The Latest Blow to Apple’s TV Venture

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.