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August 26, 2013
How quickly we’ve forgotten. Remember mobile devices before the iPhone? They all shared a common feature set: Abject horribleness.
Handheld organizers like Palm’s personal digital assistants demanded that users brandish a silly stylus and squint into a monochromatic window. Early-generation Blackberrys, the little black rectangles so revered by careerists, crammed miniaturized keys onto miniaturized pads in a forced pairing of machines -- the typewriter and the telephone -- that produced record numbers of typos per message. Cellphones, if they offered Internet access at all, did so by neutering Web pages into graphically bereft, walled-garden frames of text, visible through screens hardly bigger than postage stamps.
Everybody bought them anyway. That is, until Apple Inc. changed the game by advancing a techno version of Hans Christian Andersen’s story, “The Emperor’s New Clothes,” in which the technology products company was bold enough to say what everybody sort of had intuited privately but was too timid to declare out loud: These things are dreadful to use.
The iPhone’s runaway success came about not just because the device itself was gorgeous, innovative, and capable, but because it instantly exposed every preceding mobile communications product as a sad joke. It raised the bar for handheld computing while reducing incumbent products to yesteryear's rubble.
That same sort of willingness to challenge presumed truths is at work again at Apple, which, as everybody knows, has been circling around the television business for a while now. There has been a library’s worth of published speculation and studied what-ifs written about Apple’s presumed approach to innovating in television. Most of the speculation has been looking into the technology of television itself: Apple can invent a better TV set. Apple can invent a better interface. Apple can leverage the AirPlay application in iOS to marry computing with television better than anyone else has done.
But it now appears that everybody overshot the mark, because apparently Apple has been taking a much broader look at television. Just as the late chairman Steve Jobs identified and attacked fundamental flaws in the mobile device category, Apple seems to have seized on a revelation about one of television’s weak points -- one that resides much further up the experience chain than interfaces, screens, or search functionality. Commercials.
A report by technology journalist Jessica Lessin in July indicated that one of Apple’s ideas for revolutionizing television was to, get this, do away with advertising. As Lessin reported, Apple has talked with major television networks about a novel scheme to strip out commercials from programs and offer viewers uninterrupted streams of content. You know, like Netflix, but with current stuff.
Of course, the notion of vanquishing a revenue stream that streams roughly $70 billion into the US TV ecosystem was quickly deemed preposterous -- mostly by people whose livelihoods and expense accounts depend on streaming roughly $70 billion into the US TV ecosystem. Advertising Age’s Jeanine Poggi produced a roundup of cold-shower reactions from Madison Avenue, with executives, including Rino Scanzoni, chief investment officer of Group M, dismissing the model as economically unviable.
It certainly looks that way, when you see the idea through the default lens of television tradition. But so was the idea of fitting the entire Internet onto a handheld device in 2007.
Apple is obviously aware of the audacity, but it has a workaround. The idea is to compensate TV networks for vacant ad spots by reimbursing them for the revenue they’d be foregoing, so that there’s no immediate financial risk (although there may be plenty of strategic risk).
Although big advertising thinks it’s a laughable scheme, I actually think it could work, with minimal immediate disruption to the bigger TV ecosystem. Here’s why:
The market is going to be very small. Apple’s notion of a premium Internet-distributed television bundle -- the so-called virtual MSO model -- is likely to appeal to a very small subset of the US TV marketplace. An optimistic read is that 3 million individuals who currently pay for traditional cable, telco, or satellite video service might choose instead to subscribe to Apple’s premium service in two or three years (based partly on its alluring idea of commercial-free content). That means the household delivery universe for the largest advertiser-supported network would be reduced by about 3 percent. The potential reach would dip from the current universe of 95 million multichannel video households (the number recently published by Leichtman Research Group to 92 million.
Commercial exposure would hardly be affected. The number of homes exposed to commercials during a particular airing of a cable TV program would be pared even less. Example: Let’s take History’s Pawn Stars, which achieved total HH delivery of around 4.5 million for its prime-time episode debuts in July, according to tvbythenumbers.com. If we think Apple can take away 3 million homes from the total pay-TV universe (or about 3 percent of the base), the rough math suggests it would reduce the viewing audience to an ad-supported telecast of Pawn Stars by about 135,000 (or 3 percent of 4.5 million).
Compensation is easy to figure out. Assuming History fetches a healthy CPM (cost per 1,000 viewers) of $15 for a commercial currently reaching the full 4.5 million viewing households for a new prime-time episode of Pawn Stars, then a 30-second slot within the show would command a price tag of at least $67,000. If that’s the case, the channel’s owner, A+E Networks, would forego $1,500 in revenue for a 30-second commercial spot (reflecting erosion of 3 percent of the audience at a $15 CPM) by letting Apple send out the program commercial-free to a sliver of the pay TV universe. Left is the number Apple would have to hit with a reimbursement program. In fact, because of the strategic risks involved, Apple would probably have to pony up a premium to convince A+E that the whole gamble is worth it. If that’s the case, A+E would have actually increased its net revenue take from a commercial slot within an episode of Pawn Stars. Remember that Apple, like every other multichannel video distributor, would pay a license fee to carry the program in addition to forking over the advertising-compensation fee.
Those are the basic economics. See, kids? They’re not so scary. The consumer side of the story is actually what’s more interesting. In floating the idea of a commercial-free pay TV bundle, Apple is addressing the elephant in television’s room, which is the fact that lots of people have serious relationship issues with TV commercials.
Don’t take my word for it. Here’s Michael Bologna, managing partner director of emerging communications for the ad-buying agency Group M, from a panel I moderated at The Cable Show in June. “If I could, I would watch TV without any ads. I hate them,” Bologna deadpanned. “But with no ads, there would be no programming and we’d all be playing Scrabble.”
He was exaggerating to make a point. But it’s still a valid point, and anybody who has sampled the experience of television without commercials is likely to agree. As a personal experiment, I’ve been watching commercial-free television for the past several months almost exclusively from providers such as Netflix and Apple’s iTunes. I’ll vouch that once you go there, it’s tough to go back.
Watching episodes from the latest season of AMC’s The Killing via iTunes, sans commercials, produces a gripping, nonstop immersion. Going back to the ad-supported network version, with its predictable interruptions for pharmaceutical and hair-product ads at every dramatic zenith, is torture. Knowing that, I get why Apple has advanced an idea that seems utterly outrageous from the posture of TV industry tradition. It suggests a much better experience, so much so that I suspect a reasonable number of people would be willing to pay the bundle premium that an ad-free television environment is certain to demand.
It’s outrageous, preposterous, disruptive and threatening, yes. But so was the idea of putting Web pages on a little handheld phone in 2007. Look where that got us.
— Stewart Schley, Principal, Stewart Schley Content
Stewart Schley writes about media and technology from Denver, Colo.
Stewart Schley the founder and principal of Stewart Schley Content Services and serves as a Contributing Analyst for One Touch Intelligence. Stewart has been reporting on and writing about the telecommunications and media industries for more than 25 years, for publications and organizations including Multichannel News, Cable World, CED Magazine and Paul Kagan Associates. He has founded and served as editor of several national business magazines and is the author of the book Fast Forward: Video on Demand and the Future of Television; the editor of the book Definitive Broadband; and a co-author of Broadband Planet, published in 2004 by Cisco Press.
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