Apple TV faces many challenges
Image courtesy of Apple
COMMENTARY As always seems to happen with Apple (AAPL), there's the barest hint of a rumor of some new device and suddenly you get the incessant watch for actual products to hit the market. The latest noise is about an Apple TV -- not the set-top box version, but an Apple-branded full set. According to the Walter Isaacson biography, the late Steve Jobs said that he had cracked the problem of a successful offering.
Jobs had focused on the interface, syncing the television with all devices and cloud services, and leaving no need to fiddle with "complex remotes for DVD players and cable channels." But there is more than one problem in play. The television set market is unlike any other that Apple has entered. Not to say that the company doesn't have a chance -- far be it from any of us to rule out the possibility of success. But here are the strategic hurdles that Apple CEO Tim Cook faces:
1. Market maturity
Apple went into the personal computer market when it was nascent. Although there were MP3 players before the iPod, the gadget was still an early entry. Smartphones had been limited in scope and distribution before the iPhone.
Early markets offer some major advantages. An innovative company has a chance to help define a product category and expectations. In the TV set market, that's far more difficult in a fundamental way, largely because current technology and the way it works has had enormously high adoption for decades.
2. Established pecking order
Supporting the existing technology is a complex, massive ecosystem where the dominant players largely have interlocking interests. Retailers will clearly want to sell Apple TV, and analysts suggest that the company will provide programming in a disruptive way. But as much as Hollywood studios have worked with Apple before, they will be wary of providing content directly, because they want to protect cable and satellite distribution deals that provide such an important part of their revenues. Even though Jobs was a genius in negotiating with the networks, the iPhone and iPad provided alternate revenue streams. Anything delivered on TV sets goes to the core of programming revenue. The minute Apple TV appears to be a threat, the studios will pull back.
It's possible to have premium products in an otherwise commodity market. But TV prices have been dropping through the floor. According to NDP DisplaySearch, TV prices continue to reach new lows, with the average price of LCD sets less than 46-inches dropping below $1,000, and 60-inch TVs falling under $1,500, with holiday promotions hitting $1,000. Says NDP:
Unlike the smartphone market, there is no carrier subsidy or equivalent to keep products within reach of most consumers. Apple is already feeling price pressure in smartphones, which is why it is creating two-tier pricing.
These low prices reflect the difficult year many in the TV industry have faced. With slower than expected demand and excess production capacity, a persistent oversupply of inventory during [the first half of 2011] led to a dramatic reduction in key component costs during [the third quarter.] As a result, these cost reductions enabled the bargains seen during Black Friday and beyond. However, the positive reaction by consumers to very low prices is also a challenge for TV makers.
4. Product longevity
An important factor in Apple making high profits is regular turnover in consumer product. There is some significant expectation that people will upgrade products every two years or less. Television sales don't work that way. People have become conditioned to expect a decade or more of service out of their TVs. One reason for price pressure on set manufacturers may be that the sets have a shorter lifespan than they once did, and people want a lower price in expectation of increased replacements. So Apple probably can't use replacements as a way to boost revenue. Not only does the company have to find a way to add value beyond what televisions already offer, but it also has to develop a different business model than it's been using.
5. Ease of use
One of Apple's big selling points with consumers has been simplifying the way products work. The company's whole ethos is that a computer should be as easy to use as...a TV. Ah, right, TVs are already simple to use. It could be that any innovation will be in integrating television and Internet access into one device, but that would have the limitations of what the web requires. And it's not as though smart TVs that integrate traditional television and Internet video are scarce.
Apple may be able to overcome any or all of these limitations, but each is a significant hurdle. Maybe Jobs and all the other people at Apple have cracked a major interface problem, but unless they've overcome some of these other issues, an Apple TV won't become a financial success for the company the way the iPhone and iPad have.
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