Apple's TV Strategy Could Get Very Interesting

The world’s most feared digital disruptor hasn’t got very far with TV, and that will remain the case until the company rethinks it’s approach


Is Apple TV going anywhere?

Based on the company’s current strategy, the worldwide installed base of Apple TV devices will be 22.7 million at the end of 2014 and 73.4 million by the end of 2018. Sound OK? Well, not really when you realize that the installed base of tablets at the end of this year will be 427 million, rising to over 1 billion by the end of 2018.

Here are a couple of other trends that put Apple TV in perspective: smartphones and tablets are now the fastest-growing means of accessing and consuming internet TV content, accounting for 54% of program requests for the BBC’s iPlayer service in February 2014 – up from just 17% in January 2012 (in comparison, smart TV sets, gaming consoles and connected Blu-ray players hardly register). Meanwhile, the number of OTT service accounts is sky-rocketing, from nearly 600 million at the end of 2014 to what we project will be over 1.4 billion by the end of 2018.

With those numbers as a backdrop, Apple TV now seems to be moving at a glacial pace. But more than that, it also seems that Apple TV is developing in a vacuum or, to put it another way, it is heading in a direction that is orthogonal to the wider market.

Basically, the market today is radically different to what it was in March 2007, when Apple TV launched. But Apple TV looks pretty much the same today as it was seven years ago. And that is a problem.

So what needs to change? What could Apple do to turn Apple TV into a really big business?

The answer to that question is quite a lot - including one sneaky strategy that could put arch-rival Samsung in a very difficult position.

Where is Apple TV Today?

We estimate that Apple sold 7.3 million Apple TV units in 2013 which brought the worldwide installed base of Apple TV units up to 15 million. By 2014, we project that these figures will have increased to 9.9 million and 22.7 million respectively.  

Looking further ahead, our analysis is that sales of Apple TV boxes will continue to grow steadily with sales rising to 24 million units in calendar 2018 with the worldwide installed base reaching 74 million by the end of 2018.

In terms of revenue, with an average selling price of just $99, revenues generated from the sale of Apple TV units in 2013 would have been around USD 720 million.

In addition, we estimate that the value of sales of movies and TV shows from iTunes that can be attributed to Apple TV boxes was USD 330 in 2011, USD 1,100 million in 2012 and USD 1,690 in 2013.

So Apple TV contributed about USD 2.4 billion in revenue in 2013.

Apple TV Platform is Not a Major Driver of Revenue on iTunes

On the face of it, the above numbers for Apple TV are pretty impressive. But they are a lot less impressive when you take a closer look.

For example, while Apple TV boxes resulted in sales of USD 1,690 million of TV shows and movie content for Apple in 2013, this represents just 10.5% of the total revenue Apple reported for 'iTunes, Software and Services’ in 2013, or about 1% of Apple’s total reported revenues for 2013 - and that’s after 7 years of trying (Apple TV was launched in March 2007).

Compared with the rate at which other more recently-introduced Apple products have grown, Apple TV is clearly a very modest business for Apple: the iPhone and iPad generated USD 91 billion and USD 32 billion in revenue respectively in 2013, compared with about USD 2.4 billion for Apple TV.

Apart from Apple TV remaining a very small business for Apple, it is clear that the majority of iTunes account holders pay for their TV shows and movie content by visiting the iTunes Store directly (e.g. by using a PC, Mac, iPad or iPhone).

Why?

One reason is that the Apple TV installed base is dwarfed by the number of iTunes account holders

At the end of 2013, we estimate that there were about 600 million iTunes accounts worldwide, of which 15 million, or 2.5%, would have been Apple TV users, as shown in the following chart (note that the left and right-hand scales are different):

This chart explains why most sales of TV shows and movies come from non-Apple TV users who are downloading that content onto their iPads, iPhones, Macs and PCs.

They then play their content either using another TV connectivity solution, such as Apple AirPlay, or more simply by plugging their device into their TV set using a cable.

Another reason is that tablets are becoming the de facto method of playing iTunes content on a TV set.

Another important factor to take into account is the exploding role of tablets. The chart below shows that from a standing start of practically zero in 2010, the worldwide installed base of tablets will exceed 425 million individuals at the end of this year, and over 1 billion individuals at the end of 2018:

In comparison, the worldwide installed base of Apple TV users will be a mere 73 million by the end of 2018. Compared with where Apple TV will be at the end of 2014 - we estimate an installed base of 22.7 million units at the end of 2014 - then this is an OK rate of growth. But compared with what else is happening in the market, Apple TV is developing at a glacial pace.

The explosion in the installed base of tablets is having a dramatic impact on the way internet TV content is being consumed: more and more users are simply connecting their tablet to their TV set, completely bypassing dedicated connected TV solutions (e.g. smart TV, games console, connected Blu-ray player).

Some of these individuals will use Apple AirPlay while others will use a ‘casting’ solution like Google’s hot-selling Chromecast stick. But most consumers simply plug their tablet, PC or smartphone into their TV set.

Data published by the BBC in the UK for the iPlayer OTT service show how dramatic this trend really is:

In January 2012, tablets accounted for 9.4% of TV program requests but, by February 2014, this has increased to 32.5%. Meanwhile the share taken by connected TV has barely changed: 2.6% in January 2012 and 4.1% in February 2014. These results must be bitterly disappointing to the smart TV vendors whose smart TV sets are being mostly ignored. Another important trend is the declining share of TV program requests that are accounted for by PCs: 72.6% in January 2012 but just 36% by February 2014.

What is happening here?

Simple: tablets and smartphones are fast becoming the primary means of (i) accessing internet TV services; (ii) buying internet TV content and (iii) consuming internet TV content:

  • Most smart TV sets offer far too little content while having a user interface that is far too complex. In comparison, it is far easier to use a tablet to search for internet TV content and then play that content on the TV set;
     
  • Games consoles are primarily intended for playing games and so the addition of internet TV services to games consoles will not significantly grow the overall installed base of games consoles and is therefore an ineffective way to increase usage of OTT internet TV;
     
  • Blu-ray is in long-term decline and many users who still use physical discs are digital ‘refuseniks’ who are not very interested in internet TV anyway so adding internet TV features to Blu-ray players is ineffective.

We think that these powerful trends have major implications for Apple TV.

What does it all mean for Apple TV?

For as long as Apple persists with its current strategy for Apple TV, it will fail to realize its true potential.

With no major changes to product and market strategy, here is how we see Apple TV developing for Apple:

In order to expand the market, we think that Apple should be thinking of a new strategy which could be developed in parallel with selling the Apple TV boxes as the company is currently doing. 

The idea would be to view Apple TV as a service which may require a box, but which can also be accessed without a box.

Set-top boxes (STBs) have been a feature of the TV market for decades: cable, satellite and IPTV operators all have to use STBs because there has been no other way to connect their networks to the user’s TV set.

The first phase of the connected TV market has also relied on STBs: in the early days (say 2007), service providers like Roku, Apple and Boxee (now acquired by Samsung) needed some way to display their content on the user’s TV set. Prior to the arrival of smart TV sets, the only way to accomplish this was to use a special box which was connected between the internet and the user’s TV set.

Even today, relatively new entrants like Amazon, with Amazon Fire TV, have also found themselves requiring a STB.

However, the internet TV market is, in our opinion, moving away from separate boxes:

  • Most multi-service providers (e.g. Roku) now offer streaming sticks which allow users to use an app on a smartphone or tablet and then have the content streamed over Wi-Fi to the TV set;
     
  • There is a trend away from storing downloaded content on a companion STB and towards streaming that content over the internet or via Wi-Fi from a local device (e.g. Android tablet, iPad) instead.

    So, while the first generation Apple TV featured a 160GB hard drive, the 2nd and 3rd generation Apple TV devices offer no user-accessible internal storage at all and so are focused on (a) streaming content from locally connected devices (e.g. Mac, iPad, iPhone or PC) or (b) accessing online services such as Netflix or Hulu Plus.

    The thinking here is that when it comes to viewing movies (or any other visual content) on the TV set  then the user will either (i) cast the content from another device (e.g. tablet, PC, smartphone) or (ii) access a service which will then stream the content over the internet to the TV set.

    If the user needs to view content while out of the home (e.g. while travelling or while on vacation) then he can take all his content with him by taking his tablet, smartphone or notebook.

    So there is no need for the user to store content on the TV set or the streaming box - which is why Apple decided to remove the user-accessible storage when the 2nd generation Apple TV box was introduced.

    To put this another way, all of the services on all of the smart TV sets and all of the consumer devices-based internet TV services are, in effect, streaming only – there is never any option to purchase and download movies to the TV set or a companion STB.

If this trend continues then the logical end-point is where all user-purchased or rented content is stored on non-TV devices (e.g. tablet, smartphone or PC) and the TV becomes a display device which is controlled using apps which would be mainly on tablets and smartphones. The exceptions to this rule would be where: 

  • TV set makers integrate Android TV into their TV sets because that would allow app developers to develop apps that would allow inter-working between other Android devices – which is similar to how the Apple ecosystem works for TV shows and movies;
     
  • Apple introduces a TV set which incorporates the electronics and software contained in the Apple TV box into the TV set. But if we are right and that intelligence and control functions are moving towards the cloud and personal devices, leaving the TV set as essentially a dumb display device, then if Apple chose to take this step then the resulting TV set would need to be primarily marketed on the basis of value-added features like high resolution, sound quality etc.;
     
  • Apple could decide to license its Apple TV technology to TV set vendors like Panasonic, LG etc. The technology could be integrated into the TV set as part of a ‘made for Apple TV’ program. 

    This would be an effective response to Android TV but it would have another advantage for Apple...

    It would put Samsung in a very difficult position: as a leading player in the TV set market, it is important that Samsung’s TV sets are competitive with those offered by Panasonic, LG, Sony etc. If these players decided to license Apple TV then Samsung would be forced to do the same, but this would mean admitting defeat to a direct competitor: Samsung’s Smart TV product would be ditched and Apple TV would be used instead.

    This would be more serious for Samsung than first appears: if Apple TV was integrated deeply into Samsung TV sets then the software would allow easy inter-working with other Apple devices – like the iPhone, iPad and Apple Watch - with very serious implications for Samsung’s own non-compatible Android devices. So we think that this would also force Samsung to adopt Android TV.

    Hence, in this way, the smart TV market is resolved into a two solution model: Android TV and Apple TV, with the proprietary smart TV solutions that have been developed by the TV set vendors falling by the wayside.

There is one final option available to Apple: this would involve Apple integrating the internet television-based offers of leading Pay-TV providers into the Apple TV service, so they appeared alongside services like Netflix, Hulu Plus and others which are already part of Apple TV.

This approach might be especially interesting to cable operators who have developed pseudo-OTT internet TV services (e.g. TV Everywhere) but which are currently only available to their existing subscribers.

This would allow cable TV operators to market their services to customers whose homes presently lie outside the cable operator’s network reach and who are, therefore, currently unaddressable.

However, Pay-TV partners would of course remain free to continue distributing their ‘OTT’ services on other platforms, such as Roku, Smart TV or Google TV.

In summary, Apple TV looks like yesterday's product trying to solve a problem that will not even exist in a few years.

But Apple is in the fortunate position of being able to re-align the direction of the product with that of the wider market and, in so doing, take the fight to arch-rival Samsung.