Despite persistent rumors that Apple will have a television on the market in 2012 it is not clear that they will have built an ecosystem favorable to Apple. We assess that there is a <50% probability that Apple will have a television product in 2012.
Positive Signs of Apple Television
According to the Steve Jobs biography by Walter Isaacson the widely quoted “I’ve finally cracked it!” was not about television but about the use of Siri to control the television. Nick Bilton, New York Times, October 27, 2011, assesses the prospect of an Apple television and is more conservative than many observers. He does conclude: “It is coming though. It’s not a matter of if – it’s a matter of when.” Certainly Siri could be the foundation for control of the television but much more is required to achieve the degree of control which is typical of Apple.
Apple has the potential of reaping significant financial rewards. For example: “A recent report issued by Barclays predicted that if Apple made a television set, excluding content deals, Apple could generate an additional $19 billion in revenue a year. This number would not be a stretch either; Barclays said in the report that Apple would only need to capture 5 percent of television buyers to reach this goal.”
It is expected that that in 2012 Samsung and LG will have 55″ OLED televisions on the market. This is much sooner than most had expected. OLED technology would create stunning televisions which is the type of technology which Apple uses to create differentiable products. The first OLED television, the Sony XEL-1, certainly created a stir in the market when introduced and showed that the technology could create excitement. But in early 2010 Sony killed the product in Japan, citing sluggish demand. The $2,000 price tag was well above television pricing then. Lesson Learned: High priced technology may not create a market. Good lesson but not a new one.
iOS, Ax silicon, iTunes, the App Store and iCloud could be the foundation for an entry leveraging the strength of Apple’s infrastructure, consumer brand and depth of developer relations. These assets alone, when applied to the television, are powerful positions from which to enter the market. There is little doubt based on these properties that Apple could create a unique television which would be competitive.Further, Apple, from a consumer value proposition, would be able to provide content to all of its products. A 4 screens and a cloud proposition which builds on Apple’s products and penetration. However, securing television content is another matter.
Apple has already established some positions in this market with Apple TV and AirPlay. These products are consistent with its intent to provide an all Apple solution to the television experience. On the down side Apple TV has had limited success overseas where its content play is less successful.
Negative Signs of Apple Television
Apple was able to change the music business because of the pricing it brought to consumers and distribution via iTunes. There are a number of rumors that Apple is seeking to do the same in television content and being less successful. For example, CBS has turned down an Apple proposal to be on an Apple TV subscription. In the wireless phone business, when the iPhone emerged, the carriers were looking for a product which differentiated them, in part, as a means to lessen churn. Apple offered a solution, which was GSM based, which demanded significant concessions from the carriers, of which AT&T was the launch carrier. It worked and was exportable into worldwide markets. Those unique conditions do not exist in television content. It is highly fragmented based on local channels, cable channels, satellite channels, movies and international content. The content markets and sources worldwide vary widely. This is made all the more complex due to advertising. Bringing Apple’s degree of control to this market is impossible. It will be more narrowly focused.
The television set market is a race to the bottom. The bottom is in terms of price and margins. With large screen televisions reaching saturation in many markets Apple faces another challenge in getting consumers to reject the recent television for a new Apple television at a higher price than they may have paid for the last one. Yes, Apple has a strong draw for its products but will 2X or 4X the price of the lowest set be a block to drawing buyers. Apple has not has such premium price products and, if anything, has been going downscale in pricing. This has been very effective in blocking iPad competition. Pricing in the television market is critical to the accumulation of market share and we have doubts that either Apple will be in a race to the bottom or that a premium priced product will engender long supply line waits. Thus, margins in the television market are a critical issue for Apple.
It is assumed that Apple will use Over The Top (OTT) delivery of television content. It will be an out-of-band delivery source using the Internet on cable or other transport. The problem is that in many countries the infrastructure is insufficient for a real time viewing experience especially one of quality, i.e., HD. As a result, content must either be cached or requested in advance for local storage. This is not really an effective experience where the public has come to expect instant on or DVD like control functionality. Further, some bandwidth providers may block such OTT content delivery. Net Neutrality is at the center of this debate and the United States rules went into effect on November 20, 2011.
Apple must have a worldwide market for its products to have a significant impact on its financial performance. The iPhone rolled out relatively slowly compared to the iPad. Both are now significant worldwide products along with virtually all the other Apple hardware products, the one exception being Apple TV. If the Apple television is to achieve success it must also be a worldwide product. If Apple is only selling a television product this is just a matter of localization but if the television is tied to content delivery making it a worldwide product will take years.
Apple has achieved retail performance which is unparalleled. In the retail industry income per square foot is the measure of success. This table from RetailSails shows that Apples performance is significantly higher on a sales per square foot than Tiffany.
As Apple begins to sell televisions its square footage will be more consumed by large footprint products. Given the low margins for televisions and the large space they consume it is likely that Apple’s retail performance will be impacted. Potentially the larger the volume of television sales at retail the greater the impact. It is not clear that Apple will be willing to accept such a financial hit.
Apple Entry Criteria
Apple’s entry into television is much more than technology. Two critical predicates are marketplace control and margins. It is not clear that today or in 2012 it has either in the television market.