TV will be one of the big areas of competition among tech giants, according to a new report from Goldman Sachs. Goldman Sachs believes that the next big market disruption could come as smart TVs are rolled out. Smart TVs, integrated with existing mobile ecosystems, will likely be the next big battleground for tech giants, and Apple Inc. (NASDAQ:AAPL) is poised to seize the initiative Goldman Sachs believes that TV’s ability to become another anchor platform component will likely mean significant investment from the competition.
Smart TVs as the next battleground
Goldman sees TV as the next potential catalyst for disrupting current market dynamics, just as the advent of smartphones and tablets has created new category leaders and put Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC)’s relevance at risk. Given consumer cloud platforms largely center around media consumption, in their view the television is a natural extension of these platforms giving complements another device on which to deliver their services.
Goldman views TV is an attractive target for several reasons:
1. It carries a higher purchase price than a smartphone, with average 46-inch set costing roughly 3X the average wholesale price of smartphone.
2. The replacement cycle for televisions at around eight years is roughly 4X that of a smartphone. While this does push out revenue, in their view it also creates the potential for competitive disruption as they believe that consumers will match the platform of their more frequently purchased smartphones and tablets to the television they already own. TV effectively raises the consumer’s cost to switch platforms.
3. As a shared device the television has the potential to impact the platform choice of an entire household rather than a single individual.
For the above reasons, Goldman Sachs expects that Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT) and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) will focus intently on the connected viewing experience while Facebook will continue to serve as the ultimate complement given its user base.
In fact, they have seen signs of early disruption in the $110bn worldwide television market through set-top box-like devices such as Apple TV, Google TV, Roku boxes and through streaming video services on Microsoft Corporation (NASDAQ:MSFT)’s Xbox gaming console. In fact, Goldman would expect the launch of Xbox720 in 2H13 to take gaming and streaming content to another level and for online communication to be enhanced by leveraging assets acquired by Skype.
Further, they view the potential for technology companies to partner with cable companies on a more intuitive more user friendly customer interface, or viewing guide, as another potential source of disruption. That said, cable companies differ on their view regarding partnering with technology companies, given the risk of surrendering the viewer relationship.
As a part of the consumer cloud ecosystem, Goldman sees TV as having the potential to be a powerful anchor device for platforms due to its higher purchase price, longer replacement cycle and prominent place in the living room. On purchase price, the average selling price of an LCD television globally is roughly $480, according to DisplaySearch. However, the average price of a 46 inch LCD television, the typical size as necessary to be the center of family viewing, is more than $950. This is significantly higher than the ASP for a smartphone ($309 unsubsidized in 2012 per Goldman Sachs analyst Simona Jankowski) and more than even the most expensive tablets (64GB iPad with retina display has a list price of $699).
As such, once a consumer adds a television to their crop of cloud ecosystem devices, in their view the user is then more likely to shift their less expensive tablet and phone devices to the same ecosystem as their television, if they differ. If a user purchases a television on the same platform as his or her other devices, Goldman believes this further entrenches the user in that ecosystem.
Further, the replacement cycle for televisions is significantly longer than for tablets and smartphones. Based on IDC’s estimates for annual shipments and the installed base of network-enabled, televisions Goldman Sachs estimates that the useful life of these devices to be four years, while historically the LCD television replacement cycle has been roughly 8 years, which compares to roughly two years for tablets and phones.
As such, they would expect consumers to align their devices to their televisions, which they replace relatively less often. That said, they also view the television as creating the potential for ecosystem disruption should one of the players create an offering compelling enough to lure users away from the ecosystem of their tablets or phones.
Ultimately, Goldman Sachs views the addition of a television to a user’s set of ecosystem devices as dramatically increasing the switching cost of leaving a given platform. Finally, because the television is more a household device than an individual device, they would note that the television has the potential to affect platform decisions for multiple people rather than for just a single individual.
Speculation of the introduction of an Apple television has existed for years, but it was not until the release of Steve Jobs’ biography in October 2011 that there was any concrete evidence that any such device could actually be in the works. While the view that Apple will somehow address the television market in short order has now become consensus, the company’s actual strategy for the device remains the key question mark. In its current form, the television industry is a challenge for predominantly hardware-centric vendors—longer replacement cycles relative to their current offerings (at roughly eight years, 4X that of smartphones and tablets), razor-thin margins, massive inventory risk and near-instant hardware commoditization. But long-time industry observers know that much of the same was true of the cell phone market before the introduction of the Apple iPhone, which now garners roughly 70% of industry operating profits. So when considering the entry of Apple Inc. (NASDAQ:AAPL) or any other company, the monetization strategy is likely to be one of the most important factors to consider.
Despite the seeming commonalities and attempts at convergence, Goldman thinks there is an important distinction between Apple’s existing iOS devices and televisions. The television has historically been a passive and shared viewing device, whereas smartphones and tablets tend to be interactive computing devices, most often used by an individual (not groups) at any given time.
They believe that this distinction is why efforts to make televisions more interactive have so far been generally unsuccessful, and also explains why after nearly six years on the market, Apple Inc. (NASDAQ:AAPL) still refers to its Apple TV product as a “hobby.” With this in mind, Goldman believes that there are three possible approaches that Apple could take in attacking the market:
- An Apple-branded television could easily be “nichey”. The general assumption is that Apple will choose to enter this market with a television set. This would be the literal interpretation of Steve Jobs’ commentary from Walter Isaacson’s biography in which he is quoted as saying, “I’d like to create an integrated television set that is completely easy to use…It would be seamlessly synced with all of your devices and with iCloud…It will have the simplest user interface you could imagine. I finally cracked it.” As content consumption continues to grow, it follows that iOS device users will want to be able to easily view this content on their televisions. While this can be done through peripherals today, any Apple TV user can likely attest that the experience is far from seamless; an integrated television could solve this. In addition, they believe Apple has avoided launching a television in the past because it has had a difficult time securing licenses for an appropriate amount of digital movies and television content. Nevertheless, Apple’s available media content has been steadily increasing, and the company could be further along in addressing this issue. Despite these factors, an Apple branded television could easily be niche and high-end.
- A set-top box could reach a wider audience. A broader penetration strategy would be a set-top box approach in which Apple partners with cable/satellite providers to deliver a set-top box to consumers. Here, Apple Inc. (NASDAQ:AAPL) would be able to skirt many of the content licensing challenges that have slowed progress in the past. Nevertheless, the company would face a set of different challenges in trying to negotiate with the cable/satellite providers who vary greatly in their willingness to cooperate with third parties and many of whom have their own efforts underway to improve the user interface. With a set-top box approach, Apple would likely want to gain control of the entire user interface, which would enable it to more easily and elegantly tie live TV content with iCloud and iTunes media, as well as bring in its massive installed base of hardware devices. If Apple was able to secure relationships with enough providers, Goldman believes that this approach would allow for broader reach. Indeed, Apple would be able to marry its iOS installed base of nearly 300 million users to the massive cable/satellite TV market, which despite the rise of streaming services and alternate delivery services, remains by far the largest distributor of video content.
- Licensing iOS to TV OEMs would be a departure, but not unprecedented. Another possible approach to the television market would be for Apple to license its OS to TV OEMs. This would potentially allow Apple Inc. (NASDAQ:AAPL) to reach the broadest possible audience, though it would be remarkably out of character for Apple given its penchant for tight device-platform integration. While this strategy is consideered as least likely, it is worth noting that Apple has departed from this strategy with cars. In February, Mercedes-Benz announced that its in-house “Digital DriveStyle App” would allow drivers of cars equipped with the feature to access features on their phone (including Siri) using controls on the center armrest. With the preview of iOS 6 in June, Apple announced the introduction of “Eyes Free”, a new feature allows a car to bring up Siri voice control using a button on the steering wheel. Nine auto makers were announced at the time as committing to the Eyes Free Siri integration in the next 12 months, with General Motors Company (NYSE:GM) recently introducing several vehicles with the feature. Apple’s willingness to weaken the link between device and platform integration in this case suggests that the company could be viewing the opportunity for non-compute devices differently.
Whatever strategy Apple Inc. (NASDAQ:AAPL) chooses, Goldman Sachs believes that the company is likely to treat the new product as a peripheral rather than a main device spoke, at least in the early stages. Nevertheless, many would expect an Apple television offering to be a key driver of platform value as Goldman believes that any such introduction would be made with a keen eye on linking and potentially leveraging the company’s existing ecosystem and installed base of iOS users.
