain and simple.

  2. who needs a smart-transformed-dull tv when I have the complete package entertainment in XBox already

  3. Best article on the topic thus far. Sounds like one of your unstated conclusions is: if the way to disrupt TV is via programming that avoids Hollywood’s strings-attached, then we’ll start seeing Netflix and Hulu start producing content outside the scripted realm, under the motive of fully replacing all types of entertainment offered by networks. Hulu News….Netflix’s Got Talent…it could work. Maybe.

    1. I don’t know if Netflix would really be a good place for unscripted originals. Hulu has tried doing reality TV before, so it’s certainly possible that they’d do more of it. But honestly, I think YouTube is probably the better place for much of this.

  4. Apple could use some of the Billions it has to truly disrupt it if it wanted, hell it could buy up most of the prime time shows, create it\’s own shows and serve it all up in an iTunes revolution type TV package. Few years down the line and like with the iPhone, carriers would be asking and paying to have Apple with them.

  5. Good read but one correction – Google TV had an agreement with Dish Network, not Directv: http://www.engadget.com/2010/11/10/dish-network-officially-starts-pushing-google-tv-integration/

    1. Of course, thanks for catching this!

  6. Here’s the problem as I see it: Netflix, Hulu, YouTube, and anyone else can produce their own content, but there are only two ways for them to get their content to the public: OTA and cable. Obviously the broadcasters control OTA; and they have content which is so attractive to the public that it gives the broadcasters control of the cable companies as well.

    1. ThunderingVoice Rich Friday, August 17, 2012

      Only two ways to get their content to the public? What about, oh, THE INTERNET?

      1. Okay but if you’re connected to the Internet through dialup or DSL, you’re in a minority and will probably want a faster connection.

    2. Except for NBC and Comcast are the same company so NBC has literally gave control to a cable company.

  7. If TV show episodes through iTunes weren’t so flippin expensive I’d be all over it. $2+ for something I am going to watch once is just ridiculous. Again the pirates win the day…

  8. “Netflix’s DVD is now fading”
    More like Netflix is trying to kill it een though it’s a bigger money maker then streaming. If you go to Netflix.com, there is no mention of the DVD service. You have to go to dvd.netflix.com.

  9. Nice analysis Janko – couple of nits:

    Hollywood is not really making money from streaming. Not the way they made it from DVDs. Hence UltraViolet. But they’re freaking at how quickly that nice fat DV revenue stream is shrinking

    The MVPDs haven’t even unleashed their secret weapon yet: they own the internet. You can cut the TV cord, but you need the internet one and who supplies the best internet connections: FIOS, Comcast, Cablevision et al. Watch too much Netflix once you’ve cut the cord and they can ding you with bandwidth caps. DOJ is investigating that, but for now, that’s definitely Plan B

    Finally, I think you vastly underestimate the disruption potential of a well-designed interface on today’s TV landscape. The current interfaces bring new meaning to the word obtuse. If nothing else, they only emphasize the number of unwanted choices we’re paying for. Apple’s magic is their ability to simplify and beautify. Tivo is not a great comparison because they did not have the marketing budge (or smarts) and continued with head-scratchign policies like trying to get new users to buy expensive lifetime subscriptions. Plus, by the time they struck those deals you reference it was too late: consumers had moved on and were looking for free, not beautifully designed.

    1. “Apple’s magic is their ability to simplify and beautify.”

      That doesn’t help Apple at all if they can’t get the broadcasters and the cable companies to go along with their plans.

  10. We have YouView in the UK – http://www.youview.com/ – and it’s off to a good start with an even more amazing future.

  11. Finally an informed analysis of the TV landscape from paidcontent. Very nice article Janko. The real opportunity to disrupt the TV ecosystem is with original content. Netflix, YouTube, FunnyorDie, etc. are on the right track. It will take a long time for there to be enough original content that’s sufficiently high quality to be a true disruptor, but eventually it’ll get there.

    However, Allan Wolk makes the crucial comment – without true competition in the Internet access business, the cable operators will hit you with bandwidth caps. Not sure what the solution to that problem is – I don’t have a lot of faith that the government can avoid being outmaneuvered by the cable lobbyists.

    1. I’m sure the government *can’t* (or won’t) avoid being outmaneuvered by the cable lobbyists.

  12. Peter D. Csathy Friday, August 17, 2012

    Janko, Apple should simply just buy DISH Networks to solve all of these content licensing problems in one fell swoop. Think about it. Apple’s next great frontier IS the living room. But, yes, the cable companies will not cooperate. But, Apple has $110 billion in cash. DISH Networks’ market cap is $13.9 billion. Apple could buy out DISH for about 20% of its current cash holdings. Check out my full analysis at my “Digital Media Update” blog post from yesterday.

  13. Snickers McFlurry Friday, August 17, 2012

    HDTV broadcast channels (what used to be known as free TV) can be easily picked up with a small investment on an HD antenna. Crystal clear, brilliant and sharp HD for regular TV programming and some offbeat and movie channels can be had just by visiting a Frys and picking up an HD antenna, hooking it up to the CATV input on most HDTVs and aiming it via an OTA (over the air) HDTV guide found online (my local HD signal comes from the Hollywood Hills for instance, so I adjust my antenna accordingly). It works, it’s free (after antenna cost + tax) and its mandated by the Digital Transition and Public Safety Act of 2005. So, kill your cable and slay your satellite dish… and enjoy basic TV easily and without being forced into an expensive bundle of crap you don’t want (nor do you probably watch).

  14. The content owners would be mad to hand over the gatekeeping of their content to a tech company, particularly tech co’s as rapacious as Apple and Google.

  15. Great article Janko.

    The internet has proven to be a formidable weapon in the disintermediation of numerous industries.

    Content producers will only adapt their pricing models when the historic distribution model changes. At present there are far too companies involved as intermediaries (just count the number of pre-titles next time you watch a movie! e.g. “Brought to you by XXX”).

    Yes, devices and user interfaces do need to become more elegant, but this is competing at the periphery of an industry that will undergo fundamental change.

    Increasing broadband penetration and on-line viewing hours will eventually change the balance of power between traditional broadcasters and ISPs; this will only happen with ongoing investment by ISPs into their networks. At present most of them seem to want to fight this trend, preserve capital expenditure, impose bandwidth constraints and generally make life more difficult for their customers.

    That is a very dangerous strategy!

    There will be new content producers emerging as the distribution model changes – and that will be a tremendous source of innovation; but I would personally think that investment by the ‘big boys’ such as Apple and Google would be better directed at transforming the current means of distribution.

  16. This is such a goofy article. Television content is sold on-demand right now through iTunes and other platforms.

    Janko, your focus on technology for technology’s sake is perplexing. Want free DVR functionality for broadcast TV? Just smack an antenna on a Tivo. There’s no need to pay some sketch new company to kozmo it over the internet to you. Want individual cable programs? Amazon will sell them to you for a low cost, delivered right to that same Tivo.

    There is nothing “wrong” with the state of the TV experience. There is constant innovation every day in programming, delivery and interactivity.

    If you’re upset that there hasn’t been innovation in television *devices*, that seems to be missing the forest for the trees. I think the content owners have smartened up about providing technology companies with free assets to build the tech guys’ own businesses. If tech isn’t going to pay a fair price to disrupt the content guys’ businesses, I think it’s a pretty silly mistake to blame that on the content guys.

    1. Those in tv land live a dangerous dream state… Ad rates are not accurate to begin with but are allowed due to fear ( king has no clothe) we all know The content quality lacking, and the number and cost of ads too high ( 70% user cost of products goes onto marketing costs)

      The crash you hear will resonate for a generation and beyond

  17. How could you not talk about Roku in this piece?
    They were actually doing the right thing, up until Dish came and did an exclusive arrangement for south asian content (best selling on Roku) and killed the leaps that IPTV and App providers had made till date.

    At some point everyone is going to cave in to the pressure and money that these companies throw at the Market, the platforms and consumers are no different.

  18. “Microsoft’s Xbox 360 is arguably the most innovative living room entertainment device out there. ”

    True.

    @GigaOM tweeted this article saying: “Even Apple can’t disrupt the TV space”

    Why “even”? Apple is a one-trick pony. Without iOS, a lucky success but technically nothing new or revolutionary, what does Apple have? And iOS is old news, now.

    Apple is now famous for being profitable and having a high valuation — but these are achieved through over-priced products and services.

  19. Xbox 360? Here in the UK, we have BBC iPlayer, Sky, and various free and pay TV services on our Xbox dashboard.

  20. No one has mentioned the changing viewer. Most young audiences seldom watch TV at all. They connect with content on their mobile devices – iPhones, Android Phones, iPads, etc. The day of traditional TV is quickly drawing to a close. Broadcast style TV is a dinosaur waiting for the meteor to strike. And, I think Apples is beginning to recognize that, which explains why iTV remains a “hobby.”

  21. Bundling has been the mode of operation for the media industry for decades. My guess on the reason, for every one big hit, there are probably 100 failures. The studios, the production houses, the broadcasters all need to make money. So besides charging a lot for the hits, they bundle the misses with the hits. For instance, one probably cannot buy the rights to “The Pirates” series on a stand alone basis. Disney will bundle a lot of their library and other titles along. That’s why they resist a-la-carte.

    As for the music business, they used to adopt the same strategy. Their defense was weaker because it cost much less to produce a sound track than a full length series or movie. They were also the first to take the hit. The video side of media now has more experience in defence and they will probably fight to their death?

  22. Interesting article and comments… I think Google has the best chance of successfully disrupting the traditionally TV industry. Everyone knows Google has the financial and infrastructure resources needed to challenge the vested-interest of the TV/cable industry. With the user-generated content Google is nurturing via YouTube and a possible play to woo award winning shows away from TV/cable, Google could revolutionize the TV experience.

    Imagine Breaking Bad, Mad Men and Southland (admittedly my favorite) exclusivity on YouTube and not on cable. I haven’t done the math, but if Google could cover the production cost with ads it would be a game changer. This could also develop the nascent complimentary TV show-web/mobile experience that has tremendous potential.

  23. Necessity is the mother of invention. It is obvious that cable needs to be regulated as a utility. Right now, it is the only way to get the full spectrum of internet and television. However, we need to get back to a free TV model. The broadcasters and cable companies greed is literally driving people away from technologies that are older than me. My own local ota transmitter was just down for two weeks. I never remember that happening when I was growing up on ota. There’s a lot of politics as well. The FCC is riddled with regulations that hurt the consumer and help the broadcast industry. We are in a long term economic depression and in the end, the companies that can offer the most for the least will win out. It is a hard pill to swallow when you are paying for bandwidth that contains mostly infomercials and low budget reality shows. Originally, advertisers foot all of the bill. Now, the consumer is being asked to foot the bill of the advertisers. it’s not just tv either. It’s the NFL. It’s pay per view. It’s the internet. It’s everything. Their greed is going to kill display entertainment altogether and send us back to stone age and we will all go back to playing board games and checkers.

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