The One Critical Success Factor for Apple's Tablet

The success of the Apple iTablet (or what ever it's called) when it ships won't depend so much on the speeds and feeds, tactile feel, screen size or OS gestures. It'll depend on its economic vision for how content is delivered to the customer.

I believe that the recent ruckus between Ruppert Murdoch's News Corporation and Time Warner Cable will bear on the future of the Apple tablet. Here's a recap:

When broadcasters radiate their signals from towers, they do so with the consent of the FCC. The only revenue they receive is from ads, whether it's local ads or ads within network provided content. Historically, when those TV broadcast signals were fed into the cable networks, there was no fee charged to the cable company to carry the feed. This was in exchange for favorable placing in the channel guide. So for example, if your local NBC station is formally "channel" 9 in the radio frequency spectrum, the cable company would assign it to their own (arbitrary) cable channel 9. Satellite systems handled this a bit differently, but you get the idea.

Dedicated cable channels, like USA and SyFy, however, have a dual revenue stream. Not only do they receive revenue from their own advertisers, but they also charge cable and satellite carriers a fee for each subscriber each month. That fee is typically some fraction of a dollar.

Here's the important part.

Advertising revenue started drying up for the networks during the recession and it has been slow to rebound. Advertisers have been not only reluctant to spend, but they have been reluctant to spend money on broadcast ads that don't given them detailed return-on-investment (ROI) metrics the way advertising on the Internet does -- because, on the Internet, responses can be traced to specific IP addresses.

That disruptive technology, knowing the IP address and (indirectly) the preferences of your customer via behavioral targeting (BT), is causing the advertising industry on traditional networks to unravel.

The so-called solution by the News Corporation in its recent tussle with Time Warner Cable (TWC) was to demand as much as US$1.00 per month for each cable subscriber. That stand off just before the new year has been resolved, but the details haven't been disclosed.

This is why there have been some proposals for NBC to become a cable channel, just like, say, USA. To obtain that dual revenue stream.

Understanding all this is important because it relates to Apple's philosophy on delivering video content. Whether you buy or stream movies or TV shows in iTunes, you're paying an agreed upon fee that supports the ad-free content. You can watch your favorite TV shows in peace and quiet, and the closing credits are never blasted off the screen in favor of obnoxious promos or ads. Those who have an Apple TV or just use iTunes on a Mac or PC know what I mean. It's a whole different kind of viewing experience.

Watching video content, while on the go, on the iPhone, has merely been a warm up, a shadow of things to come. I can see a time when people carry their TV entertainment around with them instead of being glued to a TV. (Unless, in some cases, where an elaborate home theater has been set up.) Apple tablet customers will watch their favorite movies and TV shows anywhere they go, and without commercial interruptions. In fact, that habit could become the giant disintermediation that seals the fate of broadcast advertising.

For example, I'm a fan of the Denver Broncos and Dallas Cowboys. Many typical NFL games can extend to 3h45m. But I always try to record the games with my DVR, and later I can zip through a typical game in 60 minutes, sans commercials. Have you ever watched an NFL game in real time? It's almost impossible to enjoy a game when, immediately after a kickoff, they break to commercial. The commercials for food, beer, cars are mind numbing, and not of interest to may fans.

This is why its so essential for Apple to provide some leadership. As advertisers move to the Internet, to get a better handle on their prospective customers, broadcast ads are becoming an anachronism. No one really wants to watch TV ads -- just ask any DVR owner -- and it's one reason so many people are moving to the Internet: Netflix, Hulu, and iTunes to obtain their "TV" entertainment.

It's up to Apple to convince Hollywood and the Networks that both they and Apple will make more money with the iTunes model during this critical time when Apple scales up the mobile screen size from 3.5 inches to 10 inches.

I predict that, at first, Apple's tablet competitors will try to duplicate the physical look and feel of the iTablet. After all, commodity hardware is easy to come by. However, the real measure of success will be how well Apple seduces its prospective customers into a new, mobile, ad-free philosophy. The one remaining hurdle is live sports. If Apple can solve that problem in concert with the NCAA, NFL, NHL and Major League Baseball, then the iTablet will sell in the millions. Many, many millions.

If Apple can't market that crucial connection between mobile, ad-free entertainment (or better targeted and controlled ads) and the iTablet itself, then, like its competitors, it'll become just another expensive paperweight on the coffee table.