Ever since we have been exposed to iOS and a growing ecosystem that is supporting and amplifying the impact of the operating system, it is common sense to expect Apple to expand its reach into markets that are direct neighbors to its most successful products. A TV is such a natural evolution. Some of us have wondered why Apple has not released a device that revolutionizes our TV experience similarly to what the iPod has done to the MP3 player and what the iPhone has done to cell phones. The TV, however, plays by different rules; there are powers that Apple cannot control.
The TV market is ripe for an evolution. We are accustomed to and have largely adopted HDTV, but 3D TV failed. The same could be said about smart TV, which flopped with Google's first generation approach. (This should not have been a surprise. I will get to that below.) Still, market research firms are forecasting a tremendous opportunity for IETVs, or, as we may call them in the future, smart TVs. IHS estimates that 81.1 million of the 249.0 million TVs shipped in 2011 had Internet connectivity, even if it would be a bit far-fetched to describe TVs that can connect to Netflix or YouTube as "smart." In 2012, IHS believes that out of 248.5 million TV shipments, 134.5 million will be IETVs. By 2015, 92 percent of all TVs will have some sort of Internet capability (247.0 million out of 268.1 million). Imagine the opportunity for the company that can capture that segment. A mature and established 250+ million market is something that fits Apple's product strategy. Apple isn't aiming for second place; the TV could turn into the first post-Steve Jobs gold mine for the company.
Apple's Opportunity: The Third Screen
From a strategic perspective, the LCD TV screen is the third screen size for Apple – a 1920x1080 pixel display is added to the 960x640 pixel screen of the iPhone and iPod and the 1024x768 pixel display of the iPad. Another screen adds fragmentation and complexity to the AppStore, which will be, in addition to content, the most critical feature to drive the success or failure of an iTV. Just like content needed to grow to support the iPad, content for TVs will have to be created, modified and adapted. However, there will be new application areas and, if executed correctly, an iOS-powered TV can, conceivably, become a seamlessly integrated component in a network that will consist of iPods, iPhones, iPads, Macs and TVs – all of which are connected via iCloud.
What makes an Apple TV especially desirable is the fact that Apple has, among all tech companies, the greatest credibility in the consumer electronics space. There is substantial can-do evidence that would give consumers as well as content providers enough reason to believe that Apple can make a smart TV work, while we know that Intel went awry with with Viiv back in 2006 and Google learned that consumers aren't willing to shell out money for beta consumer electronics. In addition, there has been substantial success with the Apple TV box, which, according to Strategy Analytics, owns about 32 percent of the set-top box market. The step to integrate and evolve Apple TV into an actual LCD TV is conclusive.
Which Features Matter?
Siri and an integrated camera for video conferencing are the most frequently mentioned "killer features" for the rumored iTV these days. I disagree. Let's be honest. When we watch TV, we are incredibly lazy. The last thing we want to do is to lift our rear-end off the couch and engage with the TV. We want to be entertained, which is a rather passive experience and not the active experience we want to have with an iPod, iPhone or iPad. If Apple isn't able to address our laziness, Siri, as well as other active engagement features such as a camera or an email app, will be largely irrelevant.
There is another interesting part of this equation, which we usually describe as privacy. Compared to an iPad or iPhone, which shows content to only one or two users, a TV exposes content to multiple people. As long as you are not the only person in your household, it is highly unlikely that (connected) personal applications such as email or even web browsing turn into killer apps. No one wants to share personal email content. We know that video conferencing is a tough one to break as most of us feel uncomfortable in front of a camera, which gets worse with an increasing number of people who are involved in a video conferencing session. Even a hugely capable Siri voice control may not provide the grounds for a popular smart TV. I cannot remember any instance in which Microsoft's Kinect convinced me to use voice instead of a standard controller to navigate to the content I want.
What remains as the only critical feature is content – active and passive content that makes sense on a TV. The passive content would be traditional TV broadcasts as well as streaming content. The active portion would be AppStore access, especially video gaming. Both roads are covered with rocks that Apple has to remove one by one.
Traditional TV Habits, Passive Consumption
Tom Morrod, analyst with IHS, told me that if an iTV is released, "Apple's positioning is likely to be with operators, putting it up against set-top boxes more than TVs in that case." Problems for Apple include that the replacement cycle for TVs is much slower than it is for phones or MP3 players, making it less likely that we will be throwing out our existing TVs for Apple's TV. Morrod added that TVs are more price sensitive (besides a rather strange, recent survey by Best Buy of what its customers would think about a $1,499 Apple iTV) and that the believed advantage of getting apps onto the screen is much more difficult on the TV than on a phone.
As for the content, Morrod believes that an iTV will have limited reach unless Apple gets "a deal with one of the big MSOs." Even then, there is still "a dedicated and guaranteed bandwidth for premium content streaming to a TV." Imagine the friendly letters from AT&T and Comcast to Apple iTV users when you burst through the 120 GB or 250 GB monthly data limits. I am sure that your ISPs are willing to sell you extra bandwidth, but are you willing to pay for data for another device in your household? "HD TV will stretch the network and requires support from the operators long term," Morrod said. In the end, the analyst believes that Apple has a shot to dominate the TV market, but not right away. "It will take longer and probably not be quite as easy for Apple to break the market, although they may well offer a new business model that may appeal to a few pay TV operators," he said.
TV operators hold the key to Apple's TV success: content. Without traditional TV content, access to everyday broadcasts, on-demand and other premium content, an expensive LCD TV is a difficult pitch, even for Apple. The management of such contracts could be a nightmare for Apple. There may be hundreds of carriers that Apple is dealing with, but there are thousands of broadcasters once Apple extends its reach globally.
Active Content: Apple's Game Console
Leveraging active content on a TV involves a learning process that begins with what we are comfortable with: games. There are plenty of games that make sense to be displayed on a TV, possibly even a touch screen TV. Apple is likely to be offering APIs to developers that lets consumers use iPods and iPhones as remote controls for games on a TV. By using games as a foundation as well as the feature set of iOS on more compact devices, a new generation of TV-specific applications could surface. However, it is not a market that is as conclusive on the TV as it is on a tablet. The addressable market will be much smaller initially and will somewhat limit developer interest, especially if the iTV launches in just a few geographic regions. For example, IHS believes that the 2012 IETV market in North America has a volume of just 31.7 million total units. By 2015, the market will reach about 45.6 million units.
In short, the smart TV market shapes up to be a greater mess than the smartphone arena. Besides iTV, there is Google TV, and Sony is playing a few different games and is much more interested in a consumer platform with its Playstation Network, which was recently renamed to Sony Entertainment Network. Let's not forget Microsoft, which may also be interested in making a stronger play with its Xbox Live and Kinect platforms that are clearly moving beyond video games.
"It looks like the [TV] market will be more fragmented than the phone market for the next few years at least, dominated by own-brand vendor platforms," said Morrod. "Samsung in particular looks to be very entrenched with a future Tizen-bada platform. However, there is space for Google’s platform to unify across brands, and Apple’splatform on what is likely to be a very limited initial run of Apple TVs."
The Bottom Line: Not a Slam Dunk
I hate to be pessimistic, but as common sense as an iTV may sound like, it is strategically problematic. A TV is the most likely flop for Apple since its ingenious Cube, which was sold from 2000 to 2001. Passive content will be the key to success. Restricted access will break the iTV's neck before it launches. With passive content in place, Apple is likely to use active content, thus amplifying that success. Apple iOS devices live and breathe through their apps. Take them away and the devices will die, at least in the consumer space beyond Apple customer loyalty. The iTV (just like a Google TV) will need great apps and deliver developer incentive to overcome the initial limited customer base. The integration of those apps across the iOS ecosystem can seal the deal, as long as Google isn't there yet.