Rumors have once again surfaced that Apple (s AAPL) is in the midst of developing a flat-panel connected TV to compete with the likes of Samsung, Sony (s SNE) and Vizio. This time, those rumors don’t seem to be based on idle speculation, but on the channel checks of Ticonderoga Securities analyst Brian White, whose trip to a China electronics trade show leads him to believe Apple is working on securing suppliers necessary to roll out a smart TV by the end of the year.
Of course, this isn’t the first time we’ve heard of Apple building an actual TV, and not just a set-top box that connects to users’ existing HDTVs. Piper Jaffray analyst Gene Munster, for instance, has been saying for years that such a device was just around the corner. It might seem like the time is ripe for Apple to launch an innovative new product in the TV space, but there’s plenty of risk in doing so.
Chris Dixon and Marco Arment have done a pretty good job of summarizing the for and against arguments for whether or not it actually makes sense for Apple to pursue the HDTV market. On the plus side, Apple would be entering a market that is ripe for innovation. On the other hand, it would be entering an increasingly commoditized market where margins are thin and competition is fierce. In combating this, Dixon draws some comparison between the arguments against an Apple HDTV to those offered against Apple entering the smartphone market before the iPhone was introduced.
But in addition to a brilliant design and an excellent user interface, what would Apple need to actually make such a device a success? First and foremost, an Apple HDTV would need access to content — and that may prove a big stumbling block for any new product. Over the past several years, Apple has tried unsuccessfully to convince TV programmers to license content for a subscription plan that would compete directly with bundled pay TV offerings from traditional cable companies and IPTV providers. Even its less ambitious — and safer — 99-cent TV episode rental model failed to catch on with programmers, and Apple was only able to secure broadcast content from ABC (s DIS) and Fox (s NWS) for that venture.
Arment also argues Apple’s desire to create fully integrated products could keep it from interacting well with other manufacturer’s devices. The biggest source of friction, if Apple does create an HDTV, will be its interest in developing the user interface through which users browse, discover and watch the content. But in order to do so, it will need to go a step beyond just providing an HDMI input for a users to plug their cable set-top boxes into. Apple no doubt believes it will be able to do discovery and navigation better than the cable companies have — and it’s likely right.
But Apple is unlikely to get enough programmer buy-in to provide its own HDTV subscription service, as the vast majority of broadcast and cable networks aren’t ready to go direct-to-consumer with their content. There’s simply too much money in the traditional cable model. Apple’s next best bet, if it hopes to hook into live TV programming while also controlling the user experience, is to partner with pay TV operators themselves. MG Siegler suggests one option: Apple could do an exclusive deal with one of these operators as a way to get them on board.
The pay TV market doesn’t work like the mobile market does, however; it’s not made up of three or four major providers with national footprints, but dozens of competitors in incredibly entrenched local markets. Apple will need to get buy-in from multiple operators in multiple markets, if it hopes to provide as much value to as many potential customers as possible. Furthermore, Apple wants to own as much of the consumer relationship as possible, which will be impossible to do if it shackles itself to one provider.
It might seem counter-intuitive for cable companies strike a deal with Apple; after all, if its entire HDTV plan will disrupt the TV industry, it’s unlikely companies like Comcast (s CMCSA) or Time Warner Cable (s TWC) would want to play along. But already, those two firms — and more — are looking for innovative ways to provide more value to their subscribers. Increasingly, pay TV providers are rolling out apps on the iPad, and some are even creating apps for connected TVs. Creating an app — or tying into Apple’s UI — would just be one more extension of this initiative.
This is a significant shift from how operators are used to doing business, and Apple needs to move quickly to take advantage of it. Clearly, Apple will have to work with partners to ensure it has the programming it needs to make an HDTV a viable product with a greater value proposition than other competing products out there. And there are dangers to pay TV providers that would become just another app on an Apple HDTV, alongside competing online video apps like Netflix, (s NFLX) iTunes, and possibly Hulu or YouTube. (s GOOG) But the bigger danger — especially if an Apple HDTV becomes a hit — could be not having a presence on the device and not working with Apple to create the best user experience possible.