Analysis: Will Apple TV be bigger than iPhone?

Editor’s Note: This story is reprinted from Computerworld. For more Mac coverage, visit Computerworld’s Macintosh Knowledge Center.

Apple TV isn’t the first product to collect, manage and play on TV video that was downloaded to desktop computers. But then, the iPod wasn’t the first portable digital audio player.

Not surprisingly, then, some industry experts say Apple TV, due to be released this month, will be a huge iPod-like success, doing for digital video what the iPod did for audio. Some even think Apple TV could be bigger than Apple’s much-ballyhooed iPhone, which will be released in June.

“Long term, strategically, Apple TV as a revenue-generating platform is much bigger than iPhone,” said Jeff Heynen, directing analyst for broadband and IPTV for Infonetics Research. “It’s a US$300 device that multimillions of people will put in their homes vs. a $500 device [an iPhone] in a market that’s saturated with BlackBerries and similar things.”

On the other hand, some industry observers will tell you that while Apple TV may be successful some day, it has significant hurdles to overcome.

“The reality is that this class of device faces challenges,” said Ross Rubin, director of industry analysis at The NPD Group. “None has been successful so far.”

What nobody disputes, however, is that Apple TV heralds a new age in which we obtain and manage our media in significantly different ways than we once did.

Potential gain

While vendors such as Netgear and D-Link, not to mention Microsoft with its Windows Media Center, have offered similar devices and technologies as Apple TV, not one has yet succeeded. But Apple can succeed if the quality of its previous products is any indication, said Martin Olausson, director of digital media strategies at Strategy Analytics.

“You need to be able to bridge that gap from the PC to the TV set, and today there aren’t many technologies that do that very well,” Olausson said. “What Apple is trying to do, obviously, is to use their user-friendly technology and bridge that gap.”

Another difference with similar products, according to Heynen, is that Apple is entering a market that has been prepared by cable and satellite providers in the last couple of years.

“The cable companies have had a great deal of success with subscription video-on-demand for premium channels,” Heynen said. “A lot of subscribers see [on-demand programming] as better than having a DVR because it begs the question: Why do I need a TiVo if my service provider will offer content on-demand?”

Olausson added that products such as Apple TV are even better than on-demand programming because they don’t require users to pay for expensive cable TV or satellite subscriptions. “If I’m into Desperate Housewives or 24, I can just buy that. I don’t have to pay for anything else but a broadband connection.”

In other words, users are becoming accustomed to watching their programming whenever they want, and Apple TV will make it that much simpler. In addition, there are millions of video iPods already in circulation, which will boost the chances of success for Apple TV, Heynen said. Video iPod users can load their devices with videos downloaded to Apple TV.

“The fact that there are so many video iPods out there, and the mere fact that Apple sees the video on-demand market as a low-hanging fruit means that they can go get subscribers who want both to take video with them and have the ability to watch the same video on their television,” he added.

The result will not only be significant sales of Apple TV, but also dramatically increased sales for the iTunes store to the detriment of cable and satellite providers.

“It’s already working somewhat,” Heynen said. “Disney has said that iTunes downloads of its movie Cars have reached $25 million. Given the still-low penetration of digital video recorders at this point and the fact that on-demand is starting to take shape, the potential [for Apple TV] is huge.”

Another potential benefit to Apple is that success for Apple TV could lead to increased sales of its Mac computers. Market share of those computers has increased significantly in the last couple of years — it now has about 7.2 percent of overall market share — and many observers give credit to the glow created by the iPod. Apple TV could even lead to increased sales of iPods, Heynen added.

“Apple TV will have a bigger effect on video iPod sales, but it also will have an impact on Macs, too,” he said. “Mac minis are priced for that pull-through effect. Mac market share is still very small. There’s a lot of room to grow.”

Competition from Microsoft

Heynen said Microsoft and its Windows Media Center don’t compete effectively with Apple TV.

“While [Windows Media Center] does open up your PC to different content and channels and does help organize existing digital content, it’s very tough to get used to and it’s slow,” Heynen said. “Plus, you have to launch it on the PC. And most people aren’t going to stick a Dell computer in their living room.” By contrast, Apple TV content will be available directly from the television screen, he noted.

Microsoft does, however, have additional competition in mind. Specifically, the XBox 360 game console can already be used as an extension to Windows Media Center, and the company has promised to beef up those capabilities even more, turning it, in essence, into a set-top box for IPTV, which is starting to be offered by broadband vendors.

But it won’t be appealing to many people to buy what will essentially remain a game console to help them collect and manage Internet-based programming. Plus, Microsoft’s efforts won’t effectively compete with Apple TV because the two companies are aiming at different targets.

“Apple is going after the early video on demand market, while the XBox is limited only to service providers that support it,” Heynen said. “AT&T is the biggest of those and their [IPTV] subscribers total about 1,000 at this point. That will grow, but you can use the Apple TV platform no matter what type of subscriber you are.”

Potential pain

NPD’s Rubin said Apple TV could be a big success, but he’s not as confident as Heynen. For one thing, the technology is complicated.

“There are a lot of moving parts,” Rubin said. “There’s the PC, the network, then you have to connect it up to your television. Broadband is a factor if you want to download commercial content.”

“Apple TV still requires effort from the consumer, more than calling the cable operator and having the person come out and install it,” Olausson agreed.

That potential level of complication means that Apple TV won’t succeed in the same way iPod has succeeded, according to Rubin.

“With the iPod, it was the Walkman of the 21st century,” Rubin said. “That was easy to understand, but with Apple TV, it will take some education.”

Another impediment to Apple is that serious competition is starting to shape up, and not just from Microsoft.

“Some companies are building those same capabilities into their televisions,” Rubin said. “HP is one company. Sharp has said it will ship such a TV and Pioneer says it will ship TVs that can stream content from PCs. The technology could be embedded [in TVs], so you wouldn’t have to be concerned with a separate box.”

In the end, though, the success of Apple TV or similar technology by other vendors will depend on how much video content is available.

The iTunes store is steadily “increasing the video library, and that will give consumers some incentive on Apple TV,” Rubin said. “But you have to consider whether what they’re offering can’t be obtained elsewhere. Every movie they’re offering is available on DVD, and every TV show is available on cable or satellite. There’s a very high overlap between Apple TV and the premium cable and satellite providers.”

Olausson agreed.

“It will come down to having access to all the content people want,” he said. “On the music side, if iTunes didn’t have access to millions of songs, it wouldn’t work.”

Over time, all the experts agreed that, when lots of video content is available and the idea of using a product like Apple TV to manage that content is widely understood, consumer behavior will change significantly.

“In the short term, it’ll take away DVD sales more than take away from cable and satellite providers,” Olausson said. “If you look further into the future, the dynamics for offering content certainly will change. There will be converged systems using the Internet and managed systems like cable and satellite.”

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