Thursday, September 14, 2006

Should Motorola or Cisco/S.A. Be Worried About Apple?

Apple did something very uncharacteristic of them in their much ballyhooed "It's Showtime" event. They preannounced a product two quarters before it will ship. Forget the iPod announcements, the product code named, iTV, has the potential to do what Microsoft could not with Media Center: replace the set-top box. There are other appliance-type boxes out in the market that download and store content for playback, but what makes iTV a serious contender is that it comes from Apple.

Anyone in marketing or technology realizes that Apple has mastered the art of marketing. They are able to gain an almost religious following because they understand the concept of whole product. For those of you not familiar with marketing and product management concepts, the whole product is not just a specific box, piece of software, or service. It includes the whole ecosystem surrounding the product that delivers utility to the consumer. Couple this concept with a coolness factor, add some mystique, and you have a category hit on your hands.

Apple's 75% plus marketshare in portable music players is no mistake. Apple successfully accomplishes what Microsoft struggles to do...they made it easy for the average consumer to buy, store, and play music on the go even with mediocre hardware quality. You do not have to be a computer genius with knowledge of MP3 and AAC encoding, USB, virtual drives, and digital rights management (DRM) to take your music on the go. All you have to do is to plug your iPod into the supplied cables, fire up iTunes, and purchase your music at the iTunes Music Store. Apple takes care of the rest. While the geeks and techies were arguing about DRM, encoding restrictions, and batteries, consumers were downloading millions of songs from the iTunes Music Store. They make cool products. Even the packaging is cool. This attention to design is a must for any consumer product. Apple's marketing genius combined with a thorough understanding of the process consumers use to purchase content makes them envy of any product manager trying to introduce a successful new product in an overcrowded marketplace. You bet several product managers in Redmond are green with envy. It is these magic beans that makes the iTV a potential market disrupter to the set-top box market.

The iTV picks up where the set-top box leaves off. A consumer can purchase this box, available 1Q07, for $299, plug it in, turn it on, and start enjoying rich multimedia on their TV and audio system. No external clunky PC with Microsoft's Media Center is required. Just a nice, neat appliance with a sexy user interface delivering movies, TV shows, music, podcasts, and photos. Nothing from Motorola or Scientific Atlanta even comes close to date. TiVo and Moxy are contenders but they are missing the mobility/portability factor.

Content comes through the iTV's built-in wireless network interface, probably based on 802.11a/b/g until 802.11n is fully standardized, so it can be placed in the entertainment center without trying to figure out how to run Cat5 cable to it. Apple did not disclose whether a hard drive was built in to the unit so I assume that a modest one is included so it could store and display content without the help of another PC. If not, then one can easily be connected through the USB 2.0 port on the back of the unit. Otherwise, media can be streamed from any PC or Mac running iTunes sharing their content. It has component video or HDMI connectors for connecting to a conventional or High Definition TV set.

The user interface is characteristically Apple. It looks like FrontRow supercharged and crossed with Media Center. Movies, TV shows, music, podcasts, and photos on the iTV or any other computer running iTunes are available without DRM worries. You can purchase a TV show from the iTunes Music Store that downloads to iTV but you don't have time to watch it all. Just fire up iTunes on your PC and move it to your iPod. Maybe you can connect the iPod to the iTV. Take that Comcast! I do this all of the time with podcasts. I start listening to them on the PC, then move to the living room where they are streamed to my AirPort Express before finishing them up on my phone while doing yard work.

So what makes the iTV a threat to the traditional set-top box? There are technical, marketing, and business reasons. Let me explain:

  1. Apple's ability to sell a whole product or whole solution is a proven formula for success. They provide the complete ecosystem from providing access to the content all the way to enjoying the content in a simple almost non-technical way that brings the product into the mainstream beyond the early adopters.
  2. Apple is a name brand with a reputation for cool and quality products. Their reputation for quality and innovation is beginning to surpass Sony's! Can you say, marketing muscle?
  3. Movies, TV programs, music, podcasts, and pictures can be enjoyed on a PC, iPod, or iTV. It is truly portable and mobile. The cablecos and telcos are still wrestling with the mobility/portability problem. Verizon is just beginning to lighten up and allow recorded programs to be viewed on multiple TV with their new Motorola set-top boxes, but not on computers.
  4. They provide integrated content delivery beyond video. Apple is not dependent on cablecos or telcos to provide access to content. They have their own deals with content providers like Disney. Although this may threaten cablecos and telcos, they are missing real-time content.
  5. The iTV is similar to a set-top box so users will immediately understand how to connect it to their entertainment system. No external PC with Microsoft Windows OS that requires constant care.
  6. Internet content will now be available on the TV. Listen to downloaded music, podcasts, and video content from the Internet. Only TiVo has this capability now.

If Apple's marketing machine can leverage these benefits without directly taking on the video content distributors, then they will have their next hit on their hands and drive content revenue through iTunes. I know that I will buy one if they do it right. Also, I'll cancel my NetFlix subscription and stop purchasing OnDemand movies.

Adding a tuner and supporting OpenCable Application Platform (OCAP), or minimally CableCARDS, would provide real-time video content that the iTV is missing. With the DVR and on-screen program guide, Apple now has a superior solution to Motorola and Cisco even with their TiVo and Digeo partnerships. The cable companies will quickly jump on the bandwagon because they would no longer have to supply costly set-top boxes; thereby, reducing their capital and operating expenses. This is the objective that they have been driving towards for years. Consumers would love it because they could save on their cable bill and most importantly have a choice where to acquire content. If the cable companies are worried about Apple cutting into their content revenue, I am sure that Apple would create cableco specific branches of the iTunes Music store that integrated with the cableco on-demand content.

I am confident that Jobs and company have already thought of adding these features, and they will include a version with integrated cable with the release of iTV. Apple's understanding of marketing combined with content mobility gives them the opportunity to be the first successful consumer purchased set-top box. Motorola and Cisco have a long way to go to catch up in features and cost. Look for some serious competition in this market in 2007-8.

If Apple can strike a deal with Comcast, I will gladly relinquish my Motorola DCT6412 (soon to be a DCT3412) and move my AirPort Express to the bedroom. Can I have it by February Steve?

All pictures in this article courtesy of Engadget.


  1. I don't understand why excellent technical comments must have editing problems and be full of simple English grammar mistakes. Here are a few examples from this artcile:
    1. The iTV picture covers a whole paragraph
    2. The couple this concept with a coolness factor ..what is "the couple"?
    3. Apple successfully did is what Microsoft struggles to do..shouldn't the sentence start with "What"?
    4. The iTV is simple like a set-top box it does more than just video. Isn't it mising a 'but' in the middle of the sentence ?

    Shlomo Liberman

  2. Dear Shlomo:

    Thank you for your kind words and critique of my grammar. There is no excuse for shoddy editing. I was so excited about writing this article that I tried to squeeze it in between two other commitments without my proper editing tools. The formatting of the picture was screwy. The new beta treats pictures differently and I was editing HTML natively. I fixed that problem along with your comments and some other changes.

    Hopefully I have fixed most of the problems and promise to be more diligent in the future. Please feel free to comment or call me out again in the future. I strive not only for content, but proper use of English.

    Thanks for reading,

  3. Mark,

    I agree with you that the Apple iTV device has the potential to be very disruptive to the set-top business.

    However, there are two points you make in your article that require a lot of hand waving:

    1. Adding a tuner and supporting OCAP, or minimally Cablecards - this is not trial nor cheap. Once you do this, your basically back at the set-top that Motorola and Cisco / S-A are creating. To be useful at all, they would have to support a dual stream cablecard, and what are you going to use for your DVR? Are you going to stream the data back to the computer that's streaming iTunes? Now you got compressed HD video going in both directions over wireless.

    2. Cable companies will quickly jump on the bandwagon - this will ONLY happen if the device were OCAP compliant. The cable companies believe very strongly that the key to retaining subscribers is to have full control over the "experience". The only way for them to do this AND support devices from a variety of sources and manufactuers is OCAP. To support OCAP, you are back at point 1, which is bascially turning the iTV device into a set-top - with or without a hard-drive.

  4. You are correct that I made a major assumption putting a dual tuner, OCAP compliant software, and DVR functionality in the iTV. The most likely scenario would be for Apple to release the first version of the iTV without set-top box capability. It will see limited success with iPod enthusiasts because its major limitation is lack of a hard drive allowing it to operate as a standalone device. Later they will realease a version with a hard disk just as they have different versions of the iPod.

    Later this year, OCAP compliant boxes will enter the market with many of the features of iTV. Why buy iTV when I can get the same features for a small rental fee from my cable provider? Pioneer will have an OCAP complaint box with TiVo software later this year and Comcast plans to deploy it. The TiVo software has the same capabilities of the iTV with the exception of purchasing content from iTunes and mobility.

    Apple is smart. They realize that they will need a version with a hard drive to operate free from a computer. Also, they realize that competition from TiVo, Moxi, and the large set-top box manufacturers will limit their success. These pressures will drive them to forge an alliance with a cable company, potentially Charter Communications, where they will announce a version of iTV with a 200 GB hard drive, dual HD tuners, OCAP compliant software, and a Charter branded version of iTunes Music Store.

    Yes this is an expensive proposition, but they are already investing big bucks into iTV. iTV is more than an iPod accessory. It is a new appliance that they hope will have the acceptance that the iPod enjoys.

    Without this plan, other set-top box suppliers will negate the need for iTV. They already plan to support OCAP, MoCA, and DRM that will allow sharing with other household appliances and the PC. I don't see how Apple can move forward without it.

    What are your thoughts?