The Latest Blow to Apple’s TV Venture

| Analysis

There was a time when we suspected — or hoped — that we could replace our cable or satellite TV service with free Internet offerings. That pipe dream is gone, and now we’ve found that the content providers are forcing the Internet to become a supplemental service rather than a traditional service. That doctrine will be pivotal in the success or failure of Apple’s surmised venture into a broader TV service.

The pieces of the picture are coming into better focus now. The changes we’ve seen in the services provided by the current Apple TV and Netflix sugest a trend. On the Apple TV side, we’ve seen the cancellation of TV show rentals and the movement of some shows from free podcasts to paid. On the Netflix side, we’ve seen how STARZ has tried to extract more revenue and position some of its offerings as “premium.”

I’m not the only one seeing this trend. In a recent New York Times article, the paper noted: “Netflix and services like it are increasingly being positioned as supplements, not replacements, for traditional TV subscriptions as the major studios, networks and distributors work to preserve their existing business models.” This is a small but massively important observation.

Cryatal Ball

Changing The Rules

What I think has happend is that the initial specter of cord cutting and the rising popularity of Netflix as an alternative to traditional cable & satellite services (and the sense by technical columnists that Apple would disintermediate them) changed the mindset of Hollywood and the networks.

The initial doctrine was to have as many outlets for content as possible to maximize revenue. But that approach backfired because customers discovered how to use various technologies, Amazon, Boxee, Google TV, Apple TV and Netflix to pick and chose what they wanted. That allowed some influential authors to “cut the cord,” although we’ve since discovered that most of the cord cutting comes from people who lost their jobs or homes and have been in the lower income brackets.

The new strategy by the content holders appears to be to force a separation between “traditional” TV viewing and “supplemental” viewing. Here’s what I mean:

Traditional Viewing. Sometimes called appointment television. The viewer wants to see the Nov 1 showing of NCIS on Nov 1. Realtime sports are important. Seeing the very latest new shows when they come out in the fall, whether or not they succeed, is a tradition. Viewers savor the here and now of current, serialized shows.

Supplemental viewing. Realtime sports are less important. The viewer may, for example, catch up on Season #1 of Lost or Mad Men on Netflix or even disconnect altogether and watch from a DVD collection. New shows that might get cancelled or preempted are viewed with skepticism. The viewer picks and choses shows from the growing library of available content online without regard to current series.

By forcing the Internet to be the mainstay of Supplemental viewing, the content providers can maintain existing, profitable relationships with cable and satellite providers. The recent spat between Fox and DIRECTV shows how viewers can be held hostage by the networks and increased revenue can be extracted. Yet, DIRECTV carries on. They need each other.

What About Apple?

Apple would very much like to radically alter the TV viewing experience, but this new positioning by the content providers throws a money wrench into the scenario. I’ve presented my thoughts on what Apple might like to achieve several times, and Ted Landau has recently echoed my own thoughts (and best hopes) as well. We write about that because there has been absolutely no imagination in the development of the UI with modern DVRs, and Apple would love to change the game in the way it knows how to. Recall, Steve Jobs mentioned recently that he’d “cracked the code” for a simpler, better TV viewing experience.

What’s holding up Apple now is this emerging doctrine by the networks that any new service, like the one envisioned by Steve Jobs, must be forced to be a Supplemental service — which marginalizes it. The content providers are very experienced at developing licences and contracts such that it would be very difficult for Apple to circumvent their intentions. As a result, the dream of cord cutting, a forsaking of the perceived evil of the current providers, a futuristic embrace of a next generation Apple HDTV — the creation of an Apple TV nirvana, may be a fading dream.

In light of that, it wouldn’t make much sense for Apple to delve into the HDTV set market right now unless they could offer a solid alternative to the current industry. In the meantime, Apple could contemplate two remedies.

The first, rather brute force, approach has been discussed by many technical columnists, including me: classic vertical integration. Apple could try to force its way into the market by 1) buying Time Warner cable or even Comcast. That might be met with government and industry objections similar to but even larger in magnitude than Sprint’s fight against the AT&T and T-Mobile merger. Then, 2) Develop a closer relationship with Disney and its many holdings, like ABC, to gain a beachhead by showing the rest of the world what TV with Disney/ABC and Apple’s new vision could be like. Then hope that CBS, FOX and NBC are panicked into coming along eventually.

A different, simpler but more problematic, approach would be if Apple could somehow convince the content providers that it, a giant $120 billion dollar company, should be elevated to equal status with Comcast, Time Warner, DIRECTV and Dish Networks as a tier 1 provider. I don’t think that could happen, but it might. That would be a new challenge for Mr. Tim Cook.

I am sure Apple is wrestling with this and related problems right now. Until Apple figures this all out, it may well be that the current Apple TV product must remain a hobby for Supplemental viewing.

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10 Comments Leave Your Own

skipaq

Wouldn’t this be a great opportunity for some brilliant new network creation that is based on internet delivery rather than traditional delivery. This would take time. But buying as much old content as can be had and developing original content has been practiced before. Selling this material to the companies to stream over the internet could prove profitable. It usually takes some upstart new business model to shake up the old one.

Bosco (Brad Hutchings)

@skipaq: You know, that’s basically how AT&T’s U-Verse works at the delivery level. The difference between AT&T U-Verse and whatever net-based services Apple or Google or Amazon or even Netflix offers or wants to offer is that AT&T owns the last mile and HD-level bandwidth is still scarce, especially at the last mile.

Google going into communities to install very high speed networks and finding a business model where it doesn’t also have to monopolize traditional content on those networks is probably key to breaking the hold that cable and satellite operators have on that content.

skipaq

Thanks, Bosco. I’m not familiar with AT&T’s U-Verse. As far as Google or for that matter Apple developing their own network; I’d rather see it remain independent. Selling the programming to Amazon, Google, Apple, Netflix or whoever wants to repackage and deliver it seems better for consumers. Perhaps I’m thinking more of a studio/network type of startup. I would expect the others would soon have to follow.

For now, the internet content delivers should try bidding for content. Perhaps, this is one area they could cooperate for the good of all their customers. Imagine what would happen if Amazon, Google and Apple got together and won rights deals for major sports. Doesn’t even need to be exclusive.

John Martellaro

skipaq:  I like the way you think.

skipaq

Thanks John; hopefully it is “different.” However, most consumers would probably prefer such a set up.

garzonetto

All this “cracked the code” TV wishlist stuff coming from AAPL seems a lot like propaganda.  Just like reports of Steve’s involvement in iphone 5.  It PROBABLY has been thrown out there to build want from the cult of AAPL followers.  This would also be used to mitigate any downside risk of future products due the passing of Jobs.  This way they get a passing of Jobs BUMP!  Besides, the Tv and Hollywood entertainment industries are strong and entrenched.  There is really nothing new on.  It has forever been SitComs.  Now it is SitComs and Reality shows - the only “new” (now over ten years old) thing to come along in TV.  Oh and 3D - an olod trick made easy by computers.  Not much is changing any time soon.

Bregalad

The brave new world of internet delivery by Amazon, Apple or Google is blocked by two very important things: they own no delivery system and no content.

No delivery system: the internet is controlled, for better or worse, by those who own the last mile: cable, DSL and cell towers. They charge what the market will bear and nothing is going to change that. Their lobbyists will ensure that they will never be treated as just dumb pipes.

No content: as skipaq suggested some content can be purchased, but I don’t see Apple wanting to start producing their own television series. Without content that people want, your service is nothing more than a curiosity.

Nothing short of Apple or Google purchasing a major studio like Sony Pictures or NBC Universal is going to change anything. Even that may not break the grip that Verizon and Comcast have on the market. If the ISP/television providers start losing TV subscribers in a big way, they’ll simply raise data rates and impose bandwidth caps until it makes economic sense for people to get their content directly from them again.

Not only must Apple own content, they must own content that’s better than what the ISPs control so people will be willing to pay for both the content and the bandwidth needed to view it. Finally, people must also be able to pay for both content and bandwidth. Currently a lot of people aren’t willing or able.

John Martellaro

So I just saw a tweet. “LOVE it! Apple TV. Got rid of my cable. So now we know.  He’s a “supplementalist.”

Ross Edwards

As I’ve commented before, I have DirecTV still because they keep offering me 90-day retention credits every time I call to cancel.  I’m ready to cut the cord any time it costs me anything to keep it activated.  And I have to tell you, a pair of rabbit ears will pick up HD channels in most areas just fine, and that generally includes all the major network shows and a fair slate of live sports.  And the cost delta—100% less than whatever your current bill is—can’t be beat.

Sorry, CNNBCBS (a division of ABC Fox): I don’t feel like paying to watch your skits anymore.  They’re only on to provide product (our eyeballs) to your advertisers.  Cattle don’t pay for their feed.

adamC

As I see it it need not be a computer which needs to be hooked to the web to get contents.

It can be a TV like what every TV manufacturers are making and they don’t have contents but once they are installed in the homes they received contents from many TV stations which buys the contents.

The next part is it can be hooked to the web to access free contents and use the apps for subscribed contents and yes read newspaper and publications too.

As for videos it can be rented from whatever source a person like.

iTV from Apple will just be a regular TV but with web access.

As for the content owners their contents can be circumvented throught the web.

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