the rajam report

Apple TV is unique among Apple’s product line, in that it doesn’t compete in a zero-sum market. Sure, a lot of people use Apple TVs to stream content today, but it’s often not the only box hooked up to their TVs. Contrast this with iPhone, Watch, or Mac, where people buy and use an Apple product at the expense of their competitors.

Recall what Steve Jobs said regarding the set top box market back in June 2010 (emphasis added):

The problem with innovation in the television industry is the go to market strategy. The television industry fundamentally has a subsidized business model that gives everybody a set top box for free, or for $10 a month. And that pretty much squashes any opportunity for innovation, because nobody is willing to buy a set top box. Ask TiVo, ask ReplayTV, you know. Ask Roku, ask Vudu, ask us, ask Google in a few months […]

Sony has tried as well, Panasonic has tried, a lot of people have tried and they’ve all failed. So all you can do is add a box on to the TV system. You can say “well, gosh, I noticed my HDTV has a bunch of HDMI ports on it, one of them is coming from the set top box, so I’ll just add another little box with another one!”

Well, you just end up with a table full of remotes, cluster full of boxes, bunch of different UIs. And that’s the situation we have today. The only way that’s ever going to change is if you can really go back to square one and tear up the set top box, and redesign it from scratch with a consistent UI across all these different functions and get it to the consumer in a way that they’re willing to pay for it. And right now there is no way to do that. So that’s the problem with the TV market… The TV is going to lose until there’s a better, until there’s a viable go to market strategy. Otherwise you’re just making another TiVo.

In the five years since Jobs’s comments, the status quo has more or less held up. If you want access to Pay TV content, you need a subscription from a Cable or Satellite TV company and a proprietary set top box which you lease from your TV Provider. If you want to play games, you need a PlayStation, Xbox, or Wii. If you want to access content from streaming services (Netflix, Hulu, or HBO NOW) but don’t want to shell out a couple hundred dollars for a game console, you need an streaming media box like an Apple TV. And if you want something that integrates with your iOS or Android devices at the system level, you’re definitely going to want an Apple TV or Chromecast.

In other words: no one has succeeded in converging all of these things into one cohesive product.

The streaming media player market especially has become more crowded in recent years, mirroring the emergence of streaming services. Roku, Amazon, and Google all have pretty solid streaming TV products on the market today. Amazon and Google, in particular, leverage their offerings as endpoints to their respective services.

Here’s John Gruber on the subject:

The stakes are very high for Apple with next month’s new Apple TV. In some ways, I’d argue they’re under more pressure than they were for Apple Watch. Apple Watch’s biggest competition is the idea of wearing a watch at all. It doesn’t really compete against other smart watches. If you own an iPhone and want a connected digital watch, Apple Watch is it. If you don’t own an iPhone, you can’t use an Apple Watch.

With TV it’s different. There are serious competitors already ahead of Apple in market share, and their products are generally well reviewed. There are some tie-ins between iPhone and Apple TV — we all presume Apple Music, for example, will be available on the new system. But it’s not like the watch, where they’re tied together. iPhone owners can (and do) easily use Roku or Chromecast or Amazon Fire TV. Apple TV has to win on merit.

There is one other thing worth considering: the Streaming Media Player market isn’t that big.

If you look at the overall size of the Pay TV market in the US, it’s about 100 Million customers in the US alone¹. After factoring in the average number of set top boxes in a home, which is about 2.5², there’s an installed base of about 250 million Pay TV set top boxes in the US today.

By comparison, Apple has sold 25 million Apple TV boxes globally as of the end of 2014, while Google has sold 17 million Chromecasts globally as of May 2015. The current generation of game consoles have sold in comparable numbers. The PlayStation 4, the best selling console on the market, has sold 22.5 Million units as of March 2015.

It’s also worth nothing that despite all of the hype surrounding streaming services (and yes, streaming services are where the growth is), on average, people spend the majority of their time watching content on old-fashioned linear TV. Consider the following:

• A Nielsen report from late 2014, which shows Adults age 18+ spending the majority of their time watching linear TV and very little time using streaming media products, like Apple TV.
• This graphic from BTIG’s Rich Greenfield, which shows that consumers still spend most of their time on traditional TV compared to Netflix (though Netflix works out cheaper per hour).
• The fact that HBO NOW did not cannibalize HBO’s existing Pay TV business.

The Bigger Opportunity

There is clearly a viable market for streaming media players like Apple TV, Roku, and Amazon Fire TV. However, the bigger opportunity is breaking into the market for Pay TV set top boxes, which today are less compelling products but retain access to the content consumers want. The only way any tech company will be able to pull that off is by having a TV Service to accompany their hardware. Of the companies with streaming media products on the market, only one is rumored to be working on such a service.

Unlike its competitors, Apple is playing the long game in the TV market. Apple TV’s long term goal is not about beating Amazon, Google, or Roku in the streaming media player market, it’s about redefining the TV market by building a true smart TV platform. One that seamlessly integrates with the Apple ecosystem and converges all the different functions (gaming, long form video, home automation, and who knows what) we want from our TVs into one product. In other words: the only thing you need to hook up to your TV.

As Matthew Panzarino wrote at TechCrunch:

Judging by the (reported) trouble that Apple has had getting its TV streaming service locked down and ready to ship, that unhappiness is presenting itself in the form of money. If Apple is going to provide a holistic TV experience where multiple programs across multiple networks can be searched and played non-linearly with a single tap, the gatekeepers are going to want a blood price to do it.

Some very smart people I’ve been talking to suggest that, by building a platform, Apple is generating leverage that it can use to great effect in these negotiations. A mid-market breakout box offering is one thing, but a huge, rumbling platform with an upward trajectory of living-room dominating apps and third-party content is another beast. If, obviously if, Apple is successful with the Apple TV, it could be in a position to dominate content in a way that no other ‘smart’ TV platform has before it.

I’d argue it’s no longer a matter of “if”, but a matter of “when”.