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Apple TV: Paying for What You Like

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April 11, 2012 – Comments (10) | RELATED TICKERS: AAPL , DIS , AMZN

Board: Apple

Author: Goofyhoofy

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.

10 Comments – Post Your Own

#1) On April 11, 2012 at 12:02 PM, CluckChicken (28.62) wrote:

If I am not mistaken the cable companies have been trying to push this for years, yet the studios have not allowed this. Why would this be any different with Apple? If anything with the way Apple requires their large margin it would be even less likely to happen.

 

The reason why we pay $5 for ESPN is two fold, one because it is one of the most popular cable channels and two because it is one of the channels Disney can use to force other channels onto distributors. For instance I have Disney Kids and Animal Planet, neither of which do I ever watch but they are part of my basic package because Disney uses the two hammers called ABC and ESPN to force them onto me. This is what needs to be broken, why would Disney be willing to change this business model? If they let us buy the channels directly from them why would they not force this just directly on us?

 

Also I wonder what happens to my internet bill as my cable provider is probably subsidizing my internet through the cable.

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#2) On April 11, 2012 at 1:03 PM, Schmacko (55.17) wrote:

Yeah, this article completely neglects the fact that this model will require a ton of data usage being piped through your internet.  Telecom companies are already complaining about high data usage phones choking their pipes, this will make things worse.  A mass move to this model would definitely ignite another push by telecoms to make users pay more for more data usage.

I'm also thinking the no comercials aspect stated in the article is wrong.  Live tv will keep commercials.  If you want to stream the superbowl live through your apple tv, you're going to get the commercials like everyone else.  Why would the NFL not run commercials?  They get paid waaaayyyyy too much to move away from that.  Commercial free programming being streamed through Apple would most likely be dated material and Apple will face similar challenges as what Netflix is going through now with their streaming services.  Apple has more money and clout than netflix but the content providers aren't just going to roll over for Apple.  There's no way HBO sells Game of Thrones streaming rights to Apple at the same price point that Apple pays for Pawnstars. 

I think the new/live aspect is what really sets this apart from itunes though.  Itunes has no equivalent to live tv, or watching new shows as they're being broadcast for the first time.  

I'd have to see how Apple laid out it's price structure but this basically sounds like making all TV pay per view... which I have a hard time imagining working at all.  I mean I pay 150ish bucks a month for FIOS right now (including movie channels, and the rental costs of three HD boxes, one being a DVR).  I can theoretically just leave my tv on all day, every day, for a month and I'm getting roughly 33.6 hours of TV/$ spent for I don't know how many hundreds of channels.  Even at the more realistic estimate of the tv being on 5 hours a day (between me, wife, and kid) that works out to 7 hours of tv per $1 spent, and I just have a hard time seeing how Apple is going to give me a better deal than that while still providing the same access to content.

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#3) On April 11, 2012 at 2:20 PM, SkepticalOx (99.45) wrote:

#1 Are you sure the cable companies aren't the ones that want to bundle too? 

However, this article here makes the case that "unbundling" might not save you any money: [New Yorker Article]. It argues that unbundling will probably just force the cable providers to hike the prices per channel anyway.

I would love a system that allows me to watch/record the shows and events I want to watch, whenever/after they are released. I honestly don't think Apple needs to make a TV for that. A good set-top box with remote is enough. I agree with #2 on the internet data usage thing (I got first season of "Game of Thrones" off of iTunes - lol, I'm pretty sure that ate a huge chunk out of my monthly cap). Add on the fact that I'm not sure enough people have fast enough internet to get all the content they want in HD. 

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#4) On April 11, 2012 at 3:48 PM, Goofyhoofy (< 20) wrote:

Response:

(1.) Cable companies have not been trying to push this for years. Indeed, they are the ones holding "the bundle", although they're abetted by the cable programmers, who also use one popular product (MTV) to force operates to carry another (MTV2). (Or more to the point: ESPN to carry four other ESPN channels.) 

ESPN is indeed popular. Very popular. From the current BusinessWeek: "Yet the prospect of bundling all sports programming into its own pay tier is a nightmare to many in the cable industry. David Bank, analyst at RBC Capital Markets estimates 80% of basic cable customers would decline to pay for sports..."

(2) No doubt the cable companies would have to enlarge the pipes, but that does not mean a complete rebuild of every system. Each neighborhood node serves 200-2000 homes, and the "pipes" at the neighborhood level are already robust enough to handle IP traffic at that level. Anyway, any signfiicant change takes 10 years, by which time the cable MSO's will be seeing the future and preparing for higher individual data use from all households. Fiber to the neighborhood, if not the curb. Yes, this will cost more. Another reason the cable bill will increase, convincing more people to cut the cord from the bundled TV services and go with individual choice.

As for your "I can leave it on all day", sure you can. So what? How much can you actually watch? I suspect if you bought by the each you could bring you bill down. Will everyone? No. Did everyone abandon the record stores? No. The bookstores? No. Is iTunes big? Yes. Is Amazon big? Yes.

(3) Unbundling will surely raise the cost of *individual* channels, but since you won't be paying for 100 that you don't watch, you save overall.  Again, no the pipes won't support this tomorrow, but the MSO's are constantly upgrading systems and that will continue. Just a few years ago they went back and retrofitted everything for two-way (internet & on-demand) and without your knowledge fattened the pipe so they could increase capacity by over 100%. And they're cutting back analog delivery, which takes 2 to 10 times more bandwidth per channel than digital (more, even, depending on the compression used.) Run fiber to a neighborhood node and you've upped capacity by 1000%.

Apple doesn't "need" to make a TV, but now they're trying to convince people to buy a little black box and hook it up - along with the DVD player, TiVo, and other gizmos. Monkeying around in the back of the set is exactly what Apple *doesn't* do. They include the wireless in the laptop, not as a dongle. They make the iPad complete, including on-screen keyboard.

Oh, and according to the FCC, 63% of US households currently have high speed internet access. That's plenty to get started. 

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#5) On April 12, 2012 at 9:13 AM, SkepticalOx (99.45) wrote:

#4 I just wonder what is classified as "high speed internet access"? I have a 30 Mbps connection at home and I'm pretty sure that's faster than most people have. HD movies and HD shows are huge, and HD streams take up quite a bit of bandwith. I wonder if the ISP's and the connections themselves can handle the load.

Your comment regarding Apple preferring the whole package makes sense though.  

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#6) On April 12, 2012 at 9:47 AM, CluckChicken (28.62) wrote:

#4 - The big question still stands, what makes Apple so different then Comcast, Time Warner, Cox, etc in the eyes of the content holders that they would allow only them to go a la carte? What is Disney's incentive to allow Apple to do this but not others and if Disney would allow this why would they just not deal with the customer directly?

Apple already has a big disadvantage in this market because I will still have to deal with the likes of Comcast, Time Warner, Cox, etc because I still need an ISP. In the areas that Comcast serves there is yet a greater disadvantage as Comcast owns NBC/Universal so not only can they provide a connection they could provide cheaper content.

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#7) On April 12, 2012 at 10:45 AM, Schmacko (55.17) wrote:

#4)"As for your "I can leave it on all day", sure you can. So what? How much can you actually watch? I suspect if you bought by the each you could bring you bill down. Will everyone? No. Did everyone abandon the record stores? No. The bookstores? No. Is iTunes big? Yes. Is Amazon big? Yes."

I answered this in the same post.  About 5 hours a day relistically amongst all members of my family.  Works out to about 7 hours of tv, from hundreds of channels, including almost all movie channels, for $1.

And again the difference between an itunes service or an ebooks serivce vs. TV is the live/now aspect that TV brings that books and music don't.

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#8) On April 13, 2012 at 12:18 PM, Goofyhoofy (< 20) wrote:

OK, responses again.

 #5. No, current day cables wouldn't be able to handle the load. THEY WILL UPGRADE, just as the cell companies a going from 3G to 4G. More to the point, the.cable companies have completely reconfigured (rebuilt) at least 5 times that I can name, but it has been completely transparent to you because "We're adding more compassion and switching to RG 50 cable to the neighborhood node" isn't a sexy advertising slogan.

#6. The content providers won't allow ONLY Apple to go a la cart They're already doing it, however, with iTunes, Netflix, Hulu, and other services.  What makes Apple different is the "end to end" solution. They have the massive data storage (and cloud service for anyone owning an Apple product.) Netflix doesn't have that which couples seamlessly with the front end. Hulu and others require a few hoops to get to your television set, Apple TV won't because it will be built in (with AirPlay, already standard wireless from your computer to AppleTV box. The box, of course, disappears into an actual Apple TV branded set.)

 I don't see why you think Apple is at a disadvantage because you have to deal with Comcast (or whoever.) Half of all iPads are wifi only, meaning people are already combining them with "dealing with Comcast". You will still require an Internet connection, it will just be a fat dumb pipe instead of a list of cable TV channels. Yes, you will pay more for the fat dumb pipe than you do today, but a lot less than paying for programming you never watch.

Let me e clear. Not EVERYONE will cut the cord. But the more who do, the cable business model crumbles (just as the newspaper model did when Craigslist stole the classified section, or as the RBOC's is doing as people disconnect wired phones in favor of going totally cellular. The more who do it, the higher prices they have to charge to remaining customers to support the same infrastructure.)

NBC etc. will not provide "cheaper content" because that will cut them off from many other distribution channels. If that were so easy, why doesn't Harper Collins have it's own own website with "cheaper content"? Why doesn't Warner Music? Why doesn't Universal now?

#7. The "live now" aspect is highly overrated. Except for news and sports, it's largely irrelevant. (60% of households now have DVR's) And where "live" is essential, they will provide live streams, as many of them do now. You can get almost any sport you want, from rugby to NFL, from Snooker to MLB via live stream. I'm sure they will eventually provide a "monthly subscription" price direct to the consumer for those who want it, as Glenn Beck does for video stream, and as the NYTimes does for digital editions.

At the moment you can buy porn by the movie or by the monthly subscription for those who want a lot of it. I don't see why that model doesn't work for other channels, too. 

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#9) On April 13, 2012 at 4:14 PM, CluckChicken (28.62) wrote:

The "live now" aspect may seem overrated but it is very important to the content companies. How many shows are discovered by people just surfing the channels? How many reruns are watched only because they happen to be on when the watcher is looking to be entertained? Now how many of those shows would be watched if you had to pay for them prior to watching them?  I know there are several shows that I have watched that I still would not have seen if I first had to pay specifically for them.  I also know that there would be fewer shows I would currently watch if I had to specifically pay for them.

Now if you say that Apple will provide a monthly pass to watch as much of whatever anybody wants then they become nearly identical to what the cable companies are except without the ads (if they follow the same itunes method they do now). Now do you think an ad free service would be cheaper or more expensive then what we have now? My bet is on vastly more expensive. 

Why do I say that they are at a disadvantage to cable companies?  Apple and the cable companies (except for Comcast) neither own nor produce content, both will have ways to display the content (cable boxes ad iTV) but Apple lacks the way to deliver the content. In my area I can pick between Comcast and Verizion, the only real difference between them is what content I can get at a price point I am willing to pay, currently Comcast provides a better deal for me but if Verizon suddenly becomes cheaper that could change. Now Apple isn't going to magically make the quality of content change so in order to compete with others that provide access to content they are going to have to be price compeditive, here is where Apples lack of deliever becomes a problem. Let us say that internet access costs $60, cable costs $60 but internet plus cable costs $100. The question in this example is how much of a premium over $40 would people be willing to pay to have Apple?

Now I haven't even touched things like On Demand or even viewed this in a way from the content provider side, who are currently getting money from advertisers, cable companies and the itunes/netflix/hulu services.

Why will Apple, who is basically intergrating a wireless connection into a TV, be so different then it is today that is kills what we have? Why does that do: "what's going to change things is a completely different take on "cable TV.""?

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#10) On April 19, 2012 at 3:23 PM, SkippyJohnJones (< 20) wrote:

Response to #6 - The big question still stands, what makes Apple so different then Comcast, Time Warner, Cox, etc in the eyes of the content holders that they would allow only them to go a la carte? What is Disney's incentive to allow Apple to do this but not others and if Disney would allow this why would they just not deal with the customer directly?

 

There are three key differences:

 

1)  Apple will let the content providers price channels/apps however they see fit, and take a predifined cut (30%) for distribution.  Comcast, et al do not allow channels to price themselves; each tier of bundled service includes offerings from several studios.  Netflix and Hulu are the complete opposite extreme of what Apple would do; they offer exclusively an all-you-can-eat package with no differentiation among content makers.

 

2)  The cable guys are utilities.  They have geographic boundaries, and cannot sell to everyone simultaneously.  As a result, their potential is limited to the geographic area covered by copper wiring networks.  Apple would be an IP only offering, meaning they could instantly take on tens of millions of NEW customers for the producers of video.

 

3)  Apple would be a mobile based offering, with video playable through apps/dowloads/channels (whatever you want to call them) on all iOS devices, in addition to the living room screen.  Disney would be able to follow viewers on the road, and presumably charge a premium to make this content portable.  Apple has proven their security and DRM chops enough that Hollywood trusts the company more than any alternatives in the a la carte space. 

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