Why Betting on Apple or Microsoft to Win the TV Wars May Be Folly

We've been writing a lot about the future of TV in these digital pages. The debate over who ultimately wins the so-called "war for the living room" has taken many forms, but mostly we've evaluated the various news and offerings from the major vendors, including:

  • Microsoft (Nasdaq: MSFT  ) , which has signed agreements with some 40 entertainment partners to bring content to the Xbox, where it can be surfed and organized hands-free using the Kinect remote and Bing search engine.
  • Netflix (Nasdaq: NFLX  ) , which is scurrying to book content arrangements with the likes of AMC Networks (Nasdaq: AMCX  ) to become a channel unto itself, broadcast widely through devices such as Mr. Softy's Xbox.
  • Apple (Nasdaq: AAPL  ) , which boasts an enviable following of coders who write for the iOS platform that governs Apple TV and that could one day form the basis of an integrated TV set.

On balance, I believe our analysis has provided important context for entertainment investors. But I also think, as a group (me included), that we've failed to fully consider watching habits in evaluating the potential winners. We haven't thought enough about what has to change for any single vendor to win.

No longer. History tells me that usability (primary) and infrastructure (secondary) will, more than anything else, determine who dominates the digital TV market from here on.

What consumers want
Shouldn't features make the list? Partnerships? No, and no. The most successful tech products of the past 20 years have been feature-limited and partnership-poor by design. They were instead created to do something extremely simple with surprising efficiency.

Apple's iPad is my favorite example among recent introductions. Neither the most functional nor the most widely endorsed tablet at the time of release -- remember, the original iPad had precious few apps at launch -- the Mac maker won by designing to the most basic of human factors.

How so? We output most reading material to 8.5 by 11-inch paper. Designing a 10-inch tablet therefore created familiarity lacking in 7-inch alternatives. Familiarity won and is still winning.

What the TV ecosystem looks like
My experience as an investor says the most straightforward analysis is usually the best. In this case, most of us have all or some of this infrastructure in place to watch TV:

  • A cable or satellite connection.
  • A television.
  • A set-top box of some sort, whether for digital recording, on-demand programming, etc.

This combination affords us, as consumers, both serendipity and control. We can surf and find live TV we like, or we can switch over to recorded or queued content through paid services such as Netflix.

Advertising pays for the serendipitous or recorded content we consume. Premium content comes with a cost, though most of it is accessible straight from the equipment supplied by cable and satellite operators. Comcast (Nasdaq: CMCSA  ) , DISH Network (Nasdaq: DISH  ) , and their peers invest to make sure their boxes are emblazoned with logos, even though someone else makes the equipment.

There's a good reason for this. Set-top boxes and gaming consoles usually aren't required to get at premium content. Only the geekiest of consumers (two thumbs, pointed inward) are likely to own a system disconnected from the remote that comes with the cable plan.

And therein lies the problem for both Apple and Microsoft.

Controlling the remote
Sound silly? Maybe it is, but observe any non-geek TV watcher for any amount of time and you'll realize that it doesn't matter whether the Xbox gaming console does a great job of controlling a digital TV. Nor does it matter that an iPhone can control an Apple TV.

What users want and expect is one remote to control a television, and maybe a separate remote to control a Blu-ray player. But even those power users would still prefer a single controller -- it's the reason Logitech still does a good business selling Harmony remotes.

Which brings us to Google (Nasdaq: GOOG  ) and its rumored plan to become a cable alternative. I'm surprised it hasn't happened already. Why? Consider:

  • The Big G has invested in high-bandwidth delivery options for years, including fiber to the home.
  • Its newest division, Motorola Mobility, makes set-top boxes.
  • YouTube, the third most heavily trafficked site on the Web, serves 3.5 billion videos daily, offers movie rentals, and is developing custom channels.
  • And Google is perhaps the world's foremost expert on using technology for targeted advertising.

Controlling the living room isn't about controlling the content or having the most partnerships. It's about controlling the remote. Microsoft is getting closer to that with the Xbox yet is substituting an unfamiliar form factor for a remote. Apple TV is close, too, but suffers from being an add-on.

Only Google proposes to own the pipe in the same way that the current remote suppliers -- the cable and satellite operators -- do. It's a devastatingly disruptive opportunity for just how neatly it fits into how we already watch TV. (Assuming the remote doesn't look like an alien device, as was the case in Google's initial TV experiment.)

Challenge, meet opportunity
Sure, the content would be lacking at first. Google would have to negotiate with every major network and premium-channel supplier. The Federal Communications Commission would also probably have to approve the plan. Neither matters in the long run.

Consumers already want fast access to the Web wherever they are, which means Google has good reason to roll out high-speed wireless and fiber nationwide. Using the same bandwidth to deliver TV later would amount to a bonus worth tens or even hundreds of billions in new revenue. Apple and Microsoft want heaping portions of this same pie. I suspect they'll instead end up fighting over slivers.

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Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple, Google, and Netflix at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Apple, Microsoft, Logitech International, and Google. Motley Fool newsletter services have recommended buying shares of Microsoft, Logitech International, Netflix, Apple, and Google, creatingbull call spread positions in Apple and Microsoft, and creating a write covered call position in Logitech International. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 05, 2011, at 6:19 PM, kramsigenak wrote:

    Nonsense Tim.

    Many of us are already watching "TV" (whatever that means now)... on our iMacs, iPads, and even iPhones. The revolution is already at hand. iTunes and iPad give Apple a distinct advantage.

    Mark Kanegis

  • Report this Comment On December 05, 2011, at 8:17 PM, H3D wrote:

    Why are you sitting here writing about it rather than going of and doing it?

    Apart from being clueless, obviously.

  • Report this Comment On December 05, 2011, at 8:19 PM, H3D wrote:

    Hell will freeze over before content owners trust Google with their IP.

  • Report this Comment On December 05, 2011, at 10:27 PM, TMFMileHigh wrote:

    @kramsigenak,

    >>iTunes and iPad give Apple a distinct advantage.

    How so? I watch TV on my Mac all the time. I also use an Android tab for video from time to time and own an Apple TV box. But all that makes me -- or you -- is a more advanced user. For most of the rest, TV is still about lazy seats and remotes.

    @H3D,

    >>Hell will freeze over before content owners trust Google with their IP.

    You mean content owners like Disney?

    http://www.fool.com/investing/general/2011/11/25/youtube-sav...

    Thanks for writing and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On December 06, 2011, at 4:49 AM, lakawak wrote:

    mark..your "many" is VERY few to the rest of us. You can continue to live in some delusional world where anything but an insignificant percentage of people use iTunes as their main source of TV...but those of us who live in reality know that is absurd. The fact of the matter is, most people don't WANT it at all. Most people don't watch TV the way you all seem to think. Where they sit down and watch very specific programs and then leave. They channel surf. And no...the "Viewers who watched this also watched" recommendations of internet sites is not the same thing. Apple TV and Google TV are huge failures, and will continue to be becuase it is two companies trying to dictate the market's demands instead of catering to them.

  • Report this Comment On December 06, 2011, at 10:13 AM, jmharris3283 wrote:

    I think Google's first move should be to work with the cable companies to create a customizable interface for accessing the cable provider's content. I have TimeWarner service and can't stand their UI. If Motorola started shipping settop boxes with Google TV as the interface with custom software for channel guides, DVR, On-Demand services of the cable provider they could easily grow the Google TV user base. The provider keeps their advertising income and Google gets theirs from apps and search adds. Win-Win. The wheel doesn't need to be re-invented right away, build something to keep things close to what they are now to get the user base up and then work to evolve it to the next big thing once people are hooked.

  • Report this Comment On December 06, 2011, at 6:18 PM, kramsigenak wrote:

    @ Tim Beyers:

    You wrote:

    "How so? I watch TV on my Mac all the time. I also use an Android tab for video from time to time and own an Apple TV box. But all that makes me -- or you -- is a more advanced user. For most of the rest, TV is still about lazy seats and remotes."

    1. Apple has sold in the 6 figures (read hundreds of millions of mobile devices).

    2. You are talking about sitting on lazy seats using remotes. I'm surprised at you. That's the present and the past, what about the future? hundreds of millions of people watch content on mobile devices now and more of course in the future. What about the (future) possibility of Siri controlled Apple TV set? No remote, and for many of us TV not just on a lazy seat, but anywhere we go. Of course we are the early adopters. But what happens after the early adopters get the technology?? It migrates through the population. Remember (before the iPhone), when nobody went on the internet with phones, because there weren't any (real) smart phones? We were early adopters then too. Look forward.

    @ lakawak

    "mark..your "many" is VERY few to the rest of us. You can continue to live in some delusional world where anything but an insignificant percentage of people use iTunes as their main source of TV...but those of us who live in reality know that is absurd. The fact of the matter is, most people don't WANT it at all. Most people don't watch TV the way you all seem to think. Where they sit down and watch very specific programs and then leave. They channel surf. And no...the "Viewers who watched this also watched" recommendations of internet sites is not the same thing. Apple TV and Google TV are huge failures, and will continue to be becuase it is two companies trying to dictate the market's demands instead of catering to them."

    1. I call hundreds of millions more than an insignificant percentage.

    2. See above. If you think the future of TV is the old way (sitting on the couch channel surfing), you are welcome to that opinion. It may interest you to know that a lot of people watch TV on the fly already. Of course we also want a comfy seat at home to watch TV. But if you think it'll be the old "set top" box in the future, I'll be betting against you. Apple and Google are already disrupting. It's early, and of course it's far from perfect. Many watch itunes shows and regular TV. But think ahead, the days of vhf/uhf with a rabbit ears antenna are in the past. The days of cable TV are the present. The days of wireless TV and customizable content are the future. You can have my old black and white 13" sony TV if you want it.

  • Report this Comment On December 06, 2011, at 7:17 PM, kramsigenak wrote:

    @ truthisntstupid (ironic name).

    Look at quarterly mobile device sales by Apple the past couple years. Then add them together... for reference, there are 4 quarters in year. If the math doesn't fail you, you'll soon understand how many iPhones, iPads, etc etc are out there.

  • Report this Comment On December 06, 2011, at 7:46 PM, kramsigenak wrote:

    @truthisntstupid

    I'm buying everything you say in your post. Tremendous sympathy for those struggling in Misso and elsewhere. Thanks, it's a good reminder. These tech gadgets are quite expensive, and you can't eat 'em.

    However, in speaking about the future of TV: my point is that we are at a convergence of technologies. What a time to be living. Without trying to be Nostradamus, I'm thinking it's fair to say that these mobile devices (and possibly a real Apple TV) will play a huge (and disruptive) part in the future of how we watch "video content," or what we now call TV.

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