Apple TV Took Eight Years to Return to the Spotlight. Why Is Apple's TV Plan So Slow?

On TV, Apple Wants More Than a Little Box of Internet Content

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Until six months ago, Apple TV barely registered.

After eight years, this set-top media box, once billed as a "DVD killer," still does little more than play videos from iTunes and stream videos from your phone or computer over AirPlay. It also carries a few dozen partner video services, free or paid, but each one needs its own account login.

Apple TV actually arrived on the same day as the iPhone. Since 2007 the iPhone has reached its eighth generation, transformed in both design and features. Apple TV, by contrast, has essentially stood still since 2010, apart from a price cut to US$69. You can barely even find its product page on Apple's website.

But since the start of this year, Apple TV has drawn attention again.

In March, The Wall Street Journal learned from people familiar with the matter that Apple planned to launch an internet TV bundle of 25 channels, including ABC, CBS, FOX and ESPN.

Since then, news about the bundle and new Apple TV hardware has kept coming. This week there were even reports that Apple plans to hire people in Hollywood to build its own video production team.

If all goes as expected, Apple's upcoming autumn event will bring a more powerful new Apple TV that can be controlled with Siri, which matches the "hint" in the invitation. And the box is only one step in Apple's move into television.

So why has Apple TV evolved so slowly?

Only Three Generations of Apple TV Since 2007

At the Macworld conference on January 9, 2007, Steve Jobs unveiled a set-top box called Apple TV. Like its rivals at the time, it was a bulky machine with a built-in 40GB hard drive. At the same event, Apple also launched the first iPhone.

The first-generation Apple TV

In September 2010 came the second-generation Apple TV, about a quarter the size of the first and a third of the price. The hard drive was gone, replaced by 8GB of flash memory. The new version put more weight on playing online content.

In March 2012, the third-generation Apple TV arrived alongside the third-generation iPad. Its A4 processor was upgraded to an A5, it added support for 1080p HD video, and it ran iOS 5.1.

The third-generation Apple TV

That is every hardware change Apple TV has had in eight years. Third-party content sources have slowly multiplied, reaching 62 this year, including Netflix, YouTube and Sky News, but Apple TV still has no app store. Third-party content gets only a crude playback entry point.

Internet TV and Cable TV

In the US, tech companies already have some fairly successful internet TV businesses. According to Nielsen's figures, Netflix is the country's largest streaming provider, with more than 36% of the market, followed by Amazon with 13%.

Netflix, founded in 1997, started out renting DVDs online and moved into online video in 2007. For US$8.99 a month, its users can watch every show and movie in its library. In 2014, Netflix spent US$3 billion buying video content, and it also puts heavy weight on original series, such as the hugely successful House of Cards.

Amazon entered the market in 2011 and has spent more each year buying and producing TV shows. This year, when the former creators of Top Gear wanted to make a new show, Amazon offered US$250 million for 36 episodes over three years.

Netflix and Amazon work more like specialized pay-TV channels, much like HBO. For under US$10 a month, users can watch as many series and movies as they like.

But when people turn on the TV, they want more than series and movies. Sports and local news are essential to viewers. That is where traditional TV operators have the edge.

American television has two tiers. The first is broadcast TV, sent over the air and by broadcast satellite, and free to receive. The continental US now has more than 50 national broadcast networks, but the largest are still the big three: ABC, CBS and NBC. These channels live on advertising.

The second tier is cable TV, including ESPN, TNT, Disney, CNN and others. Their signals reach homes by cable, and they make money from household subscription fees, commercial breaks and DVD sales of their series.

In the US, operators such as Time Warner, Comcast and Dish bundle channels of varying appeal and sell them to viewers.

Take Time Warner: a 200-channel package that includes HBO costs US$79.99 a month. Each channel gets a cut of that revenue, sized by how much it draws viewers.

Such a package covers viewers' appetite for news, sports, entertainment, films and series. Next to it, what Netflix and Amazon offer is a smaller subset.

Netflix can attract viewers with its own House of Cards, but it cannot replace a cable package. That is a big reason the two are priced so differently.

And it is precisely the cable package that Apple's TV service wants to challenge.

Apple's TV Bundle

Not long after the first Apple TV came out, Jobs said Apple made it only as a "hobby," because no one had ever succeeded in this field.

Jobs later explained: "(Apple TV) was designed to be an accessory to iTunes and the user's computer. But that is not what users really need."

According to the biography Steve Jobs, Jobs's real plan for television was to tie together the DVD player, cable channels, users' various devices and iCloud, merging with the TV industry to make it part of Apple's ecosystem.

Netflix has solved only the "DVD player" piece of that.

After these remarks came out with Jobs's biography in 2011, some analysts even cited Apple supply-chain sources saying Apple had put together a team that spent years developing a TV set.

But a Wall Street Journal report this year shows the TV set project has been shelved, and Apple is trying other ways into the TV business. At the core is not hardware but content.

The TV subscription service revealed this year costs US$40 a month, and Apple will share the revenue with the channels that supply content. Apple reportedly meant to launch the streaming service this year, but stalled talks with CBS have pushed it back to 2016.

Piecing the reports together, Apple's TV bundle will include:

• Original series and even films. Later this year, Apple will use a headhunting firm to hire people in Hollywood for its own production team, which is set to start work next year.
• Sports. ESPN and MLB (Major League Baseball) are long-time Apple partners. When the first iPad launched in 2010, MLB was one of the few partners to demonstrate game and video apps on stage. More recently, Cook was photographed meeting the NFL (National Football League) commissioner. This very week, the NFL announced it was joining Apple TV.
• News, from the major networks down to local stations. Apple is in talks with ABC, CBS, NBC and Fox. Besides bringing these networks' national news into Apple's bundle, they will also help Apple partner with local news stations across the country, an important way ordinary people learn what is happening around them.

The whole online video service sits within Apple's software and internet services division, Apple's only relatively independent business unit, which also houses Music, News, iBooks and others.

The division's senior vice president, Eddy Cue, will run Apple TV. He previously handled the iPhone's negotiations with carriers, and he also leads Apple Music.

Eddy Cue (right)

Apple's recent music and news services both aim to cover everything. Besides iTunes's huge existing catalog, the music service tries to bring in exchanges between musicians and fans.

The news service has big organizations such as The New York Times and BuzzFeed, and is also courting individual bloggers. Paste your blog's RSS feed into Apple's open back end and you become part of Apple News.

The new internet TV bundle looks set to follow the same approach.

New Apple TV Hardware Will Subsidize Content

According to information from 9to5Mac, the new Apple TV, code-named J34, will get a full hardware and software upgrade and launch on September 9.

• A slimmer design. The new Apple TV will be flatter and wider, with a plastic casing instead of metal.
• Better specs, with a dual-core A8 chip, on par with the previous iPhone.
• A new remote that doubles as a game controller.
• Siri and better search. This Apple TV will be the first to run a full-featured iOS 9.
• An app store. This may be Apple TV's most important change: it opens up a whole new world of apps and will attract new developers. Besides music and video, games will make up a large share of the store, turning Apple TV into a game console as well.
• A price increase. The fourth-generation Apple TV will cost US$149 or US$199, the highest price in the product line's history.

Either way, that is far above the old US$69 price. If Apple TV were only another gateway to the TV bundle, Apple would have no need to raise the price; it would want hardware as cheap as possible.

But as with the iPod, iPhone and MacBook, the hardware is more than a gateway to digital content. Its high price is still Apple's main source of profit. Because the hardware already earns enough, Apple can spend more on improving the software and winning over content partners.

The same business model looks likely to carry over to Apple's new TV service. The pricier Apple TV, along with iPhones, iPads and even MacBooks, can all serve as TV screens and subsidize the service with their revenue.

Apple's 300 Million Users Are Its Biggest Advantage in TV

Negotiations with partners matter especially for Apple, and it does hold some bargaining chips.

Apple TV sales cannot match the iPhone's, but at 25 million units, they still lead comparable products. According to BI's data, Apple TV held 43% of the US streaming-device market in 2014, ahead of Roku and Chromecast.

Tim Cook has promised that "services are platform-agnostic": the Music app runs not only on iPhone and iPad, and Apple will also release an Android beta of Apple Music. On that model, Apple's streaming video will not live on Apple TV alone either. It will surely support every iOS device and MacBook, and even rival platforms.

The iPhone alone sold 170 million units in 2014. iPad sales have fallen year after year, but many iPads remain in use. Add the large base of MacBook users, and Apple can offer its TV service 300 million outlets in all, a highly persuasive fact for content providers.

Apple is also clearly a richer partner than its rivals. Netflix's net profit in 2014 was US$260 million; Apple's over the same period was US$39.5 billion.

The Challenge Lies With Apple's Partners

As early as 2009, there were reports that Apple was negotiating with film and TV suppliers over a US$30-a-month subscription plan, but nothing came of it.

Even the current talks over the TV bundle have not gone well. The service, first set for September, has reportedly been delayed several times and has now slipped to 2016.

The partners' caution is easy to understand. From what has been disclosed so far, Apple's TV service is no worse than a cable package costing twice as much, and Apple can offer a service that spans phone, TV and computer. But the revenue share from cable packages is now most channels' main source of income.

According to The Information, a site known for scoops, Apple's US$40-a-month price has not won over TV content providers. To them, it is too low. A low price would hurt cable TV on one hand and cut into their revenue share on the other.

The music industry offers a warning. When iTunes launched in 2003, every major record label worked with Apple to sell MP3s and took a share of sales. Jobs persuaded the labels to accept selling songs one at a time, at the rock-bottom price of US$0.99 each.

But MP3 sales were not Apple's main source of income. The money came from the iPod. The labels' music made the iPod far more appealing, yet the labels never saw a cent from hardware sales. In the book Becoming Steve Jobs, the Sony executive who took part in the negotiations is described as bitterly regretting the deal he struck.

Twelve years on, Apple's strategy is no secret. No wonder the TV channels at the table want more.

Apple's on-and-off talks with TV channels have now gone on for at least six years, and Apple TV has stood still for just as long. This time, can Apple get what it wants and finally break into television?

Cover image from Hellorf