AppleTV – The Revolution Will Not Be Televised

Michael Greeson of the Diffusion Group picks up on a theme we’d also raised earlier in the week – the insanity around Apple’s recent announcements, here he focuses on AppleTV.

AppleTV Unwrapped
On January 9, Steve Jobs made good on his 2006 promise to release an Internet TV Adapter (iTVA) and rolled out AppleTV, a set-top box that allows you to stream video from your PC to your TV. This was an important move for Apple and for the entire broadband video industry; one TDG predicted several years ago would likely happen in 2007.

AppleTV - The Revolution Will Not Be Televised

I don’t want to talk about the technology behind the AppleTV platform – you’ve all heard by now that it’s an 802.11n-based wireless media hub with a 40GB hard drive and Intel processing, and is capable of streaming video, music, and photos to up to 5 different PCs. You’ve also likely heard that it will hit the market in February and cost $299 (although those who simply can’t wait to say they’ve bought one can pre-order the devices as of last Tuesday).

So the real reason for this particular OpEd? The often nauseating level of presumption extended to Apple by the public media and (in many cases) the analytical community. It’s as if everything that Apple touches will not only turn to gold but fundamentally redefine how we experience media [1].

You Don’t Want This Kind of Hype
An AP article in this morning’s New York Times captured the dominant opinion regarding AppleTV, stating that it “could be as revolutionary to digital movies as Apple’s iPod music player was to digital music. [2]

In what world do these people live? Are they completely oblivious to the fact that Internet-enabled DVRs and set-top boxes, not to mention digital media adapters, have been around for a couple years? Are they aware that the latest generation of game consoles do pretty much the same thing as AppleTV (sans iTunes), including burning content to an embedded hard drive?

Why is Apple’s entry into this space considered “revolutionary” when so many others offering similar solutions were there first? Are they aware that, despite the fact that MacWorld may have been a more exciting show than CES, the number of PC-to-TV solutions, Internet-capable TVs, networked set-top boxes at CES was topped only by the number of attendees? Everyone’s in the game, so Apple’s entry could hardly be considered “revolutionary.” Again, this is convincing evidence of the press’s blind fascination with all things ‘Apple.’

But this should also be a concern for Apple itself. Could these pundits have possibly set the expectations for this device (and the whole concept of Internet-based digital video to the TV) any higher? There is no way Apple can live up to this kind of hype.

Second, these pundits are guilty of using an analogy which, however seductive, is so unrealistic it borders on being dangerous. Betting that the future of Internet video will simply mirror that of Internet music is foolish, and those spouting this nonsense should, well, have their iPods taken away for a week.

AppleTV - The Revolution Will Not Be Televised Let’s Get Serious, If Only For A Moment
Here is a litany of knee-jerk, prima facie objections to the pundits (the other pundits, that is) blind proclamation.

First, AppleTV is not the iPod. (Really? Yes, really. And neither will AppleTV enjoy the success of the iPod – again, the bar is simply set to high and such placement shows a poor understanding of the marketplace.)

Second, the online video business is not a simple mirror image of the online music business. (Yes, the similarities are strong but they are not universal. For example, purchasing a song download at $.99 is quite different than purchasing a movie download for $150-$20. Just ask someone who doesn’t work in the business how appealing this sounds. TDG has done the research and less than 13% of consumers would respond positively to such an offering.) As Dawn Chmielewski noted in Wednesday’s Los Angeles Times, no one knows whether the entire PC-to-TV or Internet-to-TV strategy will pay off, and if it does to what extent it will float all boats [3].

Third, iTunes on the TV is not the same as iTunes on the PC. (Nor should it be – Apple must avoid the temptation to simply duplicate the iTunes web store on the TV screen.)
Fourth, 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.)

Fifth, the cable, satellite, and TelcoTV players will not sit still and let someone like Apple, Sony, or Microsoft simply step in and cannibalize their TV revenue. (Yes, the future of Internet TV is bright – TDG just released an analysis and forecast on the growth of Internet-enabled TVs. However, allowing consumers access to a wide variety of unique content that is not carried by the major players is not the same as offering a movie service that competes directly with the incumbent video offerings – especially movies.)

The list of objections can go on for pages. For TDG’s clients and frequent readers, you are aware that we remain as excited about Apple’s entry into the living room as the next pontificator. In the long term, this will have a positive impact upon both the ‘digital home’ and ‘connected consumer’ industries. However, this box is not ‘revolutionary’ in the slightest, nor is moving iTunes to the TV. This is just the latest move by a very important technology innovator, a market leader whose every move is in the professional and public eye.

Despite the widespread cry of ‘revolution,’ the public has yet to weigh in on Internet video-to-the-TV in general and Internet movie downloads in particular, so that best that can be said is that the jury is still out. Research indicates that those that have used iTunes for video downloads are but a small portion of total iTunes users and comprised primarily of tech enthusiasts. Apple knows it will take a lot longer for iTunes to sell two billion online movie downloads at $20 than it did to sell two billion individual music downloads at $.99.

So let’s turn down the hype surrounding AppleTV. No doubt the expansion of Internet video into the living room is real; however, its emergence as a force in our TV viewing lives will be evolutionary or incremental in nature, not revolutionary. In other words, the AppleTV revolution will not be televised.

For a more sober look at Internet video on the television, The Diffusion Group would be delighted if you took a look at their latest report , Broadband Video: Redefining the Television Experience.

[1] This morning’s Good Morning Silicon Valley began with a headline entitled “You know, if the analyst gig doesn’t work out, there’s always a job for you in Apple PR,” a reflection on the fact that virtually every analyst on the planet was under the control of some sort of Apple-esque reality distortion field.
[2] “Apple Unveils New Mobile Phone,” Rachel Konrad, Associated Press, January 9, 2007
[3] “TV May Be A Tougher Challenge,” Dawn Chmielewski, Los Angeles Times, January 10, 2007.

Michael Greeson, Founding Partner & Principal Analyst, The Diffusion Group

Broadband-Enabled Televisions to Reach 162 Million by 2011

Slotting in nicely with Microsoft’s Xbox/IPTV Announcement (You’ll be able to watch IPTV through your Xbox toward the end of the year), Just the Beginning, says The Diffusion Group.

Broadband-Enabled Televisions to Reach 162 Million by 2011

A surge in the availability of high-quality web-based video content and the proliferation of solutions that network-enabled TVs will usher in a ‘new wave’ of television viewing, one defined less by ‘walled garden’ PayTV operators and more by open access and a variety of highly-specialized niche content.

According to Broadband Video: Redefining the Television Experience, The Diffusion Group’s latest report on IP media, the number of broadband-enabled TVs – those capable of directly or indirectly receiving broadband video content – is expected to exceed 162 million households globally by 2011.

“It is fair to say that the democratization of video delivery is officially underway,” noted Colin Dixon, senior analyst and author of the report. “As the Internet finds its way to the primary home TV – and it will – incumbent PayTV operators and established broadcasters will gradually lose control over the types of video consumers can watch. In the next few years, a growing number of consumers will look to the Internet as means of expanding the variety of content to which they have access, much of which will be available on-demand and specifically suited to their tastes.”

Dixon mentions five factors which in combination are creating a ‘tipping point’ for broadband TV including:

Broadband-Enabled Televisions to Reach 162 Million by 2011

  • The widespread adoption of broadband Internet service;
  • The expanding variety of video content available on the Internet;
  • The introduction and push of solutions intended to enable Internet video viewing on the TV (such as Microsoft’s Xbox/IPTV platform and Apple’s pending iTV adapter);
  • The entry of top-tier content producers into the Internet marketplace, many of which are now pushing high-value franchise content onto the web; and
  • The move from short-form ‘snack’ Internet video content to full-length TV programming and movies.
  • The impact of these trends remains lost on the vast majority of video entities. As Dixon states, “While the subject of Internet video is on everyone’s tongue, very few have a full understanding of how Internet-based video will impact the traditional TV business.”

In many cases, consumers will simply use a proxy to enable an Internet-to-TV connection – that is, instead of having a modem embedded in the TV which connects directly to a broadband service, consumers will use an Internet television adapter, or iTVA, such as a Internet-enabled game console, media-centric PC, digital media adapter, or hybrid set-top box to access web-based video content.

Dixon notes that for those with a broadband Internet connection, it is becoming quite simple to both provide and access Internet-based video on the living room TV. “Not only is it now technologically feasible for most consumers, but economically attractive for content providers.” In other words, the value proposition is both supply- and demand-driven.

As well, the Internet video space is undergoing a shift away from short ‘video snacks’ and toward longer form narrative content more characteristic of TV in terms of production quality, video quality, and length.

Broadband Video: Redefining the Television Experience is TDG’s latest report on the digital home and IP media. In addition to expanding greatly on the themes illuminated in TDG’s free white paper, The Emergence of Broadband Television, the full report explores in detail how many broadband-enabled televisions will actually be connected to the Internet and used to receive broadband video. Further, the report discusses the types of video services that will be launched from the Internet targeting the television and includes specific revenue estimates for these servic es. The report also looks at the barriers to open access to Internet from the television and how these barriers will be overcome.

The Diffusion Group

$15 itunes Movie Price Judged Too High By Majority Polled

$15 itunes Movie Price Judged Too High By Majority PolledAccording to new research from The Diffusion Group, only 14% of broadband households would be interested in an iTunes online movie download service for use on PCs or portable devices if titles were priced at $15 each. This compares to total interest of 23% at $10 per download – a 64% decline in interest when increasing the cost per title by only $5.

On the Viability of an iTunes Movie Download Service, a two-part report series produced by TDG, states that movie studios originally demanded that Apple accept a pricing scheme of around $20 per download, similar to the prices charged by current online movie services such as CinemaNow and Movielink. But according to Michael Greeson, founder and principal analyst with TDG, Apple demanded download prices of around $10 for even new titles, half that of existing services. “It would seem, then, that the two parties simply split the difference. All things equal, this appears to make sense.”

However, TDG’s research found that the net loss of demand from increasing the price from $10 to $15 is almost four times the gain in demand from lowering the price from $20 to $15. In other words, at $10 per title, demand would have been optimized yet profits would have suffered, while at $20 per title both revenue and profits would have been optimized with little loss in demand.

Speculation regarding Apple’s entry into the online movie space heated up in advance of the early August Worldwide Developers Conference, but nothing materialized. As Apple’s September 12 public launch event nears, the rumor mill is again churning and has this time attracted pundits from the mainstream business press. Of course, Apple continues to decline comment.

$15 itunes Movie Price Judged Too High By Majority PolledRegardless of whether the iTunes movie download service is announced this month or later this year, Greeson believes that the time is right for Apple to enter this market space. “Although current services such as CinemaNow and Movielink continue to languish, Apple is aware that the conditions are now suitable for extending iTunes to include full-length movie downloads. Consumer awareness has improved; video-over-broadband is now viable; studios are now making movies available for online download to DVDs; portable video platforms are improving qualitatively with each new generation; and Apple’s brand awareness and credibility are at all time highs. As well, CinemaNow and Movielink’s experience, while insightful, is of limited value to Apple, who continues to enjoy the fruits of being a market-maker in portable digital electronics and online media services.”

One challenge faced by today’s online movie download services that will still haunt Apple is the fact that movie downloads are still being viewing on the PC or portable devices – scenarios that do not reflect the video consumption behavior of the majority of US consumers. Connecting these services to the living room TV (either directly via a broadband-enabled set-top box or indirectly via a digital media adapter) is imperative to expanding the online movie market beyond the earliest of early adopters and to helping move Apple into the living room (the primary battleground for future-thinking PC and CE vendors).

For these reasons, TDG commissioned a June 2006 consumer study to evaluate consumer interest in and price sensitivity toward two types of Apple iTunes-branded online movie services – the first involving movie downloads to the PC and portable devices and the second involving movie downloads to a iTunes-branded set-top box or digital media adapter connected to the primary home TV. Researchers examined consumer receptivity to both of these scenarios across a variety of prices points, identified the core group of consumers most likely to adopt these services, and profiled this segment across a number of characteristics.

Both of these reports are now available for purchase on TDG’s Website..