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.