There has been a lot of speculation about an Apple iTV television set over the past few years. The rumor mill really got going when Steve Jobs was quoted as saying 'I finally cracked it' in Walter Isaacson's 2011 biography of the late Apple CEO and co-founder. Then during Apple's most recent quarterly earnings call CEO Tim Cook said Apple plans to introduce a new product category in 2014. In this post I'll lay out some of the main reasons why they would not make an iTV. I'll do a follow-up post in the future on why they would want to make a television set and you can decide for yourself. Note: throughout the article I'll refer to an Apple television set as the 'iTV' to differentiate it from their current set-top box, the Apple TV.
Why Apple won't make an iTV
The case against an iTV comes down to three main reasons: market size and growth, profit, and product differentiation.
Market size and growth
The TV market is small and stagnant compared to the market for smartphones and tablets. Worldwide, 232 million TV's were sold in 2012 (86 million of which were smart TV's) versus about 700 million smartphones and 128 million tablets. We all have multiple mobile devices and replace them regularly, but most households would only need one high-end iTV from Apple and most people only replace TV's every 5-8 years.
It is also a market that is not growing overall. However, the smart TV segment is growing. Meanwhile, smartphones and tablets are forecast to grow heavily over the next few years. The TV market may pick up and recover, but it will likely be modest compared to mobile devices.
The television industry is highly competitive and prices are constantly eroding. The TV you can buy for $800 today probably cost twice as much 1-2 years ago. Manufacturers are constantly introducing new features and technology to combat price erosion: (3D, smart TV's, 4k resolution, etc.) Sony is the industry leader and their TV business segment (which also includes home audio and home video equipment) reported an operating loss for fiscal year 2012 of (-84) billion Yen on sales of 994 billion Yen. For the most recent quarter they had a very modest operating profit of 1.2%. In comparison, Apple's consolidated operating profit usually hovers around 30% of sales. Samsung's operating profit for its consumer electronics division, which includes TV's, is also barely positive.
Simply put, this is not a highly profitable industry and Apple is used to making money - lots of it. Samsung, Sony, and others are great at mass-producing electronics and managing their costs. Apple couldn't reasonably expect to make televisions cheaper than their competition. So the only way for them to make a profitable iTV would be to charge a premium price.
Operating profit is a measure of a company's profit from operations before taking into account expenses and credits related to financing and taxes. See this Investopedia article for a deeper explanation.
Apple typically doesn't make me-too products. They make products that stand out - especially when introducing a new category. The iPod, iPhone, and iPad weren't the first to market in their respective categories, but they redefined expectations and set the bar higher for the competition. So how would they make the iTV stand out in a crowded marketplace? No doubt Jony Ive and team could come up with a beautiful design made from premium materials. And no doubt they could throw all of the functionality of the current Apple TV set top box into it plus add some extras like FaceTime and Siri. But would you spend several hundred dollars more than a Sony or Samsung goes for? Why not just get your TV of choice and add the $100 Apple TV set-top box to it?
If Apple really wants to make a TV stand out they need exclusive content Or new pricing structures for existing content. If the iTV allowed you to stream ESPN or HBO Go for $15/mo without cable that would be interesting. However, the cable companies and TV networks are extremely profitable and basically have no incentive to alter their current business models. That means we're not getting a la carte pricing or some other model that saves 50% off a cable bill any time soon. I'm sure Apple (and just about every other consumer electronics company in the world) would love to be the first to market with such a device, but it is EXTREMELY unlikely for the content companies to acquiesce to Apple's desired terms at this time.
I've read some opinions that the iTV could be the first mass-market 4k television and iTunes could be used to deliver the first 4K content to it (currently no cable operators are equipped to broadcast 4k content.) However, only people with fiber internet or other very high-speed connections could reasonably stream 4k content, so this would limit the market for the device's key feature. Also, it is my opinion that 1080p content looks good enough for everyone but videophiles, and there's a lot of room to improve compression algorithms to make 1080p look even better on faster internet connections.
For all of these reasons, I think it will be very difficult for Apple to wow us with a television that we all willingly rush out to pay a premium for.
I'm sure Apple is experimenting with iTV designs and trying to negotiate with cable companies and TV networks as you read this. However, without a landmark content deal I don't think an iTV would stand out enough to make it financially worthwhile for the company and its investors.
A side-note on the PC and music player industries:
A lot of the above could currently be said for the iPod and Mac product lines. However, those were fast-growing and profitable markets when Apple entered them. Apple now owns the market for mp3 players, high-end laptops, and all-in-one computers. Macs and iPods may not be as financially and strategically important for Apple as they once were, but they're not going to exit those businesses until enough people stop buying iPods and MacBooks that they're no longer profitable product lines.