Interviews with Digital Media Thought Leaders

There is Something There at AppleTV

Podcast Audio | Posted by Phil Leigh on March 15, 2010

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Phil Leigh

Tim Cook, who is Apple’s Chief Operating Officer, was recently interviewed at a Goldman, Sachs investor conference. He repeatedly minimized the company’s market opportunity in the Digital Living Room of the Future. Instead he implied that portable devices would be the prime growth engines in the years ahead.

For example, he commented that Apple has “no interest” in the TV market and that “AppleTV” remains a hobby because the market size is small by comparison to that for portable units. In contrast he observed that the “vast majority of Apple’s revenue now comes from mobile devices and content purchased for those devices.”

Nonetheless, Cook is an enthusiastic AppleTV user and his company continues to invest in the product because “there’s something there.” In short, he senses genuine potential in the future Digital Living Room but apparently cannot presently visualize the business models and equipment configurations that could yield a deca-billion dollar annual business.

Despite such comments, the Digital Living Room of the Future is ultimately likely to become an important focus at Apple for two reasons. First, the latent demand is so large that it cannot fail to draw the company’s most serious consideration. Second, exploitation of the latency requires user-friendly product innovations providing consumers nearly unlimited Internet access on their televisions conveniently from a TV viewing distance. In short, it requires the invention of a new product category that may well emerge from a combination of Apple’s desktop and portable capabilities.

While Cook’s contrary comments cannot be ignored, it is important to note that some of the industry’s most highly respected leaders changed their opinions once an important market opportunity begins to materialize. For example, less than a year ago Steve Jobs didn’t see e-books as a “big market” although an online e-bookstore was an important focus of the iPad product launch last month. Even more significantly, in 1995 Bill Gates was so focused on “Windows Everywhere” that he nearly missed the significance of the Internet. (Breaking Windows, page 26). Although Occam’s Razor suggests that Cook is not intentionally misleading, it does not guarantee validity.

Consider the following points:

First, as illustrated in the table below the overall market opportunity for the Digital Living Room exceeds $220 billion in the United States alone. It is almost four times the size of Apple’s anticipated worldwide revenues this year.

Digital Living Room Market Potential

Second, ultimately consumers will demand unlimited Internet access on their TVs and video will migrate to the Web. It provides on-demand access, long-tail content, online commerce, and multiple communications capabilities. According to a recent Strategy Analytics survey, fewer than 22% of CATV, Satellite, and Telco TV subscribers felt they were getting good value for their money.

Third, sponsors also will increasingly favor Internet access on TVs owing to superior advertising targeting and accountability along with the spontaneity of online commerce.

Finally, while the focus of this commentary is on the importance of the Digital Living Room of the Future, as noted in our Future of Apple research report, we acknowledge that portable devices and computers will be the company’s major wellsprings of growth over the next five years. However, we believe that the company may well be underestimating its opportunity in the Digital Living Room and trust that it will adapt as the market evolves.