Why the TV Industry is Vulnerable To Apple

by Tim Bajarin   |   March 5th, 2012

In 1992, while I was overseeing the largest multimedia computing show in NYC for a large publishing group, I was asked to meet with Sr. Executives of one of the major TV networks. In my opening comments at this show, I had mentioned that I thought that one of the major benefits of things like delivering expanded media content on a CD Disc would be to eventually launch an era of content on demand. And one of the examples I gave was that I could see someday when people would be able to call up a TV show on demand and view it at will.

Now, remember that this was before the Internet and few were even thinking about new forms of media distribution. In fact, everything we were discussing at the show was very PC centric. But one of my jobs is to look at technology and visualize its impact over a period of time and try and figure out how it could eventually impact consumers.

It turned out that since this event was in NYC, a lot of TV executives attended this show and consequently I was invited to meet with some execs at one of the major networks to explain my thinking about content on demand. As I spoke to these executives, it became clear to me that while they were interested in the future, they did not want to embrace anything that would disrupt their current business model. The idea of giving customers more of what they wanted through an “on-demand” format was taboo and if it did not increase the quarterly bottom line, they wanted no part of it.

However, to their credit, they saw that what I shared was worth thinking about and they soon created an executive position that was called something like VP of Digital Content. It was so long ago I can’t remember that exact title of the job description but this person was chartered to find out about the digital world and recommend how this company could or should deal with its potential impact on their business. So for the next three months I got quite an introduction to the TV business and its business models and more importantly, how risk averse they were and how much they feared change.

Looking back over the last 20 years, and thinking about that assignment in 1992 and how different the world of TV is today, I am actually amazed at how much progress the television industry has made. But to get where they are today in which each of the networks use the Internet to deliver some of their top shows, they had to understand that the Internet is just a medium for delivering their content. And that consumer’s will continue to want these shows on demand, anytime and anywhere they happen to be.

But to be clear, while they are starting to embrace the Internet as a vehicle for distribution, they are doing so reluctantly. If they had their way, they would keep total control of this distribution for themselves and drive their viewers only to their dedicated sites for viewing their shows. But the Internet has forced them to open up a bit and little by little they are doling out their top shows to dedicated partners who they trust to help them keep some semblance of control so that they can maximize their earning potential and if possible try to keep their customers within their network family as much as they can.

However, in this world of digital content, they are now realizing that while they ruled the roost in the world of broadcast television, they are just another channel among thousands of channels that consumers can choose from for viewing video content. But what they don’t seem to get is that in this world of digital, they will need new distribution partners and that they will not have as much control over them as in the past. And I also don’t think they really understand the idea that people want to have access to that content anytime, anywhere and on any device they own.

Enter Apple

Now enter Apple, who if the rumors are to believed, has been calling on the executives of all the networks and trying to cut deals with them for Apple’s new TV initiatives. And I am hearing that they are resisting Apple’s partnership offers as Apple wants to pay them next to nothing to carry this content and they fear that Apple will do to them what they did to the music industry in which Apple pays a minimal fee to the artists compared to what the artist might have gotten with their labels in the past.

Now, I don’t know what type of deal Apple is offering the networks, if any at all. But I do know one thing. Apple could become one of the most powerful video network distribution companies in the future and to not embrace what Apple is doing could be very painful for them. The reason is simple economics. While we don’t know exactly what Apple is doing in this area of video distribution yet, we have their history to look at for some clues. For example, when they initially introduced the iPod and the iTunes store, they opened the door for music artists to have millions of potential customers. But over a ten year period, Apple made it possible for that music to be played on iPods, iPhones, and iPads and to date, have sold over 350 million iOS devices in which music artists can sell to just through Apples own music distribution vehicle. Add a base of 40 million Mac users and in total there are over 140 million Apple devices tied to the iTunes distribution medium.

Now enter Apple TV. While many people think of this idea of being a physical TV, they miss the real point of what I believe Apple is doing. At the core, I believe they are moving towards becoming a powerful distribution network for video. And while I do think they will have a cool TV someday in their product mix, the reality is that every iOS device and every Mac will become an “Apple TV.” That means that for these networks, and any other of their video channel partners, Apple will deliver to them well over 140 million potential customers immediately once their TV distribution network gets turned on. And given Apple’s history you can expect that the Apple TV experience, whatever form it takes, will be elegant, easy to use and perhaps even revolutionary in the way people use their services across devices.

The mistake the networks could make is to not see Apple as this massive vehicle for distributing their content and instead see them as having to be their partner for making money and relying on Apple for high margin revenue. That is the business model of the past. The new business model that I believe will emerge is to find ways to get eyeballs to view the content and then get creative in the way they make money on that property. Of course, they could tie some advertising to it, but they could also offer games tied to the content, sell merchandise tied to the content, and give special prizes tied to the content, etc. Instead of resisting Apple, or perhaps Google or Amazon who I believe will create similar video distribution networks, they need to embrace them as vehicles to get their content in front of these eyeballs and find creative ways to keep their customers coming back and mining new ways to get revenue from their digital customers.

Apple is going to become one of the most powerful video distribution networks by nature of their existing customer base and one that is added to continually. They have sold 50 million iPads so far and will sell at least another 50 million this year, turning every one of them into an “Apple TV.” I know the networks would like to keep control of their distribution, but in the world of digital, those days are gone. The sooner the networks understand this and see things like Apple’s new distribution vehicle as a critical way to get their content to the masses quickly, the sooner they can adapt to and fine tune a new business models to take advantage of this new era of on demand, anytime, anywhere and on any device video content world.

Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.
  • fmanowhereman

    “Add a base of 40 million Mac users…”

    In your estimate of potential customers, it’s not just limited to “Mac” users, iTunes and the customer base is also on millions of PC’s as well.

  • shockme

    These people are so married to broadcast schedules they have forgotten their business is to sell eyeballs to advertisers. It shouldn’t matter what we watch when or where so long as we are willing to watch a commercial in exchange for free or low-cost programming.

    No matter what show I choose, the directed ads could come to me on the schedule the advertisers wish. But hey they are afraid of money.

    • synthmeister

      That is exactly what I was thinking. Why do the content providers/Cable companies even care when and where I watch their shows, provided that the ads are imbedded in the show? In fact, with a little creativity, they could probably figure out ways to customize ads for each person registered to watch their precious shows. Offer people a free Latte or something and they’ll give you all their personal information without any qualms most of the time.

  • Alfiejr

    i agree with your analysis of how the networks think. but why should they change? their ad revenues are still high, and the cablecos revenues (from us viewers of course) are still high. nearly all the TV content creators have to come to them or the cablecos to get the necessary distribution agreement that is “bankable” for raising the costs of production, so they have a “lock” on class-A content first run rights. what emerging economic forces will cause any of these factors to weaken?

    with YouTube, Google is essentially offering a kind of new web network of its own. but the content is not even class-B (except for the unauthorized rips), and boy is it a mess (the home sofa is not a “search” venue). it can’t really compete with the network entertainment model.

    independent/local low-cost content creators certainly could shift to distribution via streaming apps. for them the networks are irrelevant and the cablecos are expensive. local TV stations’ news and other productions, speciality news channels (like Bloomberg) – those dozens of cable channels with small but focused audiences. and public broadcasting, including the PBS network, could certainly do this too since their “economics” are totally different. this would all add up to an “alternative” first run streaming package of real interest to many, but still not a real threat to the network entertainment model either.

    Major league sports of course have flirted with PPV schemes for decades. but the network ad revenues are so huge they still totally dominate acquisition of those rights by the networks. what we are now seeing are supplemental apps, like MLB for Apple TV, that offer lots of extra stuff for a subscription. the NFL, NASCAR, and others will probably follow suit. the cablecos are the one most threatened by this, and they are fighting it with special premium extra content packages of their own.

    the same goes for non-sports special events that could be “monetized.” e.g., the new Oscar app was very popular this year.

    so … i see new and more sophisticated iOS and Android apps coming from all directions, monetized by either their ads, just like TV, or subscriptions for the most desired ones. some will become very popular. but i don’t see them breaking the networks control or taking much market from them. apps WERE/are the revolution Apple fostered. but that i think is as far as it goes …

    • Rich

      Why should the networks change? Because commercial entities that don’t respond to major shifts in technology end up regretting it.

      • Alfiejr

        well sure. like cable/sat mostly replaced OTA, the last huge shift in TV distribution (altho OTA+DVR is now a viable “free” alternative again after its digital conversion).

        but the change was gradual, taking a decade and more. i think the same will be true for web-based TV distribution via “smart” streaming apps, not just dumb CATV pipes. this will evolve gradually. and in fact, it is doing exactly that right now. but i don’t believe there will be a sudden “reinvention” of it by Apple or Google or anyone else. i think Apple will focus right now on reinventing the UI instead of the business model. we will see on Wednesday!

        the irony is, we will still need those dumb pipes, and have to pay the cablecos/telcos for that anyway. if i were running Apple, i’d use all that cash to buy huge amounts of guaranteed bandwith to rent very cheap to Apple customers. that really would motivate people.

    • Crofford

      “…WERE/are the revolution Apple fostered. but that i think is as far as it goes …”

      Until the 100′s of millions of users in the Apple ecosystem exceed the users in the broadcast ecosystem. At that point, if you’re the producer for Two and a Half Men, and it’s time to renew your contract, which gets you the biggest audience…Apple or CBS?

    • synthmeister

      but why should they change?”

      Because TV viewership overall is dropping significantly and because the under 30 generation doesn’t really see any reason why they should be forced to watch their favorite content on one type of screen or be forced to jump through multiple hoops to watch it on multiple screens. Instead, they will simply Bittorent the content they want to see.

  • http://www.facebook.com/people/Elder-Norm/790427967 Elder Norm

    “how risk averse they were and how much they feared change.” That pretty much says it all.

    “in which Apple pays a minimal fee to the artists compared to what the artist might have gotten with their labels in the past.” ER, actually Apple pays the artist or company 70% of the sale. Most media companies work hard to sc**w the artist as much as they can.

    The key here is that old media companies have quit innovating long ago. They just want to keep doing the same old thing and make tons of money off it. Why spend time and effort and risk making things better.

    Steve Jobs described this exactly in a speech where he talked about companies that quit innovating and the sales guys ran the company……. until someone came along that did things better…. sounds like this is the case here.

    en

    • synthmeister

      Yes, the old media companies seem to be really good at innovating arcane, convoluted pricing structure and bundling schemes.

  • Beardog1

    With iTunes, Apple already has an exceptional distribution model for selective viewing of TV. Granted it’s not free, but it is ad free, and that makes the wide range of program options that much more valuable to me. I don’t (nor will I be likely to ever) subscribe to cable of any sort, I am eager to see how this all shakes out in the end for both the networks and Apple.

  • Beardog1

    With iTunes, Apple already has an exceptional distribution model for selective viewing of TV. Granted it’s not free, but it is ad free, and that makes the wide range of program options that much more valuable to me. I don’t (nor will I be likely to ever) subscribe to cable of any sort, I am eager to see how this all shakes out in the end for both the networks and Apple.

  • http://www.facebook.com/profile.php?id=1438658827 Terry Maraccini

    Apple could take over the TV market simply by financing and distributing shows that aren’t written for and by morons.

  • synthmeister

    I think that Apple could have the Cable companies and the content companies by the throat by simply enabling three options on their mythical AppleTV and iDevice universe.

    1. Seamlessly sling any content from your Mac/iDevice to your TV
    2. Seamlessly mirror any content from your Cable/Sattelite to your Mac/iDevice
    3. Seamlessly record any content on any device and watch it on any Mac or TV or iDevice

    In all cases, you’ve already legally obtained the content, either through your cable/satellite or though your internet provider. Apple simply allows you to move it between devices.

    This completely screws with the silly, artificial limitations the cable/content providers try to put on all their content, yet you still would see all commercials and have to pay for your content.

    BTW, DISH’s forthcoming “Hopper” gizmos seem tocome the closest to allowing this kind of functionality, but I know a lot of people are trying to crack this nut before Apple.

    • Alfiejr

      as you may know already, SlingPlayer already enables you to do #2 and, combined with your TiVo/DVR, #3. you’re right, it’s great to use, and Apple TV could be a big hit by copying it. with it i have watched live TV on my iPad riding in a car two thousand miles from home (football playoff game).

      But, you may also know that HDCP DRM – which Apple TV enforces as a condition of mediaco licenses – doesn’t allow that! that’s why Slingbox requires using the component outputs from the source, not HDMI.

      most people have forgotten about DRM issues, especially HDCP. but that is how the mediaco’s enforce their content controls. HDCP is built into everything with HDMI connections. it’s ubiquitous, and Apple complies with it.

  • hdboy

    These also are the very same reasons why the print newspaper and magazine industries fear Apple. These industries still are led by a generation of executives who want to control distribution using old-world business models, because that is what they know. These overly cautious senior executives don’t understand technology or innovation and for the most part, they lack imagination. Consequently, they will not cede control until successful new business models are proven. Generally, this proof will have to come in the form of new companies and businesses that aren’t saddled with the baggage of old world technology and decision-making. Old world businesses can’t risk earnings on new business models while trying to protect the old model at all costs.

  • http://www.facebook.com/people/Todd-Templeton/1098965169 Todd Templeton

    TV industry vulnerability really comes from the fact that they quite simply, suck. We disconnected our subscription television service 2.5 years ago and have not missed it one bit. Mac Minis, WD TVs and media drives attached to all our TVs certainly points the way to the future and makes the current subscription TV paradigm totally irrelevant.

    It would also be an extremely healthy thing for our minds and our world to have broadcasting and media as decentralized as possible. History will show that the current corporate monopoly controlled model has been used in some very nefarious ways.

    I pray Apple can help bring back intelligence, culture, art and beauty to screens that have become weapons of mass deception.

  • Patrick Newbery

    There is are two points missing.

    Content
    The “Method Law of Content” is that it takes at least as much time to create content as it takes to consume it. The more attractive the content, the more opportunities for monetizing the content, the more time (and money) it takes to produce it. On-demand models are a natural extension of digital technology and IP-network-as-distribution-channel, but they don’t necessarily create a viable economic model for paying for content to be produced. Doesn’t matter how much on-demand content you offer, if it’s been seen already or is not that attractive to an audience, it is not sustainable.

    TV is part of Culture
    TV is no longer the box through which we view content, nor is it video content, which can be accessed without a TV. TV—the linear, day-parted broadcast stream with it’s mix of ads that mirror the culture and audience that the content represents and is consumed by—is still part of our culture, and as such, is not necessarily going to be replaced by on-demand services, as far as consumers ar concerned.

    Yes, the notion of content available whenever, wherever, however is moving forward and will continue to change and shape the industry but let’s not forget the larger context in which content is created and why people care about it.

  • http://flickAnalytics.com/ Vivek

    The Question is: Is Distribution King or Is Content King ?
    For good content, Consumer’s rush to the content
    Maybe for B/C quality content – Studios can use New Distribution channels for incremental revenue.

  • http://flickAnalytics.com/ Vivek

    There is NO shortage of Distribution – Cable, Browsers, Netlfix.
    There is shortage of Secure Distribution & Monetization.
    At what point can Apple compete with the existing Revenue Model ?
    There may be some shows, Titles for which this may make sense but NOT for others.