The Content Case for the new Apple TV

Apple's entrance into the living room is an important bulkhead for their content distribution strategy

Over the last several years Apple’s entrance into the living room with the Apple TV has emerged as an important bulkhead for their content distribution strategy.  Of $170B in revenue that Apple has generated over the last four quarters, it has generated $20B in revenue from it’s content business.  This is spread over software, books, games, other apps, music and video:

Over the last 12 months Apple has sold 6.5M Apple TVs – half of the total number sold since the product was launched in 2007.  Today, the device supports three core types of Apple content – Movies, Television shows and Music.  This content accounts for just 37% of the $20B Apple generates from content; this leaves a massive portion of Apple’s content portfolio outside of the living room.

With the introduction of iOS7 – Apple’s new mobile operating system – Apple has revealed that they are ready to tackle this opportunity.  iOS7 introduced three new developer frameworks – one focused on 2D animation (SpriteKit), one that enables a new AirDrop feature and one that enables third-party hardware game controllers.  Its this third framework mentioned during Apple’s keynote that provides a particular hint at the evolution of Apple’s content strategy.

Just Four Lights

Apple’s game controller framework supports three distinct types of controllers:

Apple controllers

The first two game controllers seem as though they are natural, niche extensions for game playing on Apple’s devices.  The third – the Standalone Extended Gamepad (SEG) however doesn’t appear to fit particularly well with Apple’s current hardware lineup.  The SEG controller is modelled after many existing console controllers with joysticks and gamepads – these could feasibly interact with existing iOS devices.  These game controllers also introduce four LED lights however that don’t fit as well.

Four LED lights on the controller indicate to game players which player they are in a specific game.  Naturally this indicator supports up to four players on the same device at once. This is where the existing iOS hardware is left wanting.  Rarely – if ever – will there be a case where four players are playing a game on a single iPhone, iPad or even iMac.  Rather, this type of functionality is essentially only useful for the console market.

The implication of this is pretty dramatic – the next evolution of Apple TV will run on iOS7, opening up to the living room an ecosystem of Apps – including potentially network television – and games.

The Opportunity

Apple is able to charge more for content – namely apps – sold on devices with larger screens and higher powered hardware. iPad and iPhone apps are prime examples of this; the average cost of an iPad app is $3.17 compared to an iPhone app that costs just $2.15 (great data from Distimo – 2012). The broader game console industry has even higher spending expectations with the average American player spending on average $10.40 monthly on video game content (EEDAR Research).  This is more each month than the average iOS gamer spends in an entire year. Clearly there is a great opportunity to sell more content on the Apple TV.

Competitors have identified the opportunity for a lightweight, mass market content distribution box for the TV. Many TV manufacturers and startups have attempted to build custom end solutions with limited success. Nintendo created one of the first successful TV-top connected boxes targeted beyond the traditional gamer segment with the introduction of the Wii; a console that focused on a low price tag and wider segments. On Sept. 9th Sony entered the ring with a low-end, mass-market product – the Playstation Vita TV – a box that sells for under a $100 and connects to both the internet for a variety of game and non-game content and Vita game cartridges. Other players such has Microsoft have noticeably expanded their focus in the last year from hardcore gamers to the more mainstream consumer with the introduction of Operating system features such as Skype to their upcoming boxes.

The console battle appears to be shifting away from a graphics and processor arms-race to one focused on the breadth and accessibility of content; a race Apple is much better poised to succeed in on the back of iOS.

Closing Thoughts

The line between the computer, phone, tablet and TV is becoming increasingly small as all these screens evolve to become places where users can consume and produce a range of content from common backends. Just as telecoms have faced the increasing reality of being a dumb pipe, today’s TV content distributors – networks and access providers – will need to adapt to new marketplaces and platforms where users can access content. The TV screen is primed for these new marketplaces of content just as the computer, phone and tablet were before it.