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This Is the TV Problem That Apple Must Solve

There have always been problems that Apple (NASDAQ: AAPL  ) would have to address before entering the TV market. The first of which is the "go-to-market strategy," according to Steve Jobs. The structure of the television market has always inherently entailed a subsidized set-top box, which hinders innovation as it reduces consumer propensity to pay for innovative features.

The second problem has always been solving the overwhelming number of interfaces that result in a disjointed user experience. Some recent figures from NPD reinforce that notion.

Spoiler alert: People use TVs to watch TV
In a recent study, the researcher found that the most common usage model of smart TVs was to... watch TV! While that result is entirely expected, what's really shocking is the significant lack of other types of usage, despite their availability. Many smart TVs today are fully capable of accessing social networks, video calling, playing casual games, and browsing the web, among other things.

The problem is people simply aren't doing them. One exception is that consumers are tapping into online music streaming services like Pandora (NYSE: P  ) about 15% of the time. Part of it is that consumers are likely entrenched in historical behavioral models where the TV is just a TV, despite the additional functionalities that manufacturers are now building in.

Why ask why?
Another possibility is that consumers are turning to set-top boxes for some of these functions instead of performing them directly on the smart TV itself. For example, Microsoft (NASDAQ: MSFT  ) has continued to teach the Xbox 360 new tricks, including an upcoming launch of over 40 television apps for its Xbox Live service, not to mention its rumored Xbox TV.

That can cause some confusion, as there are numerous ways to utilize roughly the same TV app. On top of that, there's a growing trend toward what NPD calls "content throwing," where a user can wirelessly beam content from a mobile device like a smartphone or tablet to the larger screen. That includes Microsoft's SmartGlass and Apple's AirPlay, among others, which is also made possible by a third-party accessory device.

NPD figures that in order to drive consumer adoption of additional usage models, TV makers "need to need to focus less on new innovation in this space and more on simplification of the user experience and messaging."

It just so happens that's what Apple does best
Reinventing the TV interface is precisely what's needed here. It's worth noting that this is exactly what Apple did in smartphones. Prior to the iPhone, smartphones were capable of many of the same things they are today, except people simply didn't do them because the interfaces were so confusing.

This video of Steve Jobs at D3 in 2005 serves as a good reminder. The iPhone was yet to be released, but Jobs describes (around the 6:30 mark) how carriers pressured smartphone OEMs to focus on higher-quality cameras in phones. The hope was that users would turn into shutterbugs and share all those photos over 3G networks, thereby driving increases in data usage and fees and average revenue per user, or ARPU.

Unfortunately for the carriers, this wasn't panning out as predicted and ARPUs were flat. The problem? Jobs offered that maybe it was "because the user interface is so crazy that nobody can figure out how to do it." Kara Swisher agreed that was probably the culprit.

The iPhone heralded the modern smartphone interface, and data usage (and carrier ARPU) has been on the rise ever since. Apple needs to do this exact same thing in TVs: integrate all the necessary functionalities in a simple user interface that offers a consistent experience. Fortunately, that's exactly what Apple does best.

Play ball
A big difference is the middlemen in the equation. In smartphones, carriers wanted to drive increased usage and fees so were willing to play ball, even if that inevitably meant giving up some control to Apple. In TV, cable operators and content creators have less immediate incentive to embrace a new structure since smart TVs with Internet content threaten to disrupt their traditional cable businesses.

There's some cord-cutting going on, but it hasn't been enough to truly scare the incumbents into action. For example, Time Warner (NYSE: TWX  ) CEO Jeff Bewkes recently said fears over cord-cutting are overblown and mostly limited to a small demographic of low-income Americans. However, Bewkes acknowledges that "cord nevers," those of the younger generation who have never had cable, are more of a concern. Oddly enough, he's also the same exec that can't wait for an Apple TV.

Meanwhile, Time Warner Cable (UNKNOWN: TWC.DL  ) COO Rob Marcus has openly admitted that cloud-based TV experiences may require "giving up control of the interface," a clear reference to talks with Apple.

Apple may be the only tech giant with enough weight to restructure the TV industry with a new interface and user experience.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (4) | Recommend This Article (17)

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 28, 2012, at 8:25 PM, dwilh51183 wrote:

    Everyone copies AAPL. If AAPL decided to collect dog crap and roll it in powdered sugar to sell at as a creme stick at crispy creme, LARRY PAGE AND SAMSUNG would also do the same. Larry Page is pathetic. He can't think of any new inventions on his own, so he cries and says he wants to be friends with AAPL so he can try to steal more of their great ideas.

    BY THE WAY, AAPL STOCK IS WAY TOO CHEAP, considering all the 75 million iPhones sold this quarter and 35 million IPAD MINI'S, along with a ton of other sales.

  • Report this Comment On December 29, 2012, at 4:12 AM, nanarchy wrote:

    Apple stopped innovating 4 or 5 years ago and have just treaded water since then, don't like your chances of seeing anything good out of them in the near future. Besides which this article misses the entire point of why many of the social networking and casual games etc haven't taken off on TV's, It is because people don't want them, you don't sit in front of the TV to use social media. Streaming Music/TV/Video really is what the majority want from their TV and no fancy interface is going to change that, I don't use the features of my smart TV as they are pointless, not because they are hard to use.

  • Report this Comment On December 29, 2012, at 10:14 AM, techy46 wrote:

    AAPL's stock is only cheap if there earnings don't come under assualt by mobile device commoditization. Google's desire to build devices is going to push Samsung to W8 and WP8. Microsoft's got the right stuff, W8, Smartglass and XBox, but has to execute very carefully.

  • Report this Comment On January 06, 2013, at 10:28 AM, z1mm3r wrote:

    Apple TV is not TV! It is a network device.

    Apple TV is two way audio/video (A/V).

    Apple TV is a big, high def monitor serving as a small device's peripheral.

    Apple TV still needs content ala Netflix and Amazon Prime, but iTunes is already in place.

    Apple TV still needs local data centers for streaming media.

    Apple TV will revolutionize American TV; however, the media conglomerates are fighting it. Think NHL lockout.

    I do not know how it will play out, but you need technology, bandwidth, and content. What about advertising?

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