I think the Apple TV has the opportunity to redefine the living room much like the iPhone redefined the phone. But I’m getting ahead of myself.
Traditional television service
This is the Direct TV and the Comcast of today. Currently, you pick a package, and you subscribe for a monthly fee for a subset of the channels they offer. Most (if not all) subscribers use only a fraction of those (40 music channels? Really?). Oftentimes, it’s necessary to subscribe to a whole different tier of programming for only one or two desired stations.
According to Forbes, each network is taking home an average of only $0.26 a month per subscriber (ESPN however, makes $5.13 a month per subscriber). Obviously, there’s a financial gap that is filled with advertising revenue. The entire revenue model is based on selling the content cheaply in order to have eyes to advertise to.
The new kids on the block
Enter Netflix and Hulu, charging you a much lower monthly fee for (arguably) much more limited content. Netflix has chosen to do it without ads while Hulu has decided to show ads to their subscription users.
Either way, these two services aren’t exactly like a cable provider, but they’re still a middleman between the user and the content they want. If I only want to watch the one TV show, there’s no way through either service that I can watch just that show. Obviously, if I just wanted to watch one TV show, I could purchase a season pass on iTunes, or buy the DVDs when they come out. Neither of these options are “live”, but they’re good solutions for the sporadic TV watcher.
Where Apple comes in
I think that Apple has an opportunity to meet these two extremes right in the middle with their “hobby project”, the Apple TV.
Imagine for a moment that you are an executive at a television studio, let’s say USA Network. One day, you get a call from Tim Cook, and he tells you that you can put an app on the Apple TV that will allow consumers to subscribe to your content for $2.99 a month. This subscription will give users full access to USA Network content, including whatever is currently playing live on your cable station. All of your content, regardless of how old it is, will be allowed to show commercials (think Hulu, but not internet kiddie crap), and there isn’t a way on the device to skip them. All of a sudden, you’re making $2 a month, per subscriber (Apple will take a 30% cut, naturally), and you’re keeping your advertising revenue intact (or possibly expanding it, since you can show ads on old and new episodes).
Now I’m not a TV exec, but I think that sounds like a tempting offer, especially for smaller networks. Bigger networks, such as ESPN, may charge more. Imagine a $15 or $20 subscription to ESPN where you can start SportsCenter whenever you want. There may still be premium packages (in-app purchases) such as NFL Sunday Ticket or NBA League Pass, so once again, the current revenue model isn’t disrupted.
The problem with this whole idea is that if only one or two networks agree to Apple, the cable providers will cut them off. In order for the model to take off, the networks would have to agree en masse, and all be ready to go with apps when Apple launches. Only then would they still be able to negotiate with the cable providers in order to keep both subscription options available.
What if Apple went beyond the current gaming capabilities of the Apple TV (Air Play from an iOS device), and offered a model about the size of the Mac Mini that was a full fledged gaming console? With the recent news about the new PS4 and the rumored next generation Xbox, there doesn’t seem to be much innovation on that front either.