Thursday, August 6, 2009

The Cable iWatch and App Store

It sounds very believable doesn’t it? Apple has demonstrated that a path to a successful business is to combine a great, closed hardware platform and entertainment content such as music, movies, TV shows, and even user generated content. Then after establishing Apple as the leader in the personal entertainment platform, Apple found a second wind to drive the revenue engine. The answer was to open the platform to application developers, vet applications, and facilitate their purchase. Apple’s hardware and iTunes combination has in fact created such momentum that it is hard to see anyone catching them in the near future.

The other cell phone manufactures and service providers have been scrambling to create App Stores to compete with Apple. I think there is a far more obvious iTunes and App Store opportunity with the TV service providers – cable companies and iPTV providers like AT&T’s U-verse. They have a good, closed hardware platform and have access to entertainment content. I know there have been arguments that video is not like music, consumers won’t view movies over and over like music and therefore anything not based on music will fail. This completely misses the real value in the Apple platform which is its simple interface, lots of content, and it is relatively inexpensive for the perceived value.


In addition to the obvious feature to serve recently aired episodes, there is a great opportunities to access the “Long Tail” of content interests much like Amazon does with books. This uncovered a latent consumer need that dramatically hurt brick and mortar bookstores that simply could not carry the inventory. TV service providers could provide viewers the ability to find and view obscure content easily. I am sure there is technology that would insert advertising for free or subsidized options or simply charge a small fee, $.99 comes to mind for a half hour episode.

The App Store

There are reported to be over 65,000 apps in the iTunes App Store and over 1.5 billion app downloads. Are they all great or necessary or even useful? No, but the sheer volume suggests that there is a viable business model that would interest both developers and consumers. With 125 Million homes passed in the US alone and 41 Million digital subscribers, this is a market that dwarfs the iPod/iPhone numbers. Would developers jump at the chance to provide apps via the TV even with a 30% service provider company cut? I think the answer is a resounding yes.

So what’s the hold up?

The problem seems to come from three areas. First, and I think the largest force, is that the cable industry has been a protected monopoly/duopoly across the country. As a trade-off for the large infrastructure investments to roll-out cable services, the cable companies were given monopolies in a region. Their only completion eventually became the satellite based providers and recently AT&T or Verizon with iPTV. The result is an industry that has never had real competition or a market in which consumers had much choice. This force has had two affects. We as consumers have lowered our expectations and the service providers have never felt very threatened.

Second, the technology platform requires a significant investment and subsidization by the provider. Although this has always been a good investment, once the equipment is deployed it is very difficult to replace it during its most profitable years. Also, before two-way interactivity it has been difficult to identify a new revenue stream to offset the equipment premium. Even now it is a bit of a gamble and far from a sure bet.

Lastly, video content owners have been even more reluctant to break out of their antiquated business models. The music industry was forced out of their model and is still recovering. Video content owners have fought to keep their assets tightly locked down and not Napster-ized. Service providers could easily claim that they would like to be more innovative but their hands were tied.

What’s the risk?

Recently, Yankee Group was presenting a perspective that the wireless service providers need to stop the substantial handset subsidization. Citing the calculation that AT&T had spent over $600M in iPhone subsidies during the quarter in which the launched the iPhone 3Gs. How does that apply here? AT&T has put itself in the unenviable position of a dumb pipe. They must provide the network but get little of the increases created by the iPhone. There is a risk that by fighting the innovations for too long will relegate the service providers to dumb pipe providers.

The biggest risk is, of course, also the biggest fear of the service providers – OTT – over the top. Industry lingo for services and content accessed “over the top” of the service provider’s infrastructure via the Internet. YouTube, Hulu and Boxee have demonstrated the potential of OTT opportunities. Are we all going to “cut the cord” and get all our programming from online services? Of course not, but the trend is there. The Pew Internet and American Life Project’s latest survey of American Internet habits, done in April showed that roughly 35% of Internet users surveyed said they had watched a TV show or movie online, up from 16% who had done so when asked in 2007. Nearly a quarter of those watching Internet-delivered TV and movies watch on their TV. Pew reports that 23% said they connected their PC to a TV screen to watch online video. Online video is growing quickly. It is now the top activity for consumers. According to Pew, 62% of online users watched video through a sharing site in April, topping the 46% of Internet users who used a social networking site, the 19% who downloaded a podcast and the 11% that updated their status on Twitter. And as I have pointed out in early posts about generational affects, an overwhelming 89% of adults ages 18 to 29 now watch online video, and more than one-third, 36%, do so daily.

Although cord-cutting households are relatively few, estimated at 2-5% the trend should be a wake-up call to the industry – the time is now to embrace a more open model. Sadly, the fear aspect is not strong enough yet to motivate serious action and unfortunately for the industry the belief in the revenue growth potential is not there either.

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