Apple TV: where's the money?

AppId is over the quota

In reaction to last week's technical speculation on the putative iTV, several commenters raised questions about content providers, distributors, and "pipes". Does iTV help or harm NBC, Netflix and Comcast? How does the [one last time: "putative"] iTV make money, and for whom?

Indeed, the column ignored an important – perhaps the most important -- part of the product: the money pump, AKA the business model. While Apple displays a sharp, fulfilling sense of aesthetics and simplicity in the design and implementation of new products, the company didn't reach the pinnacle of high-tech profitability by merely practising l'art pour l'art. Apple isn't deaf to a more practical art form: cash register music.

Starting with pipes, let's look at smartphone carriers as an analogy. When AT&T "won" exclusive iPhone distribution rights in the US, it appeared that it had traded its birthright. The iPhone bore no AT&T customisations, no stickers, no craplets. Worse, the carrier had to let Apple run the content distribution table with iTunes.

As we've since seen, the trade turned out well for AT&T. With more subscribers because it's an iPhone!, and with more revenue per customer, the device yields AT&T a $100 monthly ARPU, much higher than the $50+ industry average.

With this in mind, should we think of an exclusivity deal between Apple and a "TV carrier"? Perhaps another AT&T deal, this time for their TV and internet U-Verse line.

AT&T's network topology – a dedicated set of wires running into each subscriber's home – is ideal for voice and internet traffic. But the company is at a disadvantage when it comes to distributing several hundred TV channels, something a cable provider has no problem with. Comcast simply taps into the coax cable that passes by each house and feeds the same anonymous, multiplexed signal into the set-top box for authorisation and decoding. (This is an oversimplification and ignores the evolving topologies made possible by optical fibre … but we're still far from the dream of Fiber to the Home.

iTV could give AT&T an opportunity to take the lead in 21st century TV, to stop fighting Comcast on its own ground. The resources AT&T deploys today to bring old-style TV channels into markets dominated by cable carriers could be reallocated to the fast internet access that lets several iTV devices run in the same home. (Try asking today's friendly AT&T U-Verse salesperson how many DVRs you can have. "One" is the general answer, as this U-Verse user document cautiously explains. Comcast will let you have – and pay for – as many as you like.) A simpler, more focused life, stealing subscribers from the incumbent, a higher phone plus internet access ARPU… For AT&T, this could be a repeat of the original iPhone deal. Realistic? I don't know if AT&T is bold enough to make such a move.

For cable TV incumbents, the money pump equation is different. By "virtue" of their dominant position, they have more to lose, they have these expensive, inflexible, and tricky channel bundles to protect. What looks like a potential ARPU uptick for AT&T could turn into a subscriber revenue decrease for a cable operator supplying internet access to iTV viewers using apps instead of channels.

This gets us to iTV content. It will either be "free", meaning subsidised by advertising; by subscription, like Bloomberg BusinessWeek on a tablet; or "pay as you go", one show or game at a time. One reader suggested we'd end up paying more than we do with today's bundles. It's a possibility, but we might be happy to pay more in exchange for the freedom to pick and choose, as opposed to today's situation where adding an "extraneous" channel to an existing bundle is a chore that makes you feel like you work for the cable company and not the other way around. Who knows, we might even spend less overall – while giving more money to the better creators.

We now move to content providers. As they ''appify'' their channels, will they be willing to give Apple 30% of the app revenue? If the app is "free", no problem: 30% of zero isn't terribly onerous. But even for a free channel, there's the question of sharing ad revenue: how much for CBS, how much for Apple? This isn't a random example, we just heard Lee Moonves, the chief executive of CBS, say his company turned down a streaming TV deal with Apple because of a disagreement over ad revenue. CBS and others have to see how iTV will make them more money. (The same is true for game developers who could use iTV as a vehicle for living room or networked games.)

Finally, Apple itself. Its emotive talk about the purity of the software architecture, the praise for the elegant kerning of the Garamond Light Condensed ITC font on Keynote slides … such talk is important and relevant, it addresses the very reasons for Apple's success, but we shouldn't forget what rings the big cash register: hardware. The iTV product itself has to generate billions in hardware revenue or stay what it is today, what Jobs felicitously called a hobby, a mere hundreds of millions of dollars of hardware revenue. That's nothing when compared to the tens of billions – soon $100bn – in iOS mobile devices revenue.

How to get there? Recall last week's "no set-top box" configuration:

I've added a twist, one simplification. Why have two devices, one iTV and one Wi-Fi base station or Time Capsule? A unified device saves room, power, the need to have disk storage in two places – and it will help justify a unit price that's greater than the current $99 for Apple TV.

Let's put the price tag of this unified device at $299, the price of today's 2TB Time Capsule. If Apple can sell 10m units, that's $2.9bn in revenue … not bad, but put that number into the context of Apple's overall revenue estimates: $120bn in 2011 (calendar year, not fiscal), $160bn in 2012, and $200bn in 2013. $2.9bn in iTV revenue doesn't get it out of the hobby category. Apple would need to sell 100m units, $29bn in revenue, to really "make a dent in the universe".

What about the revenue iTV will generate through the App Store as users buy apps as channels? Consider iTunes: it made about $2bn in revenue in the 2011 fiscal year ended last September (probably much less in profits as this is a complicated organisation with many revenue streams and an expensive infrastructure). iTunes is hardly a loss leader, but its purpose is to fuel iOS device sales, not the other way around. By analogy, the App Store and advertising revenue share isn't going to make or break iTV.

In last week's Monday Note, I argued against an Apple-made big-screen TV: Too big, can't be brought back to the store for repair, the computer inside would become obsolete much more quickly than the screen itself.

Friends tell me I'm wrong. A big screen might be the answer to the revenue question. At $1,500 or more, an Apple HDTV set might achieve revenue levels in the tens of billions, and, unlike today's TV set industry, it might even be profitable.

(As an aside: Last week, Sir Howard Springer, the courageous Welshman running Sony, let it be known that while his company is – "like Apple" – in the process of reinventing the TV, "Every TV set we make loses money." We also heard about Logitech giving up on Google TV after losing tens of millions in the misadventure. And Adobe decided to stop Flash development for TV. The news from the TV front could be better.)

As a big beautiful flat-screen set, or even as a separate module, an iTV sounds like a great idea. But translating the dream into a viable 21st century TV product looks considerably more difficult. To be successful, the iTV needs to make money for carriers, for content developers, for distributors, and for Apple itself. None of which is self-evident.

Still, the ossified TV ecosystem is ripe for disruption, ready for an annoying innovator.

JLG@mondaynote.com

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Steve Jobs's greatest legacy: persuading the world to pay for content

An Apple store in Taipei, Taiwan. Steve Jobs announced last week he is stepping down as CEO. Photograph: Sam Yeh/AFP/Getty Images

Ten years is, of course, a long time in media. Ten years ago, if you wanted to download some music, your best bet was Napster or one of the filesharing systems such as LimeWire or KaZaA. There were legal services, but they were so dire they wouldn't pass much muster today: there was PressPlay and MusicNet (from rival groups of record companies), which required $15 a month subscriptions for low-quality streaming (when most people had dialup connections, not today's broadband). You couldn't burn to CD. They were stuffed with restrictive software to prevent you sharing the songs.

What happened? Steve Jobs happened, mainly. The hardware and design team at Apple came up with the iPod (initially intended to be a way to sell more Macintosh computers), and then followed the iTunes Music Store – a great way to tie people to Apple by selling music. In 2003 Jobs persuaded the music companies – which wouldn't license their songs to bigger names like Microsoft – to go with him because, he said, Apple was tiny (which it was, at the time). The risk if people did start sharing songs from the store was minimal, he argued. The record labels looked at Apple's tiny market share (a few per cent of the PC market) and reckoned they'd sell about a million songs a year, so they signed up.

Apple sold a million in the first week of the iTunes Music Store being open (and only in the US). It sold 3m within a month. It's never looked back.

Nowadays Apple sells TV shows, films, books, apps, as well as music. We take the explosion in available content for granted. But without Jobs, it's likely we wouldn't be here at all; his negotiating skill is the thing that Apple, and possibly the media industry, will miss the most, because he got them to open up to new delivery mechanisms.

Content companies have been reluctant to let their products move to new formats if they aren't the inventors, or at least midwives. Witness Blu-ray, a Sony idea which wraps up the content so you can't ever get it off the disc (at least in theory); or 3D films. Yet neither is quite living up to its promise, and part of that comes down to people wanting to be able to move the content around – on an iPod, iPhone, iPad or even a computer – in ways the content doesn't allow. Apps downloaded directly to your mobile? Carriers would never have allowed it five years ago. Flat-rate data plans? Ditto. But all good for content creators.

Jobs pried open many content companies' thinking, because his focus was always on getting something great to the customer with as few obstacles as possible. In that sense, he was like a corporate embodiment of the internet; except he thought people should pay for what they got. He always, always insisted you should pay for value, and that extended to content too. The App and Music Store remains one of the biggest generators of purely digital revenue in the world, and certainly the most diverse; while Google's Android might be the fastest-selling smartphone mobile OS, its Market generates pitiful revenues, and I haven't heard of anyone proclaiming their successes from selling music, films or books through Google's offerings.

Jobs's resignation might look like the end of an era, and for certain parts of the technology industry it is. For the content industries, it's also a loss: Jobs was a champion of getting customers who would pay you for your stuff. The fact that magazine apps like The Daily haven't set the world alight (yet?) isn't a failure of the iPad (which is selling 9m a quarter while still only 15 months old; at the same point in the iPod's life, just 219,000 were sold in the financial quarter, compared with the 22m – 100 times more – of its peak). It's more like a reflection of our times.

So if you're wondering how Jobs's departure affects the media world, consider that it's the loss of one of the biggest boosters of paid-for content the business ever had. Who's going to replace that?

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Boot up: Arrington departs, British Airways tests iPads for cabin crew, and more

Arianna Huffington, the co-founder of The Huffington Post and Arrington's boss Photograph: Daniel Barry/EPA

A quick burst of 7 links for you to chew over, as picked by the Technology team

"Arrington will partner with many well-known Silicon Valley venture capitalists - including Digg-founder Kevin Rose, Yuri Milner, Marc Andreessen, Ben Horowiz, and Accel Partners - to invest between $100,000 and $200,000 in fledgling internet firms."

"TechCrunch founder Michael Arrington is resigning as editor of the popular technology blog, and will run a $20 million venture-capital fund backed by TechCrunch-owner AOL Inc. and several venture-capital firms.

"Mr. Arrington "will run the fund and will continue to write for TechCrunch, but will have no editorial oversight," said an AOL spokesman. Erick Schonfeld, who has served as co-editor in New York, will become interim editor while AOL searches for a replacement for Mr. Arrington, the spokesman said. AOL purchased the site last year."

Arrington gets the exit that one suspects he always wanted. Now the interesting times start for Techcrunch and AOL.

Horace Dediu, analysing the comScore numbers for US smartphone users: "In the last 12 months, Android gained 25m users in the US. iPhone gained 9.5m while Blackberry lost 3.2m and Microsoft lost 1.6m. Other platforms had a net loss of 1.2m.
"The total net gain of smartphones was about 29m new users.
"RIM switched from being a consistent net gainer of users to a consistent net loser of users in October 2010. Windows Phone is showing signs of holding the line on user base erosion but share remains below 5% (now at 4.7% vs. 4.6% last month). To put the mountain-sized hurdle in perspective, Android now has 7 times more users in the US while iPhone has about 5 times more. To become the largest mobile platform in the US, as some analysts are predicting, Microsoft has a 12:1 disadvantage that looks to continue to grow.
"Those are some pretty tough odds."

"Add British Airways to the list of airlines putting iPads in crew members' flight bags.

"The U.K. carrier recently began a pilot program that will see some cabin crew members using the tablets to improve in-flight service and replace the paper clutter of the passenger manifests, seating charts and flight timetables they typically carry.
"BA will initially outfit just 100 crew members with iPads. But if that initial deployment is successful, it plans to give them to 1,800 more in the coming months."

Shouldn't we be hearing about RIM, that darling of the enterprise, winning PlayBook contracts some time soon?

Tim Harford, the FT's undercover economist and presenter of the BBC's More Or Less programme, investigates why people give up personal information so easily online.

So true, so very, very, true.

These guys are on a roll.

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Boot up: Apple's iPhone jailbreak hire, ignoring Google+, Twitter Bootstrap and more

Google+ growth chart by Paul Allen: heading towards 20m in July. Now you can ignore and block them too!

A burst of 6 links for you to chew over, as picked by the Technology team

"Nicholas Allegra, better known as 'comex', the creator of the JailBreakMe website which made it child's play for iPhone owners to jailbreak their devices, has been given an internship at Apple. "The 19-year-old from Chappaqua, New York posted the news of his new position on Twitter."
As Eric Schmidt says, we need to up our game. Where are the British 19-year-olds getting hired (rather than, say, arrested and charged) for their hacking skills?

"We want to make sure you can represent your real-life relationships on Google+ -- whether you want to connect with someone or not :-) So starting today, we're rolling out a new option to Ignore people, in addition to the existing (and stronger) option to Block them."
Now, where have we heard of that before?

"Researchers at anti-malware company F-Secure say they have found the actual infected Excel file that was used in the attack on RSA earlier this year, eventually forcing the company to replace millions of its SecurID tokens. The Outlook email message containing the malicious file apparently was uploaded to Virustotal in March and the researchers dug it out this week."
An Excel file with Flash content which Excel executes. As the researchers say, why does Excel need to execute Flash content? Ever?

Good points. It's been clear for years that Steve Ballmer is not a visionary. But does Microsoft need one?

"Bootstrap is a toolkit from Twitter designed to kickstart development of webapps and sites. It includes base CSS and HTML for typography, forms, buttons, tables, grids, navigation, and more."
Er.. thanks.

Some surprises among there, including one which lasted a glorious minus one days.

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Boot up: Windows Explorer gets ribbon, Microsoft launches cloud CRM deal, and more

A quick burst of 6 links for you to chew over, as picked by the Technology team

The fascinating thing in this is how few commands are used most of the time, and the appalling user interface decisions made in the new ribbon: "people use lots of commands, so let's cram them all in there explicitly."

An alternative view: keep the most used commands visible. Put the others in contextual menus. Simplify, don't complicate.

"Microsoft has rolled out a special deal (and new spoof video) for its cloud Customer Relationship Management (CRM) service, in an effort to draw customers away from from Salesforce.com, Oracle and SAP.
"The Redmond company will pay $150 in cash per user seat (minimum 50 seats per company; maximum 500) for customers that switch to its Microsoft Dynamics CRM Online service.
"However, to qualify for the service, businesses must be located in U.S. or Canada, subscribe to at least 50 Microsoft CRM Online licenses, and sign a 2-year licensing subscription for the service."

Interesting how Microsoft's principal business is built around the idea that it's expensive to shift from its products to rivals'. How does it go when the boot's on the other foot?

"Let's say you were given a year to kill Hewlett-Packard. Here's how you do it."

Witty.

Probably the best title for the COTD ever. Now you'll have to click through to understand it.

"One of the several new features in Chrome is the addition of HTTP Strict Transport Security. HSTS allows a site to request that it always be contacted over HTTPS. HSTS is supported in Google Chrome, Firefox 4, and the popular NoScript Firefox extension.
"The issue that HSTS addresses is that users tend to type http:// at best, and omit the scheme entirely most of the time. In the latter case, browsers will insert http:// for them.
"However, HTTP is insecure. An attacker can grab that connection, manipulate it and only the most eagle eyed users might notice that it redirected to https://www.bank0famerica.com or some such. From then on, the user is under the control of the attacker, who can intercept passwords etc at will."

Chrome will start having a preloaded list of must-HSTS sites. Seems like other major browsers should do this too.

A fun open data project in Toronto, Canada: "The City's controversial Core Service Review, a consultant-led examination of which municipal services might be cut or reduced for cost savings, involved public consultations in May and June. Those consultations generated over 13,000 responses from residents who either attended a consultation session, or filled out a form online.
"The City, being the City, crunched all that data into some black-and-white PDFs and posted it on an obscure section of its website. Brian Gilham had other ideas.
"What Toronto Said, a cleanly designed website that Gilham, a professional web designer, built over the course of three weeks in his spare time, provides a search-bar interface for the entire corpus of feedback data. It makes filtering the raw opinions of thousands of Torontonians about as simple as using Google to find a recipe for soup. It launches August 29."

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Boot up: Facebook prepares music offering, and Apple 'loses (another) iPhone prototype in (another) bar'

... And it reportedly happened on Steve Jobs's watch Photograph: Justin Sullivan/Getty Images

A quick burst of 10 links for you to chew over, as picked by the Technology team

"Facebook Inc. is preparing changes designed to make the site a hub for listening to music, watching movies and playing videogames, according to people familiar with the matter, in much the same way people already use the social network to share personal media like photos and videos."

Note: This isn't a music platform. It's not (really) an iTunes-rival.

"In a bizarre repeat of a high-profile incident last year, an Apple employee once again appears to have lost an unreleased iPhone in a bar, CNET has learned."

Photographer Thomas Hawk: "Flickr asked me if I wanted to apply it only to photos going forward, or also to images that I'd already geotagged. I told flickr to go ahead and apply this setting to all of my past and future photos -- which included a thumbnail of the photo I linked. So now when you go to this photo on flickr, indeed, the geotag seems to be removed from the photo page for the image.
"Except that there is one pretty major security hole.
"Although the geotag information is indeed pulled from the flickr photo page, ANYONE can potentially still get your geolocational data simply by downloading the original sized file and looking into the EXIF data.
"This only seems to apply to images that were geotaged at the file level (i.e. by you or your device/phone, etc.) and not photos geotagged using flickr -- but still, with cell phones and software that auto geotag things, you could easily be lulled into a false sense of security on Flickr when you should not be."

Truly, a website design that sticks two fingers up at you from its lair in the mid-90s.

Pointed out to us by John Dowdell of Adobe, the people who make Flash: details how baseball is being changed by the greater access to information about games. Guess how they access it.

Paul Thurrott, whom nobody would describe as an Apple fan, isn't very keen on the new Windows 8 Explorer ribbon idea: "The Microsoft post describing the new ribbon UI goes into great detail about telemetry data, which provides the company with information about what users are really using in Explorer and elsewhere in Windows. And according to that data, the top 10 commands represent over 81% of all commands used in Explorer. The bottom 18% of commands (by usage) include such things as Open, Edit (Menu), View Toggle, Organize, New Folder, Send To, and Edit.

"And yet, looking at a Microsoft screenshot of the new ribbon, what do I see in the default first tab? A bunch of commands - including Open and Edit, by the way - that are not in the 81% most-frequently used commands." Huh?"

He also described Apple's Finder as "much cleaner and less busy". That's really quite scary.

If you were wondering how Hot Spot and Snickometer worked in cricket...

Good graphic, though it obviously assumes that the software costs nothing to produce, and that the marketing and so on happen magically to give the "Apple's slice" element.

From early in August, but still relevant: "'With a large enterprise, you have to assume that people are going to get tricked into installing malware,' iSec CTO Alex Stamos told The Reg. 'You can't assume that you'll never have malware somewhere in a network. You have to focus on parts where a bad guy goes from owning Bob the HR employee to become Sally the domain admin.'
"At the heart of the Mac server's insecurity is a proprietary authentication scheme known as DHX that's trivial to override. While Mac servers can use the much more secure Kerberos algorithm for authenticating Macs on local networks, Stamos and fellow iSec researchers Paul Youn, Tom Daniels, Aaron Grattafiori, and William "BJ" Orvis found it was trivial to force OS X server to resort back to Apple's insecure protocol."

They also did a proof of concept. OSX Server is the weakest link. Then again, a similar flaw in Windows is what led to Google getting hacked in China in 2009.

"The average selling price for Double Data Rate 3 (DDR) in the 2-gigabit (Gb) density--the bellwether DRAM product--is projected to drop to $1.60 in the third quarter, down 24% from $2.10 in the second quarter. The dive would be the biggest decline for the year, following a surprisingly solid second quarter during which pricing fell only 5% from the first quarter. Moving into the fourth quarter, the price could plummet another 22% to $1.25--dangerously close to cash costs for many manufacturers. Only a year ago in the third quarter, pricing stood at $4.70."

There's been a fall in demand, while yields are about to rise. The money now is shifting towards NAND Flash.

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Boot up: Police 'assisted' Apple in lost iPhone hunt, and no US launch for Samsung Galaxy Tab 7.7 or Galaxy note

Ho Kak-yin in Hong Kong ... not the man whose house was searched by police in San Francisco Photograph: AP/Kin Cheung

A quick burst of 9 links for you to chew over, as picked by the Technology team

"...Anyway, I totally understand why Google did this list. It just isn't a well curated list and so I don't want my name associated with it."

For those who doubted the original report was correct: "The bizarre saga involving a lost prototype of the iPhone 5 has taken another interesting turn. Contradicting past statements that no records exist of police involvement in the search for the lost prototype, San Francisco Police Department spokesman Lt. Troy Dangerfield now tells SF Weekly that "three or four" SFPD officers accompanied two Apple security officials in an unusual search of a Bernal Heights man's home."

Police don't get involved in publicity stunts.

An intriguing stack chart of the ever-growing number; the lifespans are interesting to compare.

"For example, you're doing TDD, you write a test, do some coding and hit run test but have to wait 30 seconds+ for it to run. This takes long enough to break your flow, you have a quick think about something else and then you realise the test has run and you need to switch you attention back. You might have a quick chat about something else with your pair.
"We know it's hurting our velocity but without numbers it's difficult to convince management of the true costs.
"So what did we do?
"We took a stop watch, kept it with us all day and recorded all the time that where we were waiting for the computer to do something - from opening apps, running builds and tests, searches and refactorings in visual studio - any time at all where the developer had to wait for the machine to work, be it 5 seconds or 5 minutes the stop watch was running. It took quite a lot of discipline. The results were startling."

Worth buying the fastest possible if the project lasts more than a month.

"The Galaxy Tab 7.7 and Galaxy Note are two devices that are generating quite a bit of buzz here at IFA 2011 in Berlin. There's a lot to like about these devices, but unfortunately you might not be able to buy one stateside. According to Samsung, there are currently no plans to ship either of the devices in the U.S."

Simplifies the questions of whether to stock or not for retailers.

MG Siegler, visiting Seattle, doesn't have pictures but has been trying it out - a 7in tablet with multi-touch.

The 16GB version is $450 (save $50!), the 64GB is $550 (save $150!) and the 32GB version is... $550 (save $50!).

Explanations for this pricing regime where 32GB of Flash memory costs nothing welcomed.

Martin Belam, writing in a purely personal capacity (you understand): "[if you're moderated] ask yourself, "Was I being a bit of a dick?".
"I'd define dick-ish behaviour on a news site as including, but not restricted to: personal attacks, using 'amusing' clichés like EUSSR and Tony Bliar, making the same off-topic point day after day, being rude and grumpy and unwelcoming to newcomers, mocking other people's spelling, bullying and hectoring staff and journalists appearing in the comment threads, asking 'is this news?' on a story you are not interested in and which nobody forced you to read, hate speech, 'ironic' hate speech, anything that might now or in the future potentially land the publisher in legal hot water, and any comment which includes the phrase 'I don't suppose the moderators will publish this but...'"

Three strikes filesharing rule comes into play in New Zealand: "The three-strikes regime is not expected to be widely used by rights holders, however, because of the high $25 fee they must pay to internet providers to forward those warnings to internet users and a $200 fee for bringing cases in front of the tribunal."

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