Uncommon Wisdom

Sep 15 2011   5:00PM GMT

What’s really behind Apple TV, and how it relates to Netflix/Qwikster

Tom Nolle Tom Nolle Profile: Tom Nolle

Apple is always a wonderful target for rumors, and the current one is that the company is getting into the TV business for real, launching not only a service but a line of TV sets that would link to it. The idea has the media agog, of course, but no matter who is supposed to be fielding streaming substitutes for channelized TV, there are formidable issues involved, both technical and non-technical. So far, there’s no indication that Apple is dealing with any of them.

The first technical problem is that about a quarter of U.S. households couldn’t receive HDTV streaming properly because their Internet connection is too slow. That means that to save money by cutting the cord, they’d actually have to spend more money. And there’s no guarantee that it would work for them anyway, because many broadband users streaming video at one time could congest networks. Users could also get whacked with usage-over-cap charges if they watched a lot of TV.

Secondly, multi-TV houses would be even more likely to have quality problems, because multiple streams would almost certainly create issues. Remember: You can’t easily buffer live delivery of channels because you’ll get behind the program schedule, so congestion events could be a disaster.

Then there’s the big non-technical problem, which is getting rights to the material in the first place. The networks own their own shows, and there is no legal obligation on their part to sell streaming of contemporaneous episodes, which would mean that the material available couldn’t be the normal channelized programming. Cutting the cord from the cable bill is one thing; cutting off your programs is another.

The final non-technical issue is advertising. Online ads in streaming video bring in 1/30th of the amount that broadcast commercials bring. If users had to pay the difference, it would cost more than $170 per month, which is way more than the cable bill.

So what’s really up here? I think it is very likely that Apple is creating a line of TVs that will be tightly integrated with iTunes. I think it is very unlikely — bordering on impossible — that they plan to field a streaming TV service aimed at competing with channelized TV.

In my view, the recent Verizon moves to beef up their video on demand (VoD) sales show Apple’s real aim — they’re going to leave channelized TV alone and go for VoD only, which means that their sets will still tune channelized TV and they won’t alter the basic economics of TV viewing very much.

Netflix launched another round of angst with a comment by the CEO that it would be virtually separating its DVD and streaming services, even to the point of separate websites. While this is upsetting their customers even more, it may reveal something about the motivation of the pricing changes.

I’m hearing that the negotiations for streaming rights are getting more complicated and Netflix doesn’t want to tie them too tightly with negotiations on DVD rental, which are a completely different issue. Thus, the current flap may be a signal that there’s a lot going on in streaming negotiation, which could be because Apple is now looking at the model a bit more closely. There’s been speculation all along that Apple’s iCloud should stream video; maybe it will.

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