Apple Aims for the Living Room

While much of the discussion related to today’s Apple Showtime announcement will probably be around iTV and movies, I’d like to take a look at Apple’s strategy. Most interesting, to me, is the fact that Apple is closing up their system.

If you look at the introduction of iTV as a set-top box connected to your TV set, you might notice a few features missing: no DVR -like or TV tuner capabilities. In my view, this is not a technical oversight, in my view but is part of Apple’s strategy to become the center of the media universe and expand the control they have acquired over the music industry to the video one.

The marketing

iTV is no different that Microsoft’s offering of the Windows XP Media Center extender but Apple seems to have a knack for making their products look like innovation when they are just fast followers.

First, there’s the name. While I doubt the final name will be iTV (due to the fact that there is already a TV network in the UK by that name and the fact that it’s a name that has been used as a standard for interactive TV), I suspect that Apple will come up with a similar sounding name, one that wil evoke a certain amount of coolness and connectedness. It will not be as jargonny as media extender. Apple is very good at marketing and it is clear that they now have their eyes set on the living room. As a result, the new name will evoke something that works as a natural in the living room.

Programming

People who have been tracking Apple’s effort in the space closely know that the company is now offering TV shows in a downloadable format either on a per episode or on a per-season basis. With today’s announcement, Apple is extending this model into the sport arena, with a partnership with the National Football League to offer season passes similar to the ones offered on DirectTV. This represents an interesting move into the sports arena and I suspect that announcements will eventually come for similar deals with other sports leagues. This is an interesting move in that it puts Apple clearly in a strong position as to TV programming and ensure that it gets a portion of revenue that could have gone to traditional broadcasters. What we may start witnessing here is Apple’s attempt to redefine television as a model where TV shows are sold by the show or by the season and not as part of a traditional channel offering or with advertising sponsorship.

This is an interesting gambit that flies in the face of existing business models for media distribution and it may impact traditional local broadcasters and TV networks. If Apple manages to disaggregate the content from a channel offering, the value of individual channels could eventually drop. Why watch ABC, CBS, NBC, or Fox when you can program your own channel. This is almost a natural progression in the media landscape changes that started with the introduction of DVRs at the beginning of this century.

Furthermore, if Apple is successful in its move, it may end up converting traditional cable companies into simple pipe providers, which would undermine the ambitions of players like Tim-Warner, News Corp., and Comcast in the integrated walled garden space. By moving content of IP based network, Apple would succeed and wrestling control of the channel distribution from those providers and force them to distribute their content over its store, picking up a fee for every show that is distributed.

… and then there’s Madison Avenue. Right now, a substantial portion of the revenue for television comes from models based on advertising. If Apple manages to convince a substantial portion of the public that buying a show from them is a better allocation of their entertainment dollars than subscribing to advertising-supported cable, we could see a major portion of advertising revenue evaporate. This would force TV station to focus more on live type of events, maybe even driving the broadcast networks away from a traditional mix and towards a more focused model, either centered around sports (which doesn’t necessarily work as a download as more people still want to see games live), news (with ample “from-the-field” type of coverage) and entertainment shows like “American Idol” where a low level of interactivity (“call this number to vote for your favorite star”) is tied to the programming, ensuring a required “live” showing. Sitcoms and TV dramas, as programmed type of entertainment, might be nearing the end of the advertising supported model. If you look at it in historic terms, this is part of a trend that was started by some of the pay channels like HBO and Showtime when they started producing original TV series. Because the series were more “edgy” and turned out to be quite good from a creative standpoint, people didn’t mind paying an extra $10 a month to watch them. Eventually, those series became available on DVD and found new audiences in that way. Apple took it to its logical conclusion by breaking them down to episode level, which allow you to get a taste, and season pass, which mirrors the DVD model but ensures that Apple gets a portion of the revenue.

Movies

And then there’s today’s announcement regarding movies. The movie downloads, while expensive, represent an interesting move into the video-on-demand arena. I suspect that, as time goes on, the price of downloads will drop and that Apple will extend their FairPlay DRM to establish a 24 hour or X number of plays model for a lower price. Because Apple has insisted on being able to release the movies in their store at the first time as they are released on DVD, it gives Apple a slight edge over the pay-per-view or cable TV model. Traditionally, Hollywood has distributed movies in theater first, then a few months later on DVD,then a few month later on pay-per-view, and finally on TV, traditionally on pay channels first and then broadcast ones last. Apple has managed to insert itself in the closest position to the theater release. Granted the price is high (in a lot of cases, equivalent to the price of a DVD with none of the added value and production cost) but I don’t think that Apple is looking at the DVD market right now.

They are trying to beat out the pay-per-view market for now so the release window is more important. If they successfully implement this strategy (and here again, the partnership with Disney makes sense as Pixar makes content that kids will want to see again and again in a variety of form, possibly getting parents to agree to purchase the movies online instead of DVD because they may be portable from one Apple device to another one), Apple will start impacting another revenue for traditional cable providers. As they do so, they might see more people buying movies, which will give them more power in dealing with the movie studios, which will result in their dropping the price first to $10 a movie and eventually to somewhere between $5 and $10 for a 24 hour or single play rental.

The Ecosystem

As I mentioned earlier, there is no DVR or traditional TV tuner built into the device. I believe that this was not due to a technical limitation but rather as part of a wider play to create an eco-system around the new device. Much like Apple initially allowed other companies to develop components that played well with the iPod, I believe they are trying to get a new ecosystem built around the new device. This will allow them to gage innovation in the space and identify which opportunities may be best for future integration or as components to add to the system. The initial connection will probably happen over the USB 2.0 connection on the device (which portends more connectivity options. Integration could also happen through some network type of interface connecting either wirelessly via the 802.11 connection (and notice here that they did not specify which flavor of 802.11 they were using) or the Ethernet connection.

This also could represent another revenue play for them as they license out a “made for iTV” (or whatever the final name is) certification model that would allow them to receive a portion of revenue on every device that plugs into the new box. This is a strategy that has worked well for them in the iPod arena and could be reproduced around the TV screen.

Why announce early?

Most surprising in today’s news was the fact that Apple pre-announced this product. There can be one or two reasons around this.

The first one could be that the announcement was added in the last few days because Apple was looking to announce more partnerships with movie studios but failed to get the contract signed in time to make the announcement (rumors have been that negotiations between the company and the movie industry have been tense, as studio heads want to avoid a repeat of what happened to the music industry and also fear ostracizing existing players in the DVD distribution world while Apple insists on making movies available through its store on the same day as DVD release). If you look closely, all the movies released in this launch are produced by Disney, which had little choice in the negotiations since its largest shareholder is Steve Jobs (as a result of the Pixar acquisition.)

Another possibility is that this is a pre-emptive move to stunt the arrival of Microsoft’s Zune product line. Microsoft has made it clear that Zune is part of an integrated device strategy that will allow them to take on the iPod. Considering that Microsoft already has multiple ways to get into the living room (Xbox, Media Extender, Windows Media PC edition), Apple may be worried about ceeding ground in that space and is working on a pre-emptive strike, announcing a product that will deliver everything the public want before Microsoft can make their announcement. The irony, if that’s the reason behind Apple’s announcement today, is that this is a typical Microsoft play: leverage a position of power in one market to spread fear, uncertainty, and doubt in another one, therefore stunting the potential growth of new competitors as the public waits for your offering (Om Malik seems to agree with me on this). By doing so, Apple may also be buying itself more time to force stronger negotiating positions with the movie studios.

Let the Living Room Start

So the war is on with a number of different strategies: Cable providers are trying to leverage the power of their set top boxes to protect their de-facto monopoly in the living room.Sony is trying to leverage the power of its PlayStation franchise to get people to adopt its BlueRay technology and use the PS3 as the new center of the media world. Microsoft is taking a throw stuff against the wall and see what sticks approach, offering up multiple products ranging from set-top boxes to media center to Xbox to Zune. Apple is trying to take the approach it took with the iPod: late to the party but providing better design, a better marketing message, and an interface that has less feature but is easier to use.

All and all, it’s hard to figure out who will win out this one but I think that, so far, Apple may be taking the right approach and could extend its dominance in the audio space to a whole new arena.

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