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.

3. Price

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:

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.

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.

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.

[usastrong1]

Like many others, I think that Apple will likely release a TV. Here's the potential problems I see:
1) It will cost multiples of what anything else on the market costs. That's a problem because unlike their other products, which are reasonably attainable, this one will be more out of reach.
2) It will run unacceptably hot (kudos to the other poster who commented on the same area - this has been my experience with all my Mac computers)
3) There will be bugs out of the box with it.
4) It will lead to more overuse of superlatives
5) It will take several product refreshes before it can do things that it should have been able to do fresh out of the box
5) People will line up to buy it.

[eriksherman]

Some will line up to buy it. But that number could be small in comparison to the industry as a whole.

[joelschl]

Please.. these same 'experts' (and I do use that term very lightly) predicted that Apple could not win in the Phone arena either... and look at what happened. If anoyone can do it ... it would have been Steve Jobs... (hopefully he was behind this effort)... other corporate 'leaders' (again.. I do use that term lightly.. more like thiefs of shareholder funds) don't have the gonads to try to reinvent a mature industry. They don't have the vision nor do they have the fortitude to see it through and look past the next quarterly relase to wall street.

[eriksherman]

I didn't predict that Apple couldn't do well with a television set. However, the market is significantly different from others it has entered. The problem is that in a mature market, it's not just what executives want to do. There are other forces, including consumer inclinations, that become constraints. In consumer electronics, the television set market is decades old with a lot of ingrained behavior on the parts of consumers and the companies that own the content. It's a non-trivial problem and not one that Apple has really come to grips with before.

[werntrouble]

Well, if any company can revolutionize TV, it's certainly possible with Apple. What I and many technophiles have always liked about Apple is they offer a proven product that is well-tested by them prior to going to market and, if there are unforeseen glitches, they fix them right away because they manufacture both the hardware and the software. So, what I really want is a home entertainment system that all fits in one box and, if it needs to connect with remote speakers, e.g., it does it wirelessly. I'm sick-and-tired of having a TV (which currently is really just a monitor), a sound system, a cable or satellite tuner, a blue-ray DVD player, a Roku or Apple TV box for streaming video or sound or pictures and, of course, speakers and a maze of wires everywhere. So, Apple, please create an all-in-one home entertainment system, keep the price affordable and incentivize me to buy a new one every two - three years and then I think you'll be a market winner. Apple likes very much to keep things simple as far as the consumer is concerned, so, perhaps Steve Jobs had also realized that the home entertainment market is in severe need of a much simpler form factor than we have now with our frankenstein-like, cobbled together maze of electronics components.

[eriksherman]

I don't see how expecting people to purchase a TV set every two or three years, given the prices and already set expectations of how long the devices last, would work. And there are already TVs that are cable- and Internet-ready. The reason people have multiple boxes is precisely because they haven't wanted to keep buying new sets and because the systems work pretty well.