How Apple TV Can Change the Economics of TV

The following is also my column in next week's Advertising Age.

This week, like thousands of early adopters, I picked up an Apple TV. It lead me to believe that as Internet-connected set-top boxes take off, Apple and others will change television, and with it, TV advertising.

Apple TV is a small set-top box that connects to any flat-screen television. Think of it as a smart iPod. However, bloggers have also widely reported that it will work with any set that has component inputs. The box also connects to any wired or wireless network in your home. That's all you need to get up and running. Apple TV will then take any media in iTunes on your PC or Mac and copy it to an internal 40 gigabyte hard drive. You can then access your audio and video content on your TV even if your computer is off.

Most of what consumers will watch initially via Apple TV will be movies and shows purchased from the iTunes store. Unfortunately, these do not come in high definition, at least yet. So, the viewing experience is less than ideal. However, as the cost of HD video cameras sink below $1000, individuals are rushing in to fill the void. Merlin Mann, a productivity guru, told me last week his popular video podcast will be available in 720p next month.

TV for years has been a closed system. It requires big infrastructure and dollars to create content and broadcast it to the masses. And although distribution has shifted from broadcast airwaves to copper wires and now fiber optic cables, the economics remain the same.  The cable nets identify a niche that is big enough to support a sizable audience and therefore advertising.

Over time, however, niche content will change the economics of television. Millions of Americans will add one or more Internet-connected set-top boxes to their living rooms. Once they do, look out. As they discover there is niche HD video content that matches their precise interests, the existing TV networks will see their viewers erode even more. Further, brand marketers will see they don't need media to reach people in their living rooms. They too will produce their own content that will be distributed over the Internet for consumption on TVs.

Comments

[Phyllis]

I'm excited about the Apple TV. I', just not convinced the average person will want to pay for shows a-la-carte. Joost seems like a service more in line with what "the massses" would want. (A Joost box -- Joost TV -- would be amazing.)

Also, advertising will come to support internet TV, just as it did broadcast TV. The infrastructure just just isn't ready yet.

But, one day, it will be.

- Phyllis

[Robert McLaws]

Steve, you know I think you're a great guy, but why is Apple's product the "game changer"? Apple only copies the files from another device. There are a bunch of streaming devices already on the market that already changed the game.

And let's not forget Windows Media Center on Windows Vista. Which is better, a closed system that only works with iTunes, (and files you have to download twice) or an open system with dozens of other companies developing on delivering a wide array of programming to a variety of devices?

Did I mention that companies are building Media Center Extenders into the next generation televisions? So you won't even need a STB to get content from your Windows machine.

And what about the Xbox 360? Not only does it connect to Windows Vista, which on an HTDV is an amazing experience, but it downloads its own shows, and soon will be an IPTV set top box. Do you think that will only be exclusive to the 360? I predict that Microsoft will release a Live Video Marketplace to Vista's Media Center before the end of the year.

Sure, Apple TV is important to the marketplace. But no more important than Microsoft, Sling Networks, Orb Networks, HP, Vongo, Comedy Central, or any of the dozens of other companies that is building innovative TV experiences on other platforms.

[Evan]

We are very exicited about the opportunities for independent filmmakers and video producers to distribute content for Apple TV. http://www.hungryflix.com has already begun distributing indie films for Apple TV.

Now the distribution circle is complete and downloaded content can be viewed in the family room.

[pwb]

Robert, pretty much everything you said could have been said about iPod. I wouldn't underestimate Apple here.

[mark]

"Which is better, a closed system that only works with iTunes, ... or an open system with dozens of other companies developing on delivering a wide array of programming to a variety of devices?"

For developers and geeks, clearly the latter. But for the mainstream consumer, it depends on which is the simpler, no-frustrating/embarassing-hassle, easy-to-use system.

[Robert McLaws]

PWB: Umm... what are you talking about? I didn't know the iPod was an IPTV set top box. Or that it could function as a Media Center Extender. Or that it was made by dozens of other companies. That crazy little device can do it all... I had no idea!

[Rob Usdin]

Apple TV is definitely not the game changer - it's late to the game. It's a way for Apple to keep the faithful locked into them for content. There's no easy way to rip any DVD into iTunes so that you can put your physical video media away and have access to it all on your PC, so anything you have as a DVD you still have to switch over to your DVD player to watch.

Moreover - Windows Media, MythTv and even TIVO offer a more open system. Yes, I did say TIVO - whose Desktop 2.4 allows you to stream and convert files on the fly from your PC. The TIVO also plays MPG so use any program you like to rip your DVDs and store them and it'll get at them. The Tivo is as easy to setup and use as the Apple TV. The other advantage is that it (and all the other systems except Apple TV) can be used with folks' current systems - aka their cable or Satellite provider. People don't always want to pay for ALL their content - and having the DVR function lets them access their "legacy" system. I agree that a la carte on demand may eventually rule - but right now - Apple TV lacks that essential DVR piece that makes it a must have device for the average person. As such - its market is rather limited.

The battle for the media center OS of the home is just beginning, but Apple is staking their claim late.

[Martin Hill]

Robert McLaws,
I’m afraid your enthusiasm for Microsoft’s Media Centre PCs and the Xbox does not translate into quite the competition you are imagining. There are 12 million Media Centre PCs out there and only 5 million Xbox 360’s while there are some 120 million iTunes users.

To use the AppleTV, you only need a TV with component or HDMI connectors and a copy of iTunes on your PC or Mac. No expensive Media Centre PC required.

The Media Centre PC has been so unsuccessful that Hewlett Packard, the first and biggest supporter of the Windows Media Centre platform, has just dropped support and ceased producing Media Centre PCs because of the failure of the market to embrace the concept. HP is instead making their own TV connection that is incompatible with the MCE standard.

You state that iTunes requires you download files twice – what on earth are you on about? Unlike services like the unsuccessful Amazon Unboxed which DO require you to download 2 files if you want to be able to play a movie on a handheld media player as well as your PC, the one video file will play on your Video iPod, your Mac or PC, your iPhone and your AppleTV.

Your argument that it’s far better to have multiple companies delivering a wide range of programs versus iTunes certainly hasn’t been the case in the music marketplace. iTunes has wiped the floor against all of them.

Likewise, Microsoft’s “Plays for Sure” audio ecosystem is withering on the vine as Microsoft itself tries to copy the vertical integration of the successful iTunes model with the Zune.

Most commentators agree that the hold-out movie studios and other content producers will have to cave in eventually and put their movies and remaining TV shows on the iTunes Store or face an ever dwindling share of the online media market.

Apple’s iTunes store features over 4 million songs, 350 television series, 65,000 free podcasts, 20,000 audio books and over 400 movies (and a few games). With the store having sold over 2 billion songs, 50 million TV shows and over 1.3 million movies, the AppleTV already has a far larger ready-made audience than any of the competition you mentioned. There is no doubt that iTunes Store HDTV content isn’t far off either – the AppleTV is certainly capable of handling it.

With the pace of hacks and add-ons to the AppleTV already appearing supporting all the popular pirate video formats such as Xvid and DivX as well as wmv, the potential audience gets even wider. By the way Phyllis, Joost now works on the AppleTV and it sounds like YouTube etc shouldn’t be far off. Heck, someone’s even got Asterisk, an open source PBX (VoIP telephony solution) working on the little Apple as well.

This is why the AppleTV could indeed be a game-changer in the TV industry. We'll just have to wait and see.

-Mart

[Robert McLaws]

Mart,

HP didn't stop selling Media Center PCs, they stopped selling a specific Media Center form factor. The fact is, most computers shipped today have some level of Windows Media Center support, and most major OEMs sold XP Media center Edition as their de-facto OS of choice for the last 6 months or more. So the 12 million claim is dubious, especially since Vista sold 20 million copies in it's first month.

And your wrong on the Xbox 360 numbers too. They shipped 10 million in their first year, and are on track to ship another 2 million by June. So you're pretty significantly underestimating Microsoft's installbase.

Plus you're still forgetting Sling, which IMO has the best device out there. Who wants content down from iTiunes when you can placeshift your TV experience from anywhere? And when Orb and Vongo start playing nice, hopefully you'll get to placeshift purchased Media Content as well.

AppleTV makes you download the file twice... first from iTunes to your PC, then from your PC to the AppleTV device. It doesn't stream straight from the Internet, like the Xbox 360.

Also, everyone made such a big deal about the PlaysForSure thing, but the Zune is built on PlaysForSure technology. It uses the exact same format and protocols, with an "x" added to the end of the extension. One registry key change allows you to sync the device with Napster or any other music store vendor.

Not everything Apple does is going to change the world... remember the Newton? And the same goes for Microsoft. Remember Bob? Cairo? WinFS? Smart Displays? People need to stop the Steve Jobs Circle Jerk and critically evaluating Apple's products just like every other vendor. My point was teh game already changed, and Apple was late to it. Their device just adds to the already huge momentum in the entertainment industry.

[Phil Butler]

Great post! I have always like the quality and well thought out products of Apple. I imagine there is a good deal of pressure on all these companies to get to the market first. Given that Apple probably did an excellent job on this project.

Always,
Phil

[Martin Hill]

Robert,
Surely you'd have to admit HP’s change of direction regarding the Media Centre ecosystem is a quite damaging reversal and acknowledges Microsoft's original vision of the Media Centre as a lounge-room PC is flawed. They are basically dropping their entire Digital Entertainment Center line and dropping back to just the Media Centre software installed as default on Vista Premium and Ultimate. Also by selling their own line of TVs with their own technology instead of MCE, they’ve put the boot in to that concept as well. I'd find it hard to argue that this isn't a kick in the teeth for the whole Windows Media Centre model.

Here is more information:
"HP is pulling out of the Digital Entertainment Center (DEC) business. The company that pioneered the living-room form factor for Media Center Edition (MCE) PCs has decided to drop the line.
The company instead will focus its energy on MediaSmart, the new brand of TVs with digital media adapters built in -- not Microsoft Media Center Extenders that link Media Centers with remote TVs, but HP's own solution for distributing photos, music, video and other content (including Web-based) to the TV."
http://www.cepro.com/news/editorial/18066.html

As far as Media Centre numbers are concerned, I'm using numbers from Piper Jaffery:
"Because the iTunes customer base is nearly 10 times larger than the estimated 12 million active users of Media Center PCs, the AppleTV could be "a Trojan horse" that Apple can use to extend its dominance from portable digital players into the market for home media centers."
http://www.smartmoney.com/bn/ON/index.cfm?story=ON-20070319-000428-1506

As for Xbox 360 numbers, Microsoft stuffed the channel for Christmas and has indeed "shipped" 10 million Xbox 360's to resellers. However, the number actually sold to end users is estimated to be a lot less. According to their SEC filings, the number sold in the entire year leading up to October was only 5 million and they're only estimating another 2 million will be sold for the entire first six months of this year.
http://www.roughlydrafted.com/RD/RDM.Tech.Q1.07/8709A21F-1899-4AA2-8283-CAF3F4B353FF.html

Sling certainly has some intriguing products, but again, they've been going for a while now and still haven't made much of an impact. Cool technologies are great but unless they attract the mass-market consumer, they can't really be called game-changers.

As far as Zune is concerned, needing to hack your registry to get Zune Plays for Sure interoperability just emphasizes how much of a knife in the back for Microsoft's PFS "partners" the Zune system is. Joe consumer is not going to be able to handle it.

I agree that Apple has made plenty of mistakes over the years, but note that Newton was John Sculley's baby, before Steve Job's Second Coming. :-) However, you are correct, Steve has made mistakes as well (the Cube), but that doesn't get away from the fact that lately, Apple has been hitting far more home runs than not - iPod, iTunes Store, intel Macs, OS X, Apple Stores etc - so to simply brush off the Apple TV could be a big mistake. I'm not saying it will definitely be a hit and change the game, but there is a lot of impetus pointing in that direction.

-Mart

[Jonathan Eby]

Apple will always be a "game changer" because they are Apple. They have a captive audience around the world because they are very, very good at what they do - they "sell the sizzle", but they have a pretty good steak to boot. That being said, Apple TV seems a bit strange to me, and appears to be little more that Apple attempting to get an initial foot into the converged PC/home theater market. Resolution is a big problem for Apple TV, and once HD content on iTunes becomes increasingly more available, the 40 GB hard drive will become a bigger problem.

HP are not the only folks who've been in the MediaCenter hardware game. There are more and more hardware manufacturers (both in the consumer electronic world as well as in the traditional computer laptop/desktop world) bringing new, innovative products to consumers. Take Sony's new digital lifestyle system - expensive, yes, but integrating cable card access directly into the MediaCenter experience, providing HD content without an additional box, is HUGE progress. And Sony is not the only one implementing this. Personally, I can't imaging HP's own media interface becoming a real player in this game - much like their line of LCD TV products. The MediaCenter form factor was a fairly nice design - I still run one at home, and with Vista's updated MCE interface and added fuctionality and stability, it's a compelling combination.

Convergence is the continued name-of-the-game. When converged systems are cost-effective, reliable, easy to use and (here's the kicker, and HP's downfall) marketed well (here's where Apple consistently shines), then consumers respond en masse by gladly parting with their purchasing dollars.

[Konin]

"Apple will always be a "game changer" because they are Apple" - that's rigth.They are very good at what they do.

Your wrong on the Xbox 360 numbers.They shipped a lot in their first year and later too.

[Konin]

"Apple will always be a "game changer" because they are Apple" - that's rigth.They are very good at what they do.

Your wrong on the Xbox 360 numbers.They shipped a lot in their first year and later too.

My site: Konin