Can Apple Actually Take on Cable?
Colin Dixon, Senior Partner
September 16, 2009
With the recent $100 price cut for Apple TV, the rumor mill has once again kicked into high gear concerning Apple’s plans for the box. This price cut indicates that Apple is looking to clear inventory and make room for a new box ready for the 2009 holiday season. But, after the failure of the first Apple TV, Apple has much to do to give a new version a better chance of success. One of the loudest rumors is that Apple is planning a subscription video service. But would such a service be the draw the company is looking for?
Now Is The Time to Enter the Market
In our new report entitled Broadband-Enabled TV: Rise of the OTT Provider, we make the case that the market is ripe for a subscription-based Internet-to-TV service. The technology has been proven, as anyone who has watched full episodes on ABC.com or FOX.com can attest. Consumer interest in Internet TV delivery has been validated both empirically (e.g., by the success of the Netflix movie player on Xbox 360) and conceptually (e.g., by TDG’s primary consumer research). Content providers are finally stepping up to the plate as well, with just about every major producer committed to delivering their first-run made-for-TV programs online. Finally—and as predicted by TDG’s recent forecasts—the revenue potential is there to justify entering the market (Internet-to-TV subscriptions alone will hit nearly $2B worldwide by 2014). Taken together, these facts indicate the market is primed and ready for the right Over-the-top (OTT) TV subscription service.
Could Apple Be the One?
We at TDG have long recommended that Internet based services should avoid directly challenging traditional PayTV. This is primarily because a new entrant is unlikely to be able to match the content selection available from PayTV. The approach we have proposed is to augment the PayTV experience with unique and complimentary content not carried by PayTV operators. This advice is certainly appropriate for small providers entering the market for the first time, but Apple is certainly not numbered in this group. Does this then mean that Apple can take on cable and expect PayTV subscribers to cut the cord in its favor?
Good question, one no doubt fueling the Apple rumor mill. The recent price reduction will help clear out old inventory, thereby setting the stage for Apple to introduce a new box in time for the holiday season. Along with the box, so the rumors suggest, Apple will offer a subscription video service at $30 a month including content from major providers such as NBC and CBS.
However, if Apple does have such plans, to be competitive at the $30 price level the service must provide far more than standard “free” broadcast TV; consumers will expect many of their cable favorites as well. Until now, much of this content has been unavailable outside of a PayTV subscription. Steve Jobs, Apple’s CEO, is one of the few individuals on the planet that could succeed in unlocking a substantial proportion of that content.
The Impact on Cable
While Apple remains silent on its specific plans for Apple TV, cable is talking long and loud about its TV Everywhere effort, a TV-to-Internet initiative that has captured a great deal of momentum and press buzz (though scant on technological details). Recent announcements promise service deployments this fall with consumer expectations of the service running high. For many, nothing short of the availability of all their PayTV content on all of their broadband devices will do! (Just ask Mark Cuban! )
Yet the Achilles’ heel of cable’s TV Everywhere efforts is very much the same as that of Apple and other Internet-to-TV upstarts: limited content rights. Although some major providers have agreed to work with Comcast and Time Warner Cable on their new services, many others have not. Why the meager response? Cable’s position is that their subscribers already pay once for access to this content on their TV and they should not have to pay again to access the same content over a different conduit (in this case, a broadband connection). In other words, PayTV operators do not want to pay content providers a dime more to distribute their content to broadband-enabled devices. At the same time, content owners such as NBC and Disney are increasingly providing “free” access to their content through their own websites and online services such as Hulu – all independent of the cable operators. With little upside for content providers, it is likely that TV Everywhere will launch with little of the content now available on a consumer’s PayTV subscription. This will inevitably lead to disappointed subscribers and open the door for competitive offers.
How, then, would an Apple TV subscription service impact cable TV? Were Apple to launch such an offering, say, by the end of October 2009, it is likely the press hullabaloo sure to follow would take the wind out of the sails of the launch of TV Everywhere. In addition, with no upside for content providers in the TV Everywhere scheme, Steve Jobs could gracefully step in and offer license fees for their content in an Apple TV subscription service and likely find a very receptive audience.
Conclusions
Apple is uniquely positioned to deliver a subscription-based OTT TV service, though it will need to take a fundamentally new approach in order to be successful. First, it certainly has the technical ability to deliver a great experience through an Apple TV device. However, TDG’s research shows that, in order to be attractive to consumers, this new service must offer both on-demand content and streamed linear channels. Apple is well equipped to handle the on-demand delivery but will find stepping up to live broadcast delivery a stretch.
Second, Apple has the market clout to attract good content on good terms, the key to pulling off a successful OTT subscription service. Then again, TV content providers will expect license payments akin to the cable model, not the pay-as-you-go model that today characterizes iTunes.
The good news is we will not have to wait long to find out if the rumor mill is right. In order to be ready in time for the 2009 holiday season, Apple needs to announce and launch both the new Apple TV and the subscription service within the next 30-45 days. With market conditions ripe for such a service introduction, I am betting Steve Jobs goes for it.
To learn more about the dynamics of the OTT market and how it will change our television lives through 2014, we recommend reading TDG’s new report, Broadband-Enabled TV: Rise of the OTT Provider. If you are planning your own OTT strategy, it would be wise to participate in our upcoming primary consumer research study on TV Everywhere-type services, Models, Messages, and Must-Haves for TV-to-Web Delivery Service.