How Apple, Inc. Actually Plans to Change TV

Is Apple TV about to hit a home run? Image source: Apple.

Much of the intense speculation in recent years that Apple was about to launch a TV set can be attributed to one sentence written by one man. Walter Isaacson quoted Steve Jobs as saying he had "finally cracked" TV. You've heard this by now.

Yet, here we are nearly four years after Jobs' death, and there's still no Apple TV set to be found. There aren't even any recent supply chain leaks, rumors, or "people familiar with the matter" suggesting that the mythical Apple TV set will ever become a reality.

Maybe investors have had it wrong all this time. Perhaps Apple never wanted to enter the TV market, and has a different idea altogether.

Speaking of "people familiar with the matter"The Wall Street Journal is reporting that Apple is in talks to create a slimmer bundle that includes approximately 25 different channels, including headliners like Disney's ABC, CBS, and FOX. It would also include related subsidiary channels like ESPN and FX. Notably absent would be Comcast and its NBC channels. That's because things have apparently soured between Apple and Comcast.

The service is expected to cost between $30 and $40 per month, and would be available on Apple TV (the current streaming box) as well as iOS devices. Apple will reportedly announce the service in June (likely at WWDC) and launch in September (likely alongside the next iPhone).

Why it makes perfect senseApple has long said that it feels that it can contribute to evolving the TV experience. This is clearly an antiquated industry that's ripe for disruption on numerous levels. But Apple can have a positive influence on the industry without directly building a full-blown TV set.

Image source: Apple.

The TV market is very different than any market that Apple has ever participated in, and not in a good way. Apple generates recurring revenue from hardware upgrade cycles within its loyal customer base. TVs have the longest upgrade cycles within consumer electronics, far longer than smartphones, tablets, or PCs. With those long upgrade cycles comes greater inventory risk as the underlying display technologies advance.

TVs also typically face rapid hardware commoditization, since there is no strong differentiator. Apple typically combats commoditization with vertical integration, tying its hardware to its software platform. That generally gives it pricing power.

In fact, Apple would be effectively flexing its pricing power muscles. You can already get a stand-alone basic TV package for $30 to $40 from the cable companies, which actually gets you a lot more than just 25 channels. Apple would likely justify its premium with an intuitive user interface, simpler subscription and cancellation process, and seamless integration with other iOS devices.

Plus, Apple isn't going to charge you a ridiculous $10 per month set-top box rental fee (after you buy a $69 Apple TV, that is), among other fees that cable operators like to sneak into your bill, or try to bait-and-switch you with promotional rates tied to service contracts. Insert nightmarish anecdote about a Comcast customer trying to cancel service here.

Apple's rumored service sounds comparable toDISH Network's new Sling TV service, which offers a handful of the most popular live channels on a wide range of devices at attractive price points.

By using the existing Apple TV and iOS devices as the conduits, Apple can accomplish what it wants without the hassle of dealing with the unappealing TV market itself.

Who needs hardware profits?That also means we could be talking about a fairly low-margin and low-volume business in terms of hardware. Apple has sold 25 million Apple TV units to date after the product was launched in September 2010 (compared to 591 million iPhones and 251 million iPads over the same timeframe).

Tim Cook frequently talks about how Apple creates its magic at the intersection of hardware, software, and services, but this would be a case of the company focusing on software and services without seeking much in the way of hardware profits.

Instead, the rumored service would reinforce Apple's broader ecosystem, strengthening the "halo" that surrounds all of its products.

The not-so-Holy GrailOnce upon a time, an a-la-carte pricing model for cable channels was considered the Holy Grail among consumers. Many thought this was what Apple wanted, unbundling individual channels much like how it unbundled individual songs from albums with iTunes over a decade ago.

However, the a-la-carte model for channels simply isn't economically viable. Sure, all of the mainstream popular channels would be fine, and could even benefit from a paradigm shift, but many niche channels only survive because they're bundled. How many people do you know that regularly tune in to Jewelry TV (this is an actual channel) and would pay for it a-la-carte? That's even more potent when you acknowledge that these niche channels would have to increase prices to compensate for lower volumes of dedicated subscribers compared to bundled subscribers.

Image source: Apple.

In essence, these lesser-known channels are subsidized by viewers of other niche channels as well as by viewers of the mainstream channels. Take away these subsidies and these channels may not survive. This is why a smaller bundle is a good compromise. By including the most popular channels, Apple is targeting the mainstream consumer. Jewelry enthusiasts need not apply (Apple has another product for them anyway). Well, the mainstream consumer just so happens to be precisely the crowd that Apple has always gone after.

Apple once pointed out that it's easy to confuse abundance with choice. Do you really need or even want hundreds of channels? Probably not, since it's a safe bet that you wouldn't watch the vast majority of them anyway.

Sign me up, Apple.

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Evan Niu, CFA owns shares of Apple and Walt Disney. The Motley Fool recommends Apple and Walt Disney. The Motley Fool owns shares of Apple and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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