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Reuters/China Daily
What will it look like?
COMMENTARY

Here’s why Apple will bring iTV to China first

Steven Max Patterson
By Steven Max Patterson in China

If Tim Cook is to fully take reins from Steve Jobs, he’ll need to bet the company on his own grand product vision—one that suspends investors’ disbelief without affecting Apple’s stock price. Apple’s next big product will have to be television and because of the barriers to entering the television market in the US, Apple will need to make its introduction in another world market, and China appears to be the best alternative.

Apple needs a new product category that matches its $170 billion annual revenue scale. Inventing an entirely new and untested product category like watches and wearables can’t generate large gains and fuel Apple’s growth. So its only option is to disrupt a very large existing industry with its product design prowess and brand. A big splash in the $400 billion worldwide television market will reestablish Apple as an innovator and tantalize its investors and observers with growth prospects that match its scale. Contacted about this story, an Apple spokesperson declined to comment stating that “Apple does not comment on unannounced products.”

The iTV (as some have called it) will first appear in China because the country has millions of the right consumers, an abundance of television content, and a partner in China Mobile that has an abundance of radio spectrum to wirelessly deliver television to mobile devices and to the living room.

Abundance of the right consumers

The largest online-video audience in the world is in China. And Chinese consumers are able to watch more than just archival videos like Netflix and Amazon prime. In addition to archival content Chinese internet television includes dramas, variety shows, news, animations and sports events. Unlike the US, online-video ratings have jolted the traditional television broadcasters to add new genres to their lineups to compete. According to the Q4 2013 China Online Video Report (registration required) by iResearch, in November of 2013 online-video sites saw 460 million unique visitors using browsers and 170 million unique visitors using PC apps. Just the browser online-video traffic alone is larger than all the monthly unique visitors to Google and Yahoo combined as reported by Comscore. Netflix’s 27 million monthly unique visitors pale in comparison.

Most online video revenue is from advertising. In 2013, total revenue was ¥12.8 billion ($2.1 billion)—about the same revenue generated by Netflix, Amazon Prime, Apple and Hulu.

The mobile and wired internet is growing in China and has room for even more growth, especially the mobile internet. Internet adoption in China has reached less than 50% of its population. Although the US surpassed this level of adoption over a decade ago, with its 618 million internet users today, China has twice as many internet users as the US does.

The China Internet Network Information Center (CNNIC) recently reported:

“Among the Chinese Internet users, the proportion of mobile Internet users rose from 74.5% at the end of 2012 to 81%, much higher than the proportion of the Internet users that access the Internet via other devices. It is indicated that mobile phone is still the major driving force for the growth of Chinese Internet users.”

The same CNNIC publication reported robust growth in the consumption of mobile video content.

“The number of China’s Internet users who watched videos online or downloaded videos on mobile phone had reached 247 million, increasing by 112 million over the end of 2012, up 83.8%, ranking the first in the statistics about the growth of mobile phone application users.”

A back of the envelope estimate using CNNIC’s statistics indicates that between 40% and 50% of China’s internet consumers exclusively use mobile phones to access the internet.

Although most internet television is sponsored by advertisers, China is also important because Digital TV Research forecasted China to grow to have the greatest number of paid subscribers of television delivered using the internet (IPTV).

An abundance of content

The abundance of domestic and imported television content gives Chinese television internet companies a disruptive advantage.

Justina Zhang is an attorney who represented Chinese internet television company Youku with its US IPO as well as American television content studios like Disney. Recently, she told me why the Chinese internet properties such as Youku, Tencent, and Baidu are disrupting the Chinese television market:

“Most dramas are free on the internet. American television content is available and very popular in China especially with young people who want exposure to American culture. American television content is both a consumer acquisition strategy and a source of advertising revenue for the internet television companies. Chinese television internet companies have an abundant supply of American and domestically produced television content.

These companies have an advantage because it is more convenient to import American television for internet broadcast than for viewing via traditional media under the current legal regime. This fast track for internet television content is partly due to more liberal government regulation intended to foster growth of the internet and partly because it is a new area that the regulators are still defining. This content-based advantage held by the internet television companies will further change the traditional media, particularly with regard to its audience, concepts of traditional “air time” and advertisement placement patterns.”

What’s more, there is also an overabundance of Chinese video content available to online-video sites. The reason for this was reported by The Economist: Only about 30% of the professionally-created content in China meets the censorship standards for traditional television networks. Much of the remainder of this content is available to the less heavily censored online-video sites.

Chinese television internet companies can compete as equals. Tencent, China’s largest internet company paid $41.3 million for the internet broadcast rights to air the third season of the reality TV show “The Voice of China” showing parity with the traditional television networks. Amazon, Apple, Google or Netflix have yet to relocate a popular reality TV show to the internet or been recognized as equals to the television networks.

Compared to China, the American market is an inhospitable place to test iTV. A similar but failed venture to break into the US television market by Intel explains why. A few years ago Intel hired BBC veteran Eric Huggers to lead its Intel Media group. Huggers proved that it was much easier to search and select television content using a channel-less tablet app than the traditional remote and a broadcast television network could deliver high definition television over the mobile and wired internet. He also proved how hard it is to compete with the established television broadcast networks in the United States for a full range of news, sports, reality TV and original first run content.

Unable to acquire content and a distraction to Intel’s turnaround of its core business, Intel Media was sold off to Verizon in January of this year. Apple is not in the midst of a turnaround, so it’s not an exact comparison. But because no established studio will sign-on with Apple to sell first-run original television episodes to individuals for $1.99 each when networks like ABC, CBS, Fox, HBO and NBC will pay in advance, there is a Chinese wall around American content. The only way around it for Apple is to spend tens of billions of dollars to buy into it. And after buying in, Apple will need to convince American consumers who customarily buy television bundled, with broadband internet, to cancel cable TV, retain cable broadband, and add iTV. In response, cable companies can raise the price of broadband and lower the cost of cable TV keeping what the consumer pays the same but squeezing the price consumers will pay for iTV.

Intel Media’s problem is the same one faced by AppleTV, Chromecast, and Roku in the US. The content created by the television network’s captive studios isn’t licensed for first-run broadcast on the internet and independent content creators are too risk averse to try. This drought of original content is the reason Amazon Studios and Netflix are producing their own shows.

An abundance of radio spectrum

China is also ripe for iTV because of the advanced 4G LTE mobile data network under construction by Apple’s partner China Mobile. Upon completion of the network this year, it will be possible for China Mobile to offer wireless broadband that is as good as or better than wired broadband. (China Mobile did not respond to my request for comment about its partnership with Apple.)

China Mobile’s 4G LTE network with 500,000 base stations, covering 340 cities will be the largest in the world. Although each generation of wireless data communications equipment becomes faster, radio spectrum is the more significant resource needed to replace the wired internet with mobile. Radio spectrum carries information through the air just like pipes carry water, but basically more spectrum allows more data to be transmitted to more concurrent users. China Mobile’s 4G LTE network has a generous allocation of 130 MHz of radio spectrum which is three to six times as much as Verizon has and six to 12 times the amount of spectrum of AT&T and T-Mobile’s networks.

Building a broadcast television network on top of a mobile data network may sound implausible because the imaginations of smartphone users are capped by their monthly data usage. The typical caps at 4 or 6 GB each month are enough to watch about 4 to 10 hours of television per month but far short of the of the 157 hours per month watched by the average American consumer, as reported by Nielsen in its June 2013 Cross Platform Report.

Most 4G LTE mobile broadband networks in developed markets are too constrained by radio spectrum to be candidates for iTV yet. Carriers cap data usage so that limited spectrum can be shared. This isn’t a permanent condition because carriers will reallocate radio spectrum when older and slower 2G and 3G networks are decommissioned and communications regulators throughout the world such as the FCC free up and auction more radio spectrum. Given the present day constraints though, it will take time for these networks to add spectrum for LTE and become big iTV opportunities.

Even with China Mobile’s generous serving of spectrum, a large number of users watching mobile online-video would clog the network because each incremental user that streams a video consumes an increment of the network’s capacity. Three television viewers in the same cell watching an episode of HBO’s “True Detective” consumes three times the network capacity of one. With too many users, the online video experience will deteriorate.

Recent advances in wireless broadband technology eliminate this problem. Qualcomm’s LTE Broadcast technology offered as a service by Korea Telecom and demonstrated by Verizon point to how Apple and China Mobile can build network television using a mobile network. An LTE broadcast of the same episode of True Detective will consume only the network capacity of a single viewer no matter how many simultaneous viewers watch.

When I asked Ed Kozel, former Cisco CTO and Range Networks CEO, about the feasibility of building an Apple LTE Broadcast television service, he told me:

“If I were to speculate about an Apple LTE broadcast network from a carrier perspective, the mobile carriers would need to believe in a new business model with new revenues and new customers. With enough spectrum and a well engineered network, it is possible today. But I emphasize that such a network would have to be a broadcast network, simple unicast video streaming like Netflix would overwhelm the network and the consumer experience would degrade.”

Apple created the mobile web—next is mobile television

Looking back at the mobile web, created by the introduction of the iPhone in 2007, the implausibility of a mobile television network becomes an inevitability. Mobile carriers need to periodically renew products to attract and retain customers and encourage them to spend more.

Such was the case when the iPhone was introduced. At that time, phone calls, SMS messages, and email had become a commodity. The mobile web that is taken for granted today gave Apple’s first exclusive partners, AT&T and Deutche Telecom, something that the other carriers could not offer: a handheld internet connected computer. The price that AT&T and Deutche Telecom paid for this was big network investments to support the deluge of mobile data that the iPhone brought.

The handheld computer or smartphone is now a commodity presenting the next struggle for relevancy for mobile carriers. Mobile television is the solution. It avails the carriers to new customers and new revenue by siphoning revenue from the television networks. The price of relevancy for the mobile carriers is investments in their networks to deliver the accompanying explosion of data.

What is iTV?

No one really knows what an Apple iTV will look like, though it will be more than a revision of the lackluster AppleTV. Lackluster isn’t Apple’s fault because this category of devices in general, including Chromecast and Roku, limit the viewer to streaming last week’s, last month’s or last year’s archival episodes of original TV content and doesn’t offer news, sports, and reality TV. For these devices to disrupt television and create large businesses they need to compete with consumer’s set-top boxes with diverse, 24/7 programming.

Apple could certainly build a beautifully-designed flat panel television but it is less important than delivering diverse continuous television content. Yukari Iwatani Kane reported in her book Haunted Empire: Apple After Steve Jobs that Jobs told his top executives before he died that he had no plan to release a television because it’s a bad business, presumably because competing with LG, Samsung and Sony building dumb displays would erode Apple’s large margins. What is important are intelligent consumer devices that are able to search and choose online-video content that connect to wireless broadband, integrating television into consumers’ lives. An end-to-end business model that includes advertising and analytics is necessary to monetize Chinese television and, if successful ,will outflank Google in television advertising and even the score for Google’s success with Android.

Apple brings to the partnership with China Mobile its brand, user-experience design skills, and its experience monetizing content learned from iTunes. In return it will get a large stage on which to debut iTV to China Mobile’s 750 million consumers that is unique in its delivery of television over wireless broadband. Leading with Apple’s brand and technology, China Mobile will leave behind its basic feature phone business becoming more relevant by monopolizing consumers’ time at home and away from home with broadband television and internet.

China Mobile’s 4G LTE mobile network is the ideal showcase for Apple to enter the television market and prove it can scale iTV into a big business. If Apple can prove it, it can introduce iTV to new markets as mobile carriers shift from being mobile phone companies to mobile broadband and television companies.