Interviews with Digital Media Thought Leaders

Evaluating Apple’s Go-to-Market Analysis

Podcast Audio | Posted by Phil Leigh on June 14, 2010

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During the past few months Apple twice implied the Digital Living Room of the Future is not a good market for the company. In February Tim Cook said that AppleTV remains a “hobby” since its potential is considerably smaller than the markets for mobile and tablet devices. Partly in response to GoogleTV, earlier this month Steve Jobs amplified Cook’s point with analysis.

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Essentially, Apple minimizes the Digital Living Room because there can be no “go-to-market” strategy. Jobs reasons that modernizing television requires replacing conventional set-top boxes with better designs. While readily conceding that Apple could develop such designs, he assumes they could not profitably sell them because the cable and satellite industries rent current set-tops for artificially low fees cross-subsidized by programming charges. By way of example he notes that TiVo, ReplayTV, Roku, Vudu, and similar products failed to tap into the mass market. Apple’s analysis is faulty for two reasons. First, it is unnecessary to replace the set-top box, although it would be preferable. Second, consumers will pay for TV enhancements when the improvements are sufficiently valuable.

Most with a computer already connected to their TV cannot doubt that consumers will eventually demand abundant Internet access on televisions. The experience is simply that transformative. If cable and satellite set-top boxes fail to offer it, consumers will buy separate appliances in order to get it. The main reason TiVo, Roku, Vudu, and Replay failed to become mainstream is their Internet access is sharply limited. Their failure echoes the experience of early record-label-backed online music services PressPlay and MusicNet which were similarly restrictive. Only when iTunes convinced the labels to drop overly confining rules did legitimate online music become a mass market.

Significantly, Jobs didn’t mention Mac’s and PCs among the products failing to be commonly mated with TVs. But domestically alone we estimate about 12 million computers are attached to televisions to provide unlimited Internet access on the big screens. They are navigated with familiar browsers and can be controlled remotely with a wireless mouse & keyboard. While not yet a mass market phenomenon, the trend is likely to be a forcing-factor leading to the advent of consumer-friendly appliances for the same purpose. Such units will provide either (1) a browser-centric experience at the TV or (2) an abundance of Apps capable of delivering Internet video and popular websites to TV screens. An evolved form of AppleTV could be just such an appliance.

Confessedly, Jobs correctly notes that adding such an appliance without replacing the set-top box increases cost and clutter. But prior experience demonstrates that consumers will do so when the added value is sufficient. For example, thirty years ago broadcast television reception was generally good in urban markets. Nonetheless, city residents eagerly subscribed to CATV despite the incremental cost and added set-top box clutter because they wanted the additional programming. More recently they connected video game consoles and DVD players to TVs so they could play games and watch movies that were unavailable on television.

Similarly, Internet age consumers will increasingly value Web access at their TVs. The trend is particularly evident among young adults. For example, a survey commissioned by RealNetworks revealed that nearly half of 18 – 25 year-olds split their video time equally between the Internet and conventional television.

Finally, the market is simply too large for Apple to ignore. We estimate the Digital Living Room market potential in the United States alone at over $225 billion as outlined in the table below. It is almost four times the size of Apple’s estimated worldwide revenues this year.

Apple’s go-to-market analysis is valid when applied to devices intended to simultaneously accommodate conventional television and Internet access. It’s a fool’s errand for two reasons. First, when sold in competition to the CATV and satellite industries, such units cannot approach the subsidized price for existing set-top boxes as Jobs argues. Second, if designed to be marketed and thereby subsidized by the CATV and satellite industries themselves, the contraptions will likely be saddled with too many restrictions. Basically, the conventional television industry does not want consumers to have abundant Internet video on their TVs any more than the record labels wanted music distributed over the Web.

In sum, abundant Internet access at the TV is as certain as fleas on a yard dog. If cable set-top boxes don’t provide it, consumers will buy computers and future appliances that do – just like they bought video game consoles and VHS & DVD players to enjoy entertainment of the screen that television did not offer.