Apple TV - So When Exactly is Showtime?

Apple TV - So When Exactly is Showtime?
http://www.tdgresearch.com/tdg_opinions_AppleTV_Showtime_010308.html

Michael Greeson
Founding Partner and Principal Analyst

Download this TDG Opinion as a PDF

January 3, 2008

Much has been made about how poorly Apple TV has performed. Though the Company has yet to release specific numbers, consensus suggests sales have been disappointing (by Apple's high standards, it must seem a letdown). Not that the spin machine isn't in full motion; indeed it is, and it's the strength of spin that leads me to believe it's worse than previously thought.

For those who have followed TDG's opinion pieces over the last year, you know that while we were enthusiastic about Apple's entry into this space (and still are), we strongly warned of the difficulties the platform and distribution model would face - warnings that today seem rather prescient.

On the Subject of Over-the-Top Video Delivery

TDG was among the first research firms to tackle the subject of over-the-top broadband video delivery and, according to our clients, the most insightful. Why? Because we're neither cheerleaders nor evangelists for the products and services we analyze. Not that our opinions are monolithic or single-minded - not at all. In fact, we strongly believe that over-the-top video will be a significant threat to incumbent operators and ultimately redefine the TV experience. That being said, we continue to believe (1) current models are insufficient to spur significant demand, and (2) critical mass for such services is still three to five years away. As I recently noted in Investor's Business Daily1:

"There's not a success story out there yet....A lot of people overestimated consumer appetite for (over-the-top) video services. The original models were far ahead of the consumer market."

Therein lies the rub: over-the-top video distribution models (whether Moviebeam, Akimbo, or Apple TV) have been way ahead of both the needs and technology sophistication of the consumer (not to mention last-mile and in-home infrastructure). Yes, TDG welcomed Apple TV as an important moment in the brief history of over-the-top solutions. Nonetheless, we (loudly) pointed out the significance of its limitations. Despite the incredible power of the Apple brand; its renowned sense of aesthetics; its witty PR and advertising; and its undeniable market momentum, the Apple TV model was never going to attract the millions of users needed to sustain it - at least not as originally conceived.2 And we were right.

1 http://www.investors.com/editorial/IBDArticles.asp?artsec=17&issue=20071211
2 http://www.informationweek.com/management/showArticle.jhtml?articleID=196900579&subSection=Global

Apple TV as "a Hobby"?

During an interview with Walt Mossberg in May 2007, Apple CEO Steve Jobs was asked about what "business" Apple was really in. Jobs replied as follows:

"We're in two businesses today, we'll be very shortly in three business and a hobby. One is our Mac business, second is our music business, third business is the phone business, handsets. And the hobby is Apple TV. The reason I call it a hobby is a lot of people have tried and failed to make it a business. It's a business that's hundreds of thousands of units per year but it hasn't crested to be millions of units per year, but I think if we improve things we can crack that.3"

For many, the comment just slipped by, especially given how successful Apple has been in first three market spaces. But buried in this statement was an important rhetorical repositioning of the Apple TV platform. Deflecting criticism for poor sales is one thing, but repositioning the platform as a "hobby" bordered was a bit far-fetched. Consider the following:

* Apple TV was the first product whose arrival Apple actually preannounced months ahead of time; a big deal for Apple and proof of the importance of the platform to Apple's strategy. Sorry, but no "hobby" positioning involved in this marketing move.

* During this September 2006 "It's Showtime!" preannouncement, Jobs stated publicly that Apple TV was going to be very popular, that consumers would quickly latch on to the idea.4 While the rhetoric failed to reach the pitch of iTunes/iPod PR spin, there was certainly no mention of Apple TV being but a "hobby."

* During his January Macworld 2007 keynote, Jobs positioned Apple TV as a key extension of Apple's strategy, extending the "success" of iTunes into the living room and make Apple TV "the DVD player for the 21st century".5 Once again, no "hobby" language anywhere is his speech.6

3 http://www.engadget.com/2007/05/30/steve-jobs-live-from-d-2007/
4 http://www.engadget.com/2006/09/12/live-from-the-steve-jobs-keynote-its-showtime/
5 http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/01/22/BUGE7NLDUN1.DTL
6 http://www.engadget.com/2007/01/09/live-from-macworld-2007-steve-jobs-keynote/

Was It All Just A Dream?

So what happened between the January 2007 product launch and the May 2007 Mossberg interview to push Jobs to reposition Apple TV as a hobby? Failure and frustration, neither of which Apple has much experience with dealing (certainly not of late). Having Jobs publicly reframe Apple TV as a "hobby" is tantamount to admitting failure, even if Jobs had a coy and witty way of doing it. Imagine, the CEO of the hottest company in the world publicly contradicting his own statements and leaving many to wonder about the future of the platform and the model. Now that's pretty risky, I'd say. But it had to be done, and who better to do it than Steve Jobs himself - the perpetual "hobbyist." Recall his statement to Mossberg: "The reason I call it a ‘hobby' is a lot of people have tried and failed to make it a business.7" Yep, and so did Apple: it tried and failed. And they should have known better for the writing was on the wall.

* As early as September 2006, TDG published extensive primary research indicating that an iTunes-to-the-TV movie download service would appeal to only a minute segment of consumers, and even they would be reluctant to pay $15 for a movie download or $300 for the equipment.

* As I noted in a January 2007 opinion piece, "...the 'for-purchase only' model of iTunes remains unproven. Despite the fact iTunes has sold 50 million TV episodes and more than 1.3 million feature-length films, the real long-term winner may be movie rentals, not sell-thru" (emphasis added).

* As well, between late 2006 and early 2007, TDG published numerous opinion pieces, syndicated reports, and press releases warning of the limitations of current over-the-top models, again pointing to expensive upfront hardware costs and the lack of rental options.

And where is Apple TV today? Suffering from poor demand, undergoing radical reconstructive surgery on its market positioning, and now scrambling to add movie rentals to their offerings. Oh, well - it's just a "hobby," right?

Will Rentals Save Apple TV?

Rumors have been swirling since mid-2006 that Apple would "soon" offer movie rentals through iTunes, but this never came to fruition. Jobs himself has long rebuked the appeal of rental services because they do not give consumers permanent ownership of content9 (a cornerstone of iTunes' differentiation strategy). But this was before Apple TV (and iTunes to the TV) was revealed to be such a dud.

As recently as mid-2007, these same rumors began to resurface,10 and in the last few weeks The New York Times, The Financial Times, and Variety have all reported that Apple is expected to use January 14's Macworld as the venue through which to announce video rental relationships with a variety of studios. To date, an agreement between Apple and Fox is the only one that has received confirmation (and even then from undisclosed sources). Variety said that Paramount, Lionsgate, and MGM may also participate, but Sony, Universal and Warner Bros are not expected to offer rentals via iTunes. We'll know soon enough who's onboard, but no doubt this will constitute a major shift for Apple, one that will not only redefine reposition Apple TV in a more consumer-friendly fashion, but will also lead to major shifts in the iTunes platform (intended or unintended).

7 http://www.engadget.com/2007/05/30/steve-jobs-live-from-d-2007/
8 http://www.tdgresearch.com/tdg_opinions_Apple-TV.htm
9 http://online.wsj.com/article/SB118152397413230778.html
10 http://www.ft.com/cms/s/d6ebaeb4-17b7-11dc-86d1-000b5df10621.html

Does adding movie rentals to iTunes open the door for music and video rentals via subscription-based plans (something which Jobs has repeatedly opposed)? Should Apple form a separate content brand that serves video to the home, a service separate and different from iTunes but better matches the over-the-top model? What about the upfront cost of the Apple TV platform - should the fee be waived in exchange for a long-term contract, or should the fee include a couple hundred dollars worth of subsidized movie rentals?

Adding movie rentals will not in-and-of-itself make Apple TV a success; other adjustments and tweaks will be needed (and quickly). And Apple must be flexible in how it reformulates its Apple TV strategy, both in terms of the platform itself and the service that feeds it. Referring to it as a "hobby" doesn't help anyone, for competitors are emerging as we speak. For those that have used the new Vudu movies-on-demand service, you've already got a glimpse of what a real over-the-top movies-on-demand service should look like (although the $399 upfront price tag, if not reduced or subsidized by free movies, limits Vudu's appeal, as well).

For the most part, Vudu created what Apple TV should have been - a simple-to-install, simple-to-use, movies-on-demand service that combines both rental and purchase options AND is seen by the studios as a cool way to get their content directly to the TV set (even releasing day-and-date The Bourne Ultimatum in HD, a huge win for Vudu).

A Hypothetical Note to Mr. Jobs (It's obvious he doesn't read our material)

Dear Steve,

You've got an opportunity to do something really unique and innovative with Apple TV, something that will impact the future of TV, but calling it a "hobby" is just a sly way of admitting failure. I would advise listening more closely to those who know the most about the subject: the consumer. As you decide how to rearticulate the Apple TV vision, remember these key factors:

1. Consumers don't want to pay several hundred dollars for yet another set-top box (unlike a new computer or a new iPod);
2. Most consumers would rather rent a movie than own it, especially if "ownership" in this case means a digital copy of the movie versus a physical DVD (something still very foreign to most consumers).
3. iTunes-to-the-TV may not be the best content strategy for Apple. Consider a separate content service (and brand) that says "Apple" and "TV" but doesn't say "Internet" or "PC," (and for sure doesn't say "Tunes" - we're talking video on the TV here, Steve, not some upstart PC-based application).
4. Cut the dependence on the PC, take it out of the mix altogether. Apple TV could easily be a stand-alone box fed directly by a broadband connection (again, just look at Vudu).

All that shines is not gold; simply because it's an Apple product or service doesn't mean it will be successful. You may have achieved purchase presumption in the portable and mobile spaces, but that doesn't de facto extend to the living room - at least not yet.

Regards - mg

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About The Author:

Michael Greeson is the President and Principal Analyst for The Diffusion Group. He manages strategy and research efforts for TDG's global members and recently completed TDG's Broadband Video Platforms in the Living Room primary research project.

He also bought his mother an iMac for Christmas.

About The Diffusion Group (TDG):

TDG is an analytics and advisory firm helping companies in the connected home and broadband media markets. Using a unique think-tank approach that blends executive-level consultants and in-depth market research, TDG generates reasoned and pragmatic insights that help clients make intelligent market decisions. TDG produces more than just research - we create Intelligence in Action®.

ENDS

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