Sunday, November 8, 2009

This Apple Defies Newton's Laws

The title sure seems apposite when viewed in light of Apple's latest quarterly results. Despite the all-round depressed economic environment, and declining consumer spend on TME products and services, Apple has managed to drive both top-line and bottom-line growth significantly. That such stellar results have come in what is usually considered a soft quarter of the year is testament to the twin growth engines of Macs and iPhones. With the iPhone having established itself as the benchmark in the smartphone space, and Macs increasingly finding mainstream acceptance, Apple now appears to be setting sights on creating future revenue streams.

In this backdrop, it is interesting to see how Apple is increasingly using content to create and sustain its future growth. While the iPhone with its staggering 100 K+ apps (leaving aside the quality/quantity debate) forms a key part of Apple's long-term competitive edge in the smartphone space, its attempts to use the iTunes platform as the gateway for digital content into the home merits a deeper look.

Recent reports indicate that Apple is now negotiating with TV networks on introducing a monthly subscription product. The idea being that for an amount of ~$30, consumers could get access to TV content through iTunes. Internet TV is steadily raising its profile, with the rising success of Hulu. However, treating it at par with traditional TV platforms is some time away. Broadcasters and cablecos have begun to feel threatened over such over the top services. However, Apple's entry has the potential to raise the stakes and enhance the reach of Internet TV services. Unlike a Hulu, which is largely viewed on PC (forgetting the Rokus of the world), the prospect of using iTunes as the enabling platform, as opposed to a device, poses a tricky situation for the TV networks. In putting iTunes as its front. Apple's leaving the door open for a device-agnostic future, where content can be viewed/purchased on PC/mobile/E-book/Netbook/what-have-you. With a rising interest from both device vendors and software players in embedding applications directly into next-generation large-screen TVs, the prospect of Apple embedding iTunes in to a TV doesn't sound that much more preposterous. Now compare this offering from Apple with that of a traditional operator like Comcast. And suddenly, Comcast's digital TV offerings sound obscene with monthly rentals of over $60! And yes, out goes the "TV Everywhere" initiative as well, given the fact that it requires customers to have a regular cable subscription in order to view the content on PC.

iTunes has had a more than significant role in hastening the demise of the traditional music labels, with its a la carte pricing model. If Apple is able to bring a similar proposition to the TV space, that could significantly impact cablecos who thrive on creating bundles and where a host of also-rans piggyback on one or two premium channels. Of course, there is the key issue of one of the large networks actually signing up with Apple, but it is more likely a question of when and not if anymore. Internet TV of course has still to better its overall user experience, given the significant bandwidth requirements, and the renewed debate in US and other developed economies on metering usage. And there's also the issue of shifting consumers to a different screen other than the TV. However, Apple does have a dark horse in there in the form of its relatively-neglected Apple TV line of products. A la carte pricing of TV channels, and a more robust Apple TV can precisely replicate Apple's success in the music business in TV content. And Apple's success is defined not by the margins that it is making in its music sales, but by the strong vertical control that it has over the customer experience, including billing and provisioning. Music labels who initially treated iTunes as just another distribution platform are now realizing that the middleman (Apple) today exerts more influence over the consumer, than them. Video could be the next market.
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