Why the TV Industry Can’t Ignore Apple

Tim Bajarin is the president of Creative Strategies Inc., a technology industry analysis and market intelligence firm in Silicon Valley.

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In 1992, while I was overseeing the largest multimedia computing show in New York City for a big publishing group, I was asked to meet with senior executives of one of the major TV networks. In my opening comments at this show, I had mentioned that I thought one of the major benefits of things like delivering expanded media content on a compact disc would be to eventually launch an era of content on demand. And one of the examples I gave was the idea that someday, people would be able to call up TV shows on demand and view them at will.

Now, remember that this was before the Internet as we know it today, and nobody was even thinking about new forms of media distribution. In fact, everything we were discussing at the show was very PC-centric. But one of my jobs is to look at technology and visualize its impact over a period of time and try and figure out how it could eventually impact consumers.

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A lot of TV executives attended this show and, consequently, I was invited to meet with some executives at one of the major networks to explain my thinking about content on demand. As I spoke to these executives, it became clear to me that while they were interested in the future, they did not want to embrace anything that would disrupt their current business model. The idea of giving customers more of what they wanted through an “on-demand” format was taboo, and if it did not increase the quarterly bottom line, they wanted no part of it.

However, to their credit, they saw that what I shared was worth thinking about, and they soon created an executive position called something like VP of Digital Content. It was so long ago I can’t remember the exact title of the job description, but this person was chartered to find out about the digital world and recommend how this company could or should deal with its potential impact on their business. So for the next three months, I got quite an introduction to the TV business and its business models and, more importantly, how risk-averse they were and how much they feared change.

Looking back over the last 20 years and thinking about how different the world of TV is today, I am actually amazed at how much progress the television industry has made on this issue. But to get to the point today where each of the networks use the Internet to deliver some of their top shows, they had to understand that the Internet is just a medium for delivering their content, and that consumers will continue to want these shows on demand — anytime and anywhere.

While they are starting to embrace the Internet as a vehicle for distribution, they are still doing so reluctantly. If they had their way, they would keep total control of distribution for themselves and drive their viewers only to their dedicated sites for viewing their shows. But the Internet has forced them to open up a bit. Little by little, they are doling out their top shows to dedicated partners who they trust to help them keep some semblance of control so that they can maximize their earning potential and, if possible, try to keep their customers within their network family as much as they can.

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However, in this world of digital content, they are now realizing that while they ruled the roost in the world of broadcast television, they have become just another channel among thousands of channels that consumers can choose for viewing video content. But what they don’t seem to get is that in this digital world, they will need new distribution partners and they will not have as much control over them as in the past. And I also don’t think they really understand the idea that people want to have access to that content anytime, anywhere and on any device they own.

Enter Apple, who if the rumors are to believed, has been calling on the executives of all the networks and trying to cut deals with them for Apple’s new TV initiatives. And I am hearing that they are resisting Apple’s partnership offers as Apple wants to pay them next to nothing to carry this content and they fear that Apple will do to them what it did to the music industry.

Now, I don’t know what type of deals Apple is offering the networks, if any at all. But I do know one thing: Apple could become one of the most powerful video network distribution companies in the future, and to not embrace what Apple is doing could be very painful for the networks.

The reason is simple economics. While we don’t know exactly what Apple is doing in this area of video distribution yet, we have history to look at for some clues. For example, when Apple initially introduced the iPod and the iTunes store, it opened the door for music artists to have millions of potential customers. But over a 10 year period, Apple made it possible for that music to be played on iPods, iPhones, and iPads.

And to date, the company has sold over 300 million iOS devices, which music artists can leverage to sell content just by using Apple’s own music distribution vehicle. Add an installed base of at least 40 million Mac users and in total there are over 350+ million Apple devices alone tied to the iTunes distribution medium. Now add the Windows PCs that also have iTunes, which we believe is about 50+ million, and that’s quite a lot of people Apple could deliver next generation video content to in the future.

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Also, look at Apple TV. While many people think of this idea of being a physical TV, they miss the real point of what I believe Apple is doing. At the core, I believe the company is moving towards becoming a powerful distribution network for video. And while I do think Apple will have a cool TV set someday in its product mix, the reality is that every iOS device and every Mac and every PC with iTunes on it will become an “Apple TV.”

That means that for these networks — and any other of their video channel partners — Apple will deliver to them well over 350+ million potential customers immediately once Apple’s TV distribution network gets turned on. And given Apple’s history, you can expect that the Apple TV experience, whatever form it takes, will be elegant, easy to use and perhaps even revolutionary in the way people access and use their services across all of these devices.

The mistake the networks could make is to not see Apple as this massive vehicle for distributing their content, and instead see them as having to be their partner for making money and relying on Apple for high margin revenue. That is the business model of the past. The new business model that I believe will emerge is to find ways to get eyeballs to view the content, and then get creative in the ways they make money on that property.

Of course, they could tie advertising to it, but they could also offer games tied to the content, sell merchandise tied to the content, and give special prizes tied to the content, for instance. Instead of resisting Apple, or perhaps Google or Amazon — who I believe will create similar video distribution networks — they need to embrace them as vehicles to get their content in front of these eyeballs and find creative ways for mining revenue from their digital customers.

I have no doubt that Apple is going to become one of the most powerful video distribution networks by nature of its existing customer base — a consumer base that is added to continually. The company has sold 50 million iPads so far and will sell at least another 50 million this year, turning every one of them into a potential “Apple TV.” I know the networks would like to keep control of their distribution, but in the world of digital, those days are gone. The sooner the networks see things like Apple’s new distribution vehicle as a critical way to get their content to the masses quickly, the sooner they can fine tune new business models to take advantage of this new era of video content that’s on demand, anytime, anywhere and on any device.

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Tim Bajarin is the president of Creative Strategies Inc., a technology industry analysis and market intelligence firm in Silicon Valley.