Apple TV: Paying for What You Like
I figured it out. Well, maybe.
A mistake: Right off the bat, let me cop to an error. A couple days ago I speculated that ESPN was getting about $3 a month from each and every cable subscriber. A bit of research informs me that they average over $5 a month from every household, including yours. And that's just ESPN: Comcast has sports networks. Fox has sports networks. Other regional players have sports networks, most of which are carried on basic tiers, so you are paying for those too. In other words, you are likely paying near $10 a month for "sports" on your cable bill, even if you never watch a minute of it.
The same is true, although to a lesser extent, for any channel you don't watch. Disney. Discovery. The Learning Channel. HGTV. USA. Spike. CNN. And 300 others, you pay for them even if you don't watch. This makes a much sense as going to a newsstand and having to buy "Elle" even if you're never going to read it.
More to the point, cable guys say they're afraid that if viewers were given the choice, around 80% would opt not to pay for a sports tier, so it's the 20% who are driving the requirement for you and me to pay. Not to put too fine a point on it, but is this like requiring me to buy 10 bad songs on an LP to get the two I want? Analogies to the pre-iTunes era, anyone?
Changing the paradigm. OK here's the deal. We have to put away the idea that Apple will make a gazillion dollars selling TV sets. They won't. The turnover cycle is too slow and the manufacturing industry already at a point of cutthroat pricing and technical innovations unlikely to change things a lot. Oh sure, maybe you can have "retina display" on a bigger monitor, but that's not going to induce a wave of purchase on the order that the iPod did to the CD player or that the iPhone did to the clamshell market.
No, what's going to change things is a completely different take on "cable TV." I take you to the future through the portal of the recent past:
Tivo, while a great and wonderful thing, still requires people to navigate menus and laboriously hunt and click for the desired option. In that way it's just like Excel or Pages or any software from, you know, ancient times like the 90's. Apple's Siri does not. You say "Do this" and it does it.
It's hardly prescient to think Siri will be incorporated into Apple TV. The sleek TV unit will come with a remote because hey, everybody's used to it, guys need something to fondle, and Siri needs a microphone close to the mouth, not across the room where ambient noise makes the commands unintelligible. It's not really "a remote" anymore anyway, it's a Siri microphone, and you can have a couple of them included for next to nothing so the second viewing position in the room doesn't have to be powerless as it (still) is today.
Instead of the Tivo hard drive (which fails after a few years,) the Apple TV enables streaming, which works forever. Apple already has the massive data centers, it already has the utility in the little black Apple TV cube which will doubtless disappear into the back panel of the television just as the towers of ancient PCs disappeared into the display of the iMac. (Yes, there will still be cable inputs. Nothing happens overnight.)
We now have better functionality and easier use for the consumer, and the backend support with data centers and iTunes from the company. The other component, of course, is programming. Without the music companies on board iTunes was worthless. Without video product, Apple TV will just be an overpriced screen with a few extra doodads.
The Switcheroo: If the TV set manufacturing industry is cutthroat, how does Apple convince people to "pay up" for a more expensive set? Answer: they don't. They sell the set at a modest margin and push to get the things in people's houses. This is not a new idea: best known is King Gillette's "give away the razors, sell the blades" model, more recently visited by Amazon's "lose money on the Fire, sell more music and video downloads and ebooks."
There are countless billions of dollars flowing every month to Comcast, Charter, Time Warner Cable and the rest of them, most of it for product people don't want. Billions. (90% cable/satellite penetration x 105 million households x $50/mo = do the math.) Remember how I started the post with ESPN? Think of how much money there is to be made by convincing people to "cut the cord" and put an Apple TV in the living room (and the bedroom, and...) , and then buying the programming from iTunes by the each. (Or, as an alternative, by the 'bulk hour', as cellphone data plans are now. "Would you like to buy 20 hours a month? 50? 100? You decide which programs you want, of course.)
"Siri, I'd like to watch Pawnstars now." "Siri, give me a season pass to SMASH." "Siri, yes, I'll pay for the Masters Golf Tournament this afternoon." Recall that these programs, coming through iTunes, are commercial free, on demand, and available in any house with an Apple TV, and you have the makings of the total disruption of an industry. Cable companies' "buy what we sell the way we sell it" withers in favor of precise consumer selection.
Networks begin selling direct to the public rather than third hand, begging affiliates carry their programs and wining and dining advertisers to buy "spots" in some programming that none of them actually would watch, given the choice.
The costs per eyeball are higher by the each, yet lower in aggregate because people stop buying all this crap they don't really want. Networks profit because (at first) it's a higher payment per viewer and a new and improved revenue channel, eventually they eliminate many tiers of redundant costs in advertising agency discounts, sales commissions, and payments to affiliates. Producers benefit because they have the option of a direct pipeline to the public, rather than dealing with the gatekeepers at NBC, Showtime, or AMC. The public benefits because their costs of video entertainment go down and become commensurate with whatever their personal desires are. Want to watch just a little? Pay just a little. What a concept!
Summary: No, Apple doesn't make a lot of money selling TV sets. They make a bloody fortune as the aggregator of programming, selling television shows, movies and sports events with a store that services all comers and a brand that assures quality and an enabled device in the home that people trust. (Couldn't NBC do this on their own? Sure, but so could've Warner Brothers Records, and consumers aren't going to search around for each and every possible provider, that's why iTunes and Amazon do so well and individual corporate websites don't.)
It isn't the hardware that generates the big profits this time. It's the hardware at each end that makes it possible to profit in the middle: between the data center and the living room, it's the software that reaps the profit - selling television programs to the public which is justly tired of a business model which forces them to buy things they don't want just to get the few things they do.
Why do people pay up to get an Apple TV? Because for a few extra bucks, they slash their cable bill by 2/3. Would you spend another $100 on a set if you could save $500 this year and every year forever, on the check you write to Comcast? Would you pay up to have more than one? "Siri, I'd like to finish watching this in the bedroom."
We've seen this movie before: It's the music industry all over again, only this time with pictures, and the potential rewards are inconceivably bigger. Who else is poised to do both ends? Maybe, as a long shot, Amazon. Nobody else, I can think of. Dell? Microsoft? Google? Facebook? LG? Comcast? Who?
Standing in center field with a line drive hit directly at them, is Apple. They just need to raise the glove, catch the ball and change things all over again.