For the last several years, there have been many rumors that Apple is working on a device for the living room that would reinvent the television viewing experience much the same way they redefined the smart phone with the iPhone. For believers, comments by Tim Cook in November 2012 all but confirm this. Johnny Ive has made similarly vague but apparently revealing comments. And any number of anonymous sources have chimed in, offering various specs and features across a spectrum of incredibly vague (it will run on electricity) to quite specific (it will use the A5 chip). The one thing almost all of the rumors have in common is that the iTV will actually be a TV display as opposed to a separate box a la the existing Apple TV.
There may be a day when that makes sense, but there are two main reasons why that day is not now or any time soon. As much as it may be hopeful to look at Apple’s success transforming the Smartphone market, the television market (“television” as a distribution method) is wholly different with completely different factors.
Prior to the release of the iPhone in 2007, Apple only had to convince one market partner, AT&T, that they had created a great, if not revolutionary, product. All phones can call other phones (a call to a Verizon customer requires no extra steps and is just as easy as calling someone on AT&T), so it’s wasn’t necessary for Apple to get Verizon, T-Mobile, etc. on board as well. This is markedly different from television, where signing an agreement with CBS and HBO doesn’t mean much if every other network else isn’t willing to play ball. Result: limited content and ecosystem, similar to so many other lukewarm TV offerings.
This assumes of course that Apple has determined that doing business with networks is the desired market entry point. It could be that they decide to move further downstream and work with MVPDs. The benefits would be access to their system APIs, but by working with the likes of Time Warner and Comcast, Apple’s product would have to deal with the existing constraints handed down by networks: e.g. no TV Everywhere, limited time-shifting, limited on-demand viewing, maintaining some form of the dreaded grid. The result of this partnership means iTV wouldn’t substantially change how we get or experience TV.
Taking another step down the distribution ladder, it’s possible that Apple could offer a product that works on top of existing TV service, similar to Google TV. The benefit of this approach is that it doesn’t require contracts or licensing agreements with anyone, but in bypassing networks and MVPDs, any product is inheriting all of the tangled mess that is television, with none of the leverage or power to change the existing system. Apple would be hacking the system rather than changing from within, and it’s harder to change things fundamentally if it’s just a layer on top of what is already a big mess.
Part of the issue that Apple surely recognizes, it that people are watching content differently than they were twenty years ago or even five years ago. The future of video content consumption lies in on-demand viewing. More than half of all video content will be consumed on-demand within seven years. With that as a backdrop, a product that doesn’t cater to those modes of consumption is questionable at best.
The more Apple is truly interested in transforming the television experience, the more participation and cooperation it will require from networks. At the same time, networks understand that their leverage (and revenue) will only continue if they stand together as a unit. But here’s where things get really sticky: even in the unlikely scenario that a small number of networks decide that Apple is worth doing business with, the resulting content lineup Apple could offer would almost certainly be the slimmest (and least desirable) of pickings.
But let’s assume that Apple has a solution to all of these problems. Even in that situation, it still doesn’t make sense that the iTV product would be a television display.
Unlike smartphones, the cost of televisions are not subsidized. With an average price of $1250, their significantly higher cost means they’re not an item that gets replaced every 2-3 years, unlike phones. They also don’t suffer the physical wear and tear of being toted around all the time in pockets, rubbed against keys, or suffering the occasional drop. There’s also the issue of market saturation: in 2007, practically no one had a smart phone, meaning a huge potential market for the iPhone. Today, as much as 80 percent of households already have a high definition television. Those who do not aren’t likely early adopters and aren’t prospective customers anyway.
With the popularity of Netflix and other video services, television manufacturers have added connectivity features to recent models. This appears to be very convenient by not requiring the purchase of a streaming device (Roku, Boxee, etc.), but the reality is much different. The streaming market, both in terms of services and technologies, is changing rapidly. Combining a television with the minimal hardware (processor, ram, audio/video decoding) to process online content is a formula for obsolescence. TVs are replaced every 5-10 years but the video streaming and networking hardware will be woefully insufficient in 2-3 years. Even if there are no changes to DRM technologies, 4K doesn’t happen, 3D fades away, no one wants to connect their webcam, and data throughput for streaming doesn’t increase, there is still the problem of software. As online content ecosystems grow in size, complexity and features, so will the software that host and serve this content. Those changes necessitate hardware improvements: imagine trying to use FaceTime with a first generation iPhone.
The most obvious way to combat hardware obsolescence is to build with the fastest and best components, but that gets expensive very quickly. For a product that is already expected to command a premium price, adding hardware designed to make the iTV a capable product for the next five years means it would be extraordinarily expensive. The problem is profit margins on TVs themselves are incredibly small. Panasonic, manufacturer of some of the best displays on the market, is currently contemplating getting out of the business because the market is already saturated and it’s not clear they can make enough money to make it worth their while. The MSRP of one of the best rated televisions on the market, the Panasonic TC-P50ST60, is just shy of $1200. Assuming Apple could meet that price point for a fifty inch display, it would still need to add the hardware equivalent of a Mac Mini (at the least). Calculating for the additional cost of overhead, plus the premium for owning an Apple product, it seems almost certain that a 50 inch Apple iTV would start north of $2000.
A $2000+ television in an already saturated market, with almost certainly limited content offerings, all seems like a bad idea. The far more likely scenario, should iTV ever materialize, is a $200-300 successor to the current Apple TV. That’s not to say Apple won’t make a television designed to work nicely with such a set top box (though with slim profit margins, that doesn’t make much sense either), but integrating those technologies together into one unit is not a sustainable business.