Apple’s next big thing (2): The end of TV as we know it

Four weeks ago, on September 7th, Steve Jobs unveiled not only the iPod nano, but also Apple’s latest strategic weapon:

“This next statistic we’ve never shared with anybody before: How many accounts do we have on iTunes? How many accounts? We have just crossed 10 million accounts on iTunes. And they come with credit cards. (…) And with 10 million accounts, that makes iTunes one of the largest internet stores around. (…) iTunes may be the second largest internet store behind only Amazon.”

You might ask, “Where’s the weapon”?

Apple has now accumulated 10 million customer accounts and every single customer is able to buy products from Apple by a single click on the mouse button. No painstaking registration procedures, no worries about sending credit card data over the Internet… – heaven on earth for unpremeditated buying. A low barrier for its customers between the desire to buy and an actual purchase: that’s what every retailer lusts after.

Those 10 million customer accounts constitute what management scholars refer to as strategic resource, i.e. a resource that is valuable, idiosyncratic, imperfectly imitable, and imperfectly substitutable. Strategic resources build the core of successful businesses.

But how can Apple leverage this important asset? What kind of new products or services is Apple going to sell to its 10 million Music Store customers?

Is Apple going to compete with Amazon and start selling books, CDs and DVDs? That seems unlikely. One of Apple’s competitive advantages is in delivering intangible digital products over the Internet (e.g. iTunes Music Store, Quicktime movie trailer portal). Thus it should be some kind of digital product or service.

As Apple is rumored to work on an “iPod video”, let’s assume that the missing intangible product is: movies.

The question is: How could Apple gain a competitive advantage over its established competitors in the movie business, namely television, pay-TV, and video stores?

The answer can be derived from analyzing the different strategic options for entering this market. The movie market can be systematized by using two criteria:

  1. Does the consumer buy or rent the content?
  2. Does the consumer pay for each movie “a la carte” or does he pay a subscription-fee?

Thus four generic options are available:

  1. Rent & Subscription: Apple could act like a pay-TV provider; the consumer would have to pay a monthly fee to get access to a limited or unlimeted catalog of content.
  2. Buy & A la Carte: Apple could sell movies the same way they sell music over the iTunes Music Store.
  3. Buy & Subscription: Apple could port the book club’s business model to the Internet. Customers make a certain buying commitment, e.g. to buy “one download per months for $9,99” or “five downloads per quarter for $39,90”.
  4. Rent & A la Carte: Apple could offer content on a “pay-per-view”-basis. Customers would choose movies from a broad catalog of content and were allowed to watch them for a certain period of time.

strategic options movie download store

For several reasons the fourth model (Rent & A la Carte) seems to be the most attractive:

  • Apple ties in an established consumer behavior: renting movies through a video store.
  • Apple offers a significant customer benefit: An online download store could feature a larger catalog than any traditional video store; the desired movie would never be out; and the store would be just a few feet away from the sofa.
  • Direct competition with pay-TV providers on a saturated pay-TV market is avoided. It may be easier to win new customers with an innovative service than to alienate them from established competitors.
  • The decision to watch a movie is a spontaneous decision. Many consumers could prefer an easy-to-use “a la carte”-service over a pay-TV subscription or over the scheduled offerings of a TV-channel.
  • In the age of globalization an increasing number of people live and work permanently or temporarily far from home. Thus there’s a growing demand for globally accessible regional content.
  • The market for niche content is undeveloped. A globally accessible store platform and low publishing costs could build a profitable market for various specialized content providers (e.g. a Chess-Channel, a Badminton-Channel etc.)
  • In contrast to the cable companies’ fibre connections the Internet already exists; capital investments for Apple are low.
  • The “A la carte” model is based upon Apple’s strategic “10 million customers” resource. It would be difficult for competitors to imitate Apple’s strategy.

This could be the end of video stores, pay-TV and television as we know it.

7 Responses to “Apple’s next big thing (2): The end of TV as we know it”

  1. John Says:

    For technical reasons, it may be premature to look for a movie version of iTMS. However, this could work very well for shorter, lower resolution videos. Television shows would work here. A half hour TV show compresses down to well under 300MB. To avoid head to head competition with broadcast TV or cable they could offer shows on-line after a short delay. For example, The Daily Show after a one week delay, the evening news a day later, maybe a weekly news recap. In a few years this could grow to include high definition programs and movies. (HD would work well now for some people but I’m guessing the larger group of people won’t have a fast enough broadband for a while.)

  2. Eric Pollitt Says:

    So many reports have got it wrong. The natural transition of a video enabled iPod is technically feasible, but will users love the experiance?

    A video iPod is like a calculator watch — doable, but not necessarily usable or desirable to the user. Think about this for a minute: calculator watch.

    OK. Now let’s move on the the model of iTunes and iPod. The “true” natural transistion for video content is not only a new video section on iTunes (most likely _not_ another application) and a player. However, the player is what you already have: a TV.

    So, Apple’s new “Video iPod” pretty much has to be either a set-top box, or device to get video content from the computer to the player (e.g., AirTunes). So, this is the same model — a jukebox / store and player.

    This will allow Apple to get a foot into the living room and to possible start selling advertising on users televisions. This _could_ place Apple on track to be the next Viacom by supplementing cable and satellite networks and selling advertising along with content. Apple to be the next Google? Perhaps.

  3. Carl Says:

    Thank you for a terrific analysis. I agree with your conclusion that Apple will follow the iTunes model, but I also note that NetFlix has been quite successful with the “book club” model as well. There is clearly room for other models to be tried in the future.

    Again, I very much enjoyed your article. Keep up the good work.

  4. AVCfan Says:

    FYI, is launching soon with A La Carte downloads of AVC/H.264 MP4 video. The downloads should be compatible with the upcoming video iPod.

  5. Roger Says:

    Movies over broadband has some problems but they could be downloaded over night like Podcast. The overnight would hurt the impuls factor. The Podcast method would work for some of the TV content.

  6. Spyinthesky Says:

    Spot on. SJ has constantly ridiculed one aspect of the ‘vpod’ idea and that is that people do not want to watch video or movies on a small screen, or of course on a smoke screen. While he has continually expressed this opinion the less bright have presumed that this precludes a video capable iPod.

    Of course it does nothing of the sort it dampens speculation (successfully as it turned out) while work on the actual concept continued a pace the results of which we will see to day and I suspect will be of a nature outlined in your article. Apple has to get from here (impractical movie download service for the majority, especially utilizing a vPod) to the future (movies on the go viewing all forms of video content as and when you like both in home and on the move). It simply can’t wait till B is practical and popular to start this transition, it has to take action now (or at least soon).

    Therefore it does so with a gradual series of steps using the more practical forms of video content and effectively creating a whole platform to sell and develop the concept as a whole. All the practical elements will be built into the computers , Airport will be upgraded software provided where necessary, seemless conection to other media devices gradually introduced and possibly even a dedicated media server based on the Mini. Music videos will be the major player at the moment TV content (the BBC cooperation is extremely significant here) and video blogs a close second and then other more intensive content as it develops over time (at least concerning the mobile aspects of this platform). SJ was quite right in down playing the vPod concept for I suspect at this stage it will be more an adjunct to this rather than the star- well in reality but of course in marketing terms that is not the point.

  7. Says:

    “…I think there is a world market for maybe five computers…” - Thomas Watson, chairman of IBM, 1943.
    LoL !