Apple's HDTV and the challenge of subscription programming

Why Apple's desire to secure subscription-based content for its rumored HDTV may prove impossible

The noise surrounding Apple’s alleged foray into the HDTV market has grown increasingly louder over the past few months. And while some are quick to boldly proclaim that Apple will upend the Television industry in much the same way it revolutionized music and phones, the reality is much more nuanced.

The success of the iPhone and Apple’s chain of retail stores certainly underscores Apple’s ability to succeed in markets where they have little to no prior experience. But because of their past triumphs, expectations for an Apple HDTV have spiraled out of control as speculation permeates through the rumor mill and pundits ignore the roadblocks and hurdles in Apple's path.

Now while Apple may very well revolutionize the Television industry, it’s important to keep in mind many of the unique challenges they face in entering a completely new market. Indeed, suceeding in Television may prove to be Apple's most challenging endeavor in over a decade.

As for Apple's highly anticipated HDTV, it’s been widely rumored that Apple is actively seeking to secure content deals with various networks that would enable users to sign up for monthly TV subscriptions. The upside is that users would only have to pay for channels that they actually watch.

But Apple thus far has encountered serious resistance from content providers in their quest to get TV subscriptions up and running, and upon a close examination of the issues at play, it doesn't seem like success is right around the corner either.

At the end of the day, a subscription-based model for Television shows may prove to be a losing proposition for all parties involved.

Here’s why.

Today, most mainstream consumers are more than happy to watch programming on a standard 1080p LCD screen with a decent contrast ratio. And though those 55-inch OLED displays touted by Samsung and LG at this year’s CES are mighty attractive, if Apple wants to firmly distinguish its HDTV offering from the rest of the pack, it’ll have to include software and services that the competition simply can’t match.

And that’s why a subscription-based TV offering from Apple is so appealing and is one of the more popular theories behind statements that Apple’s HDTV will revolutionize the TV industry.

As it stands now, cable users pay a lot of money for cable subscriptions that include channels they never watch. The allure of only paying for channels you want to watch, also known as a’la carte programming, is that users would be able to reduce their monthly cable bill rather significantly.

What better way to differentiate an Apple HDTV! Pay a little bit more for an Apple HDTV but save a lot of money in the long run.

If only it were that simple.

The reality is that a’la carte programming has never caught on in the cable industry because it would actually raise monthly cable bills while also working to drive some channels into extinction.

To understand this counter-intuitive conclusion requires a quick primer into the mechanics of cable television.

A losing proposition for consumers

When you pay your monthly cable bill, your payment is allocated between all of the networks you receive. ESPN, for example, reportedly receives about $4 out of each user’s monthly cable payment. Naturally, less popular stations receive a lot less, with some of the more niche stations perhaps receiving only $0.25.

But often times, content providers offer a selection of channels to cable providers as part of an all-inclusive bundle wherein the successful (i.e more expensive) channels help subsidize the existence of the less popular channels. Viacom, for example, bundles many of its music stations like MTV and VH1 with stations like Nickelodeon and the LGBT themed Logo channel.

But in a world where each channel has to survive on its own merits, many of the niche stations that make cable so desirable -  ie HGTV and The History Channel - wouldn't generate enough money to warrant staying in business.

Now as for why prices would increase, let’s take a closer  look at ESPN.

Assume that ESPN, which commands about $4 per subscriber, went to an a’la carte model and that 50% of cable viewers decide to sign up for the channel. In this scenario, ESPN would have to raise their monthly fee to subscribers to $8/month to account for that missing revenue.

Now roll this scenario out across a multitude of channels. Stations like SciFi, E!, CNN, FX, Discovery, TLC would all have to raise their prices. If you happen to only watch a few stations then perhaps you would save money overall, but even 8-9 select channels might prove more expensive than your current all-inclusive cable plan.

Similarly, a monthly subscription plan for an Apple HDTV isn't likely to save consumers money in the long run unless Apple is able to extract favorable content deals, something which it's been reportedly having a lot of trouble accomplishing.

A’la carte is also a losing proposition for TV networks

Even if we assume that stations like ESPN can raise prices and maintain their subscription-based revenue stream, overall profits would still plummet.

With a’la carte pricing, networks would experience decreased advertising revenues because they would lose the casual viewer - the type of person who channel surfs and happens to randomly stumble upon something of interest.

Joe Nocera of the New York Times explained why in an article a few years back:

Marketing budgets, on the other hand, would skyrocket, because the channels would have to pay huge sums to persuade people to subscribe. "Identifying everybody who likes the Food Network and getting them to pay for it is hard to do," says Christopher Yoo, a law professor at the

University of Pennsylvania who has studied cable bundling. One of the nice things about the current system is that once a station gets on extended basic, it can be discovered by viewers — and that wouldn’t happen in an à la carte world.

In short, a non Sports fan might lament that they have to pay for ESPN, but an a’la carte system might put channels that he/she does watch out of business. In the meantime, prices would rise for both the viewer and the networks.

The end result is that users would be paying a lot more for a lot less.

What's the incentive for TV networks, anyways?

Right now, networks are making a pretty penny with the current business model of Cable TV. One struggles to find a reason why they’d strike streaming and content deals with Apple when they’re happy with the status quo.

Why would they want to  incentivize users to drop their cable subscription and sign up for an Apple HDTV subscription when they'd be losing money in the long run?

At the end of the day, there’s money in it for Apple, and perhaps money to be saved from the point of view of the consumer, but where’s the money for the networks? What's their impetus for signing on the dotted line with Apple?

Notably,  TV networks have remained cold to overtures from Apple about licensing content as far basck as 2010.

A 2010 Businessweek article explained:

Many studios, nervous about angering the cable companies that pay billions for their content, refused Apple's efforts late last year to put together a subscription service, say three media executives involved in the talks, who requested anonymity because they did not have approval to discuss the negotiations. Consumers would have been able to purchase only those shows they want in an a la carte model, rather than pay for hundreds of channels they never watch.

An Apple HDTV that's best in class, what will it take?

Greg Joswiak, Apple's VP of worldwide iOS Product Marketing, recently said that Apple never enters an industry unless it feels it can be the best.

"If you can’t enter the market and try and be the best in it, don’t enter it. You need that differentiation. At Apple if we can’t be the best then we are not interested in it," Joswiak explained.

So while it’s easy to randomly blurt out a number of features Apple could include in an HDTV, the real question is what Apple can do to actually improve the TV viewing experience.

In terms of picture quality, there’s not much Apple can do to improve upon the current selection of HDTVs on the market. Of course, it come to market with a 55-inch OLED screen, but the only companies manufacturing them en masse are LG and Samsung. Notably, though, Apple's display provider for its rumored HDTV is Sharp.

So again, Apple will need to differentiate its offering in software.

But whereas the the iPod/iTunes combo simplified the entire music listening and purchasing experience, what will an Apple HDTV bring to the table?

Apple is notoriously stubborn during contract negotiations, but this time around they have nothing to hold over the heads of equally stubborn cable companies.

The iPod was able to succeed, in part, because the music industry was reeling from piracy. In that regard, iTunes filled in a gaping hole. Similarly, Apple was able to create the iPhone according to its own vision because AT&T was in desperate need of a flagship device.

Right now, cable networks have no pressing need to close their eyes and put their trust in Apple. And keep in mind that it took Apple months upon months to secure licensing deals for music as part of its iTunes match program. Much harder.

Consesquently, I don’t think an Apple HDTV will launch with a’la carte programming. Or if it does, the pricing will be a lot higher than people anticipate.

That said, expect an Apple HDTV with Siri integration (via a remote or iOS device as to negate shouting across the room) coupled with an easy to user interface, easy access to online videos,  AirPlay support, unbelievable picture quality and the ability to rent movies right out of the box. In that vein, think of an Apple HDTV as a TV+Apple TV+Boxee.

But let's assume, for a second, that Apple somehow is able to secure subscribtion-based content deals with a slew of networks. In such a scenario, Apple would have to pass along what would undoubtedly be expensive costs onto consumers. But with incredible HDTV deals to be had at both ends of the price spectrum, this is one market where Apple may very well need to compete on price.

At the same time, the margins in the TV business are abysmally low. Just ask Sony who hasn’t made a profit in that market in years, even though they offer some of the highest quality sets around. If Apple wants to buck the trend and release an HDTV at a premium, assuming content deals for TV programming can be reached, the ultimate and real-world cost may ultimately prove to be prohibitive for prospective TV owners.

At the end of the day, Apple faces the prospect of entering a competitive market that doesn't necessarily lack innovation and revamping an industry that isn't necessarily broken.

I'm not saying it can't be done, but gaining control of the living room has proven to be the most challenging of prospects for all tech companies. Now Apple does have a history of stellar innovation and the strength of its iOS ecosystem behind it, but the success of an Apple HDTV is by no means a guarantee.

And lastly, people have wrongly assumed that Apple has its TV plans already figured out as a result of this quote from Steve Jobs' biography.

‘I’d like to create an integrated television set that is completely easy to use,’ he told me. ‘It would be seamlessly synced with all of your devices and with iCloud.’ No longer would users have to fiddle with complex remotes for DVD players and cable channels. ‘It will have the simplest user interface you could imagine. I finally cracked it.’

But in a subsequent interview, Jobs biographer Walter Isaacson fleshed out some more detail. When asked how far along Apple was with their TV, Isaacson responded, "They weren't close at all. He told me it was very theoretical. These were theoretical things they were thinking about in the future."

Now perhaps Jobs was playing the Apple HDTV close to his vest, and indeed, Apple's HDTV plans may have crystalized in the time following Isaacson's aforementioned interview with Jobs. But with the inherent problems mentioned above, not to mention Apple's heavy, albeit unofficial, presence at CES, it seems that the project remains a work in progress.

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Copyright © 2012 IDG Communications, Inc.