Will Apple Introduce Its Own TV or Just Improve Apple TV?

Will there be a new TV in Apple's future - the so called iTV - or will Apple upgrade its set-top-box, the Apple TV. DigiTimes claims that Apple was ordering 32" and 37" TVs for its new product line. Unfortunately, DigiTimes is not always an accurate fortuneteller. Why would Apple get involved directly in the TV business? Isn't it easier to make a better set-top-box that can be used on any TV?

Before deciding what and how the iTV might work, let's ask a few questions about the market, who the consumer is, and what technology is available.

How Big Is the Market?

Price is the key to any market. Sure, the price of a 32" or 37" TVs has dropped, but it is still several hundred dollars. I checked a few prices, and the 32" size is selling between $300 and $500, while the larger 37" sells for between $350 and $600.

There is already huge pressure on the price of a new LCD TV. Demand is down, and the price has dropped. Apple could try to break into the market by selling a TV for less, but to do that, Apple would have to take a loss. That doesn't sound like Apple.

Besides, becoming the low price leader hardly has any benefits for Apple's brand. Apple wants to add value to its product with extra hardware details and software. This would push any Apple product to the top end of the price range. That would restrict the total number sold even if it was offset by value enhancements.

The TV market caters to a lot of different demands. Some rooms can only fit a small TV, while other rooms make even the 37" size too small to be effective. If Apple only sells its new product matched to two sizes, there will be a lot of buyer who will be left out.

Would it be safe for Apple to ignore all the possible customers who need a different size? All other TV manufacturers cover a large range of sizes just so they don't leave customers needing to go to the competition. What could Apple offer in a new TV that would make a consumer give up their current 62" TV?

The iTV would not be like the iPod that took over the early MP3 market. It is more like the smartphone market that the first iPhone competed in. Even with plenty of smartphones available, the iPhone delivered a better experience and brought value with the supply of inexpensive apps.

One big difference is that your current TV has plenty of content options. There are game consoles, cable, DVD and Blu-ray players, satellite, and Internet and content streaming boxes (like the current Apple TV). These work with any TV, and this open up a larger market than just those people wanting to get a new TV.

This is where a set-top-box - like the Apple TV - makes more sense for Apple. It is cheap in comparison. It is only $99. For an Apple product, the $99 price is very low, but for the set-top-box market segment, it is average.

Reports are that Apple already has 32% of the set-top-box market, or an estimated 4 million sold in 2011. That's great for that market, but it makes the Apple TV a big fish in a small pond. It does show that Apple can compete in this segment if it brings enough value.

Obviously, the missing piece is bringing enough value to offset the price. Whether it is $99 or $999, Apple has to deliver value.

Who Will Buy?

When Apple first released the iPod and iTunes, they were released for Mac users only. This created a fan based to rave over the device before releasing it to the rest of the world on Windows. Once the momentum was started, they became impossible to stop.

Today, Apple is in a very different place. It already has incredible product momentum. The iPhone, iPod touch, and iPad are already selling in the millions each quarter. Releasing a new iOS compatible TV product has a huge capacity for growth that the Mac-only iPod didn't have. There are easily between 50-100 million iOS users around the world.

You also have a group of users trained in a particular type of interaction that can be leveraged. Apple will appeal to this group the most, because any interaction will be based on this training.

What is the Latest Technology?

Apple introduced an incredible piece of technology to millions of users, Siri. For those who already have used it, you know how well Siri does or does not respond to your voice. It can find restaurants, tell you its favorite color, and help you with natural languages searches (you don't have to type the request in a Google search bar).

If you want to cut through all the clutter of screens and menu options and go directly to the show you want to watch, then nothing would seem better than to ask Siri. After a few dozen requests, you could start having Siri recommend choices based on your previous requests. You could say, "Siri what's a good movie?" Siri isn't ready for movie questions yet, but Apple could add these types of searches if it wanted.

The Missing Pieces

If Apple already has a huge customer base and great technology, then what is missing is a way to increase the value of the product so that whatever Apple charges it will be worth the connivance.

The public beta of Siri will lead to a more accurate version of Siri that will give Apple the best product on the market to deliver instant (and reasonable accurate) selection of the movie, TV show, or channel of their choice based on simple voice command. That brings a measure of value that will take awhile to be replicated by a competitor.*

The second piece is having the available content. Apple has added movies and shows to its iTunes library for years. The addition of streaming content gave Apple the extra boost in the eyes of Hollywood by delivering movies only for viewing and not for sale that the Hollywood studios want. This will give the studios more comfort to offer more material, because at the end of the day nothing but a temporary license was sold, and the content can be pulled or priced higher at any time.

Don't forget that Apple has a billion dollar server facility in North Carolina just waiting to deliver content. Apple has been investing in the backend infrastructure to handle this type of delivery.

Another content option will be the use of iOS apps for your TV. Many are designed to require multitouch. That may work great for a personal device that you hold in one hand. It will not work for a 37" screen. The flip side is that it could give developers a new way to sell their existing apps updated for the new format - like how you can buy iPad apps separate from iPhone apps.

All of this is great, and some will buy an iTV just to get these features integrated with no extra cords. For me and millions of others, we are going to need more. One big value boost would be the option to subscribe to selected cable content without the need to purchase an expensive cable package. That is a $50 savings to my home budget if I could drop cable and just subscribe to the channels that I want.

Apple could be negotiating for the likes of ESPN, Disney, or ABC. The more channels available, the more people will buy different content. If they can offer enough that you no longer need Netflix, TimeWarner, or Dishnetwork, the more consumer dollars that could be spent through iTunes. Once they can get momentum, their ability to negotiate more contracts will be easier. Who would want to be left out once it became popular?

The Risks

Apple has to hit this out of the park on its first try. It cannot let the competition slowly catch up. It cannot let partners walk away if adding customers is too slow that interest wanes before critical mass is achieved. It can't have people joke about how bad the search results from Siri are, or that streaming movies is slow.

What Will It Be Then?

Based on these facts, I see Apple delivering an updated Apple TV for the sheer pricing advantage it gives. It will want to sell millions ASAP. The update doesn't have to be costly new hardware, but better content options, cable channels, and apps. This could be done with a software update with unseen legal contract negotiation in the background.

With so many who already own an iPhone or iPad, the use of your own iOS device as the remote control. For those who don't already have one, then maybe for a few dollars more you get a stripped down iPod touch as your remote. By mirroring the content on the TV screen, you could maintain the multitouch interface that people have been trained to use.

The hardware doesn't have to be expensive. The processing power won't be great. It will have integrated graphics to supply HD TV, but nothing fancy like 3D. It will have either a small hard drive or flash drive to hold a few hours of TV at most. It will not be designed for storage.

With the low power requirement, this could all be packaged into an iTV as a premium product. I wouldn't expect Apple to sell millions, but it would give them a position to experiment with finding better solutions for tomorrow and allow them to compete with other integrated options that may be planned by Google or Amazon.

If Apple can sell a $999 computer monitor, then it can sell a $600 to $700 TV. At that price, if they just sell 10,000 they add $6 to $7 million in sales - and at a 30% margin, that is an extra $1.8-$2.1 million in profit. That is enough reason to start a new project.

The sad thing is for any other company earning an extra $18-$21 million would be considered great. For Apple, the iTV alone isn't enough for success. That's why an improved Apple TV is needed to drive the success out to as many homes as possible. Adoption of the service is just as important as any money that will be made with the release.

* Nuance just released Dragon TV speech recognition software to be licensed for use on set-top-boxes. I guess Apple won't have a complete advantage with Siri.