On the feasability of an Apple Television

For years, many in the tech industry have been speculating that Apple will release a full television set.  This speculation grew fiercely upon the release of Steve Jobs' biography, in which Steve is quoted as saying that he "figured out" television user interfaces.  Since then, Tim Cook has reiterated that Apple is "intensely interested" in the television market.  Many rumors in late 2011 and early 2012 pegged the Apple Television (ATV) for release in late 2012. Those rumors were wrong. I am projecting that the Apple Television will be released in 2013.

However, beyond simple speculation of the device's release, I find it much more interesting to think about 1) what the product will look like and how it will function, and 2) how Apple will deliver it the ATV the market.

How will the Apple Television function?

It's fairly safe to assume that the ATV will be a large flat panel piece of glass with an integrated computer.  There may even be multiple screen sizes available. Rumors suggest a 46" inch model, which makes sense, but I can also envision Apple offering a larger model, perhaps even 2, with fatter margins. But really, I don't think the screen size is a very interesting question.

The biggest question about the Apple TV is the user interface. How will people interact with the devices?  For the better part of 2011, I thought that the answer was the iPhone, iPod Touch, and iPad.  Having used those devices in conjunction with the current Apple TV (little black box), I realized that capacitive glass screens are actually excellent remote controls.  The user can easily swipe to navigate menus, see additional information about what's on the TV, and type (and thus search).  And of course the remote controls would already be in the hands of millions of households.  Using the millions of iDevices in the wild today, Apple can deliver a television-experience unlike any other company.

But after considerably more thinking, I realized that my initial thoughts were incorrect.  The problem with using iDevices as remotes is that they force you to look away from the content. That is a horrible UI design. The mouse and keyboard work well because you can look at the screen while operating both. You could operate an iPod without having to look at the clickwheel. And obviously, the same holds true for the modern iDevices as well. It would be an atrocity for Apple to release a device where you must not look at it in order to interact with it.

I am almost certainly convinced that the ATV will be based on human gesture controls, similar to Microsoft Kinect.  The ATV will also feature Siri, again in a similar fashion to what Microsoft has done with voice controls in Kinect.

In order to meet Apple's strict product aesthetic requirements, I postulate that the sensors will be integrated into the display, rather than exist as a separate unit.  I am also certain the ATV will run iOs, and because it will run iOs, it will have a "home screen" with a grid of icons similar to all current iOs devices.  Apple will want to leverage the app-centric user-interface and distribution model that has been so successful in iOs, and will want to provide a development environment where app developers can write apps spanning all iOs devices in a single codebase.

If the ATV were to be released as described above, many critics would dismiss the device as a copy of Kinect. And they would be largely correct, except for 4 major distinguishing factors:

1) Purchasing an Xbox 360 professional System Development Kit (SDK) costs $20,000.  An Apple iOs developer subscription costs $99 per year, and non-free app submission costs $99.

2) Branding and advertising.  The Xbox is still widely perceived as a gaming-first device, even though the Xbox today has more non-gaming features than gaming features. There is a huge stigma of videogames associated around the word Xbox. Many women and older people simply don't know that the Xbox can do anything other than play videogames.

3) Apple will deliver a better UX than Kinect. With over 2 years since the original Kinect launched, motion-sensing technology has improved significantly. Apple will integrate that with world class software, just as it did for iOs, in a package that's simpler and easier than Kinect. Apple has a track record of taking existing technologies and integrating them correctly to create new markets; see the Mac, iPod, iPhone, and iPad.

4) Price and distribution. See below.

How will Apple bring the Apple Television to the market?

In Steve Jobs's last appearance at the Wall Street Journal's "All Things D" conference in 2010, he was asked about the challenges of the TV market.  He enumerated that the biggest problem in the television market is the "go to market" problem.  It has been difficult for companies to create a better TV experience because no matter how good of a product they made, the product would always be in competition with the free set top boxes that come with all cable subscriptions. From the cable providers perspective, the set top boxes were a means to an end (selling content subscriptions), and most cable providers enjoy regional monopolies duopolies with little price competition, so they never invested in making set top boxes better. Of course, the ATV inherently makes the go-to-market problem irrelevant.

Apple also faces 3 other challenges in bringing the ATV to the market:

1) Apple is a platform company that thrives on building strong network effects.  Every successful device in Apple's history is based around a platform and ecosystem (original Mac, iPod + iTunes, iPhone + apps, iPad + apps).  In order to maintain Apple-level margins in the long-run, Apple needs to quickly build network effects so that its competitors will have a tough time replicating its success. In order to build a network quickly, Apple needs...

2) Volume. The global TV market is 237M units today, and shrinking. However, a huge percentage of those TVs are sold to business (think sports bars), who would never be in the market for a gesture controlled ATV.  Of the 237M units, about 35M of those are sold in the US.  For comparison, the cellphone market is over 1B units, and the laptop/desktop market is about 350M units annually. Apple's addressable market is relatively small, shrinking, and TVs have...

3) Slooooooooooooooooow replacement cycles.  Historically, the average TV is used for about 10 years. The US flat panel/HD transition began in around 2006. The HD transition market peaked in 2011, as 2012 saw a decrease in units sold in the US.  The rest of the world is lagging the US in this transition by a few years. Put simply, many people simply aren't ready to upgrade their TVs.  Their TVs are already good enough, and were recently purchased. The lackluster launch of home 3D TVs is a testament to this fact. Even among the early adopters, uptake of 3D TVs was slow.

The 3 problems above all compound one another.  Apple needs achieve critical mass quickly to build a network, but it needs to do it in a relatively low-volume business with slow replacement cycles. And on top of all of this, Apple needs to maintain its extremely high margins.  I see one solution that solves all of these problems:

Buy your Apple Television with a 2+ year cable contract

Lets say for the sake of the argument that the base model ATV costs $1000 retail.  With subsidized pricing, they might be able to get it down to $400 up front*. At this price point, and with the strong Apple brand and marketing blitz, Apple could take the smart TV market by storm, and quickly hit the critical mass necessary to fend off Microsoft and Google.

So, to sum it all, up, Apple will release the ATV in 2013. It will be a single display, probably available in a few sizes, and use many of the same technologies found in Kinect, but delivered in a sleeker package, and sold with a cable subscription.

*Apple should be able to net $600 worth of subsidies/unit out of cable providers.  For comparison, in the mobile arena, Apple gets about $440 of revenue from its carrier partners. In the cable world, infrastructure is already built out, and is cheaper to maintain than wireless. Thus, Apple should be able to demand a higher subsidy in the TV market than in the phone market.