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Rumors and press reports indicate that Apple is planning a television product. While conjecture on the nature of this product varies widely, IHS speculates that Apple could achieve success by offering a complete television solution.

This is partly because such a product would be simple to utilize and functional right out of the box, in keeping with Apple’s user-friendly approach to hardware. However, it also would allow Apple to integrate access to pay television right into the TV, differentiating the product from the competition, and allowing the company to tap into the expanding market for subscription revenue. Apple could do this either by expanding its existing iTunes services, or by partnering with pay TV providers to deliver programming via cable, satellite or other means. Such a partnering deal could be critical to the success of Apple’s television and could serve to reshape the television business, much in the same way the company has revolutionized the music market with iTunes.

“Apple has the opportunity to do for television what has done for PCs and tablets—offering something that’s easy to use, works right out of the box and that delivers a compelling user interface that’s unparalleled in the industry,” said Randy Lawson, principal analyst, display and consumer electronics at IHS. “But even more important than that, Apple is really the only company that can pull off partnerships with operators, allowing it to offer a television set that’s completely ready to watch when a consumer buys it, requiring no additional hardware like a set-top box, or a subscription for service from a third party.”

Television Sales Go Flat
Apple’s rumored product announcement comes during a time of weakening conditions in the global television business.

After riding high during the flat-panel replacement wave of the 2000s, the growth of television unit shipments has slowed, impacting market revenue. Having frequently risen by double-digit percentages in the mid to late 2000s, global television shipment revenue growth will slow to the low single digits in 2011 and 2012, will stagnate in 2013 and actually will decline in 2014 and 2015.

In contrast, global pay television subscription revenue is expected to continue to rise in the coming years. Although growth will slow somewhat, revenue still is set to expand by a healthy 5 percent in 2015.

The figure below contrasts the IHS forecasts of global revenue growth for televisions and for pay TV subscribers.

Meanwhile, the already thin margins are dwindling in the television market, making it increasingly difficult to cut a profit.

“In light of these diverging trends, if Apple does enter the television market, it will have to make its money not on hardware, but rather on subscriptions to content,” Lawson said. “This is a similar model to the wireless communications market, where cellphones are sold to consumers at a breakeven price or even at a loss, and the profits are all made on mobile service subscriptions. Apple has achieved major success with this model with the iPhone in the wireless market and could bring a similar business model to the television business.”

Watching Apple’s Television
While prognostications are all over the map about what Apple might do in the television market, IHS believes  that the company’s expected product will represent a complete television solution with a display, rather than an external set-top box that plugs into a set, like Apple’s current offering in this area, the Apple TV

“Apple TV is only a marginally successful product because it doesn’t allow Apple to control the entire experience, as it has done in the past with products like the iMac” said Lee Ratliff, principal analyst, broadband and digital home for IHS. “If Apple were to offer another set-top box, it would have the same problems that Apple TV has with consumer being forced to hook the box up to a television, and integrate the device into their existing entertainment system. I think Apple might may to enter the TV market so it can offer an integrated experience, where all the hardware, software and content comes in one easy-to-use package.”

IHS speculates the product may be at least a 50-inch set using liquid crystal television display technology. The panel represents the most expensive component of an LCD TV. However, the large-sized LCD market is currently in a state of oversupply that may worsen over time, making such panels increasingly affordable when the Apple television begins shipping, which is rumored to be in late 2012.

Combined with Apple’s capability to manage the supply chain to obtain optimal pricing, the company should be product the set at a competitive cost.

The Apple television would also likely integrate the electronics from Apple TV set-top box into the television chassis.

A critical feature of the Apple television will be the user interface. Press reports indicate Apple plans to use the Siri voice recognition software first employed in the iPhone 4S smartphone. This will bring revolutionary ease of use to the set, allowing users to eschew complex, easy-to-lose remote controls and instead employ voice commands using natural language.

Content is King
A possible course of action for Apple to provide the third-piece of the puzzle—the content—Apple may choose to partner with pay TV providers, such as cable operators.

“To make money in the low-margin television business, Apple’s product is going to have to be different from every TV that’s on the market today—and it will have to deliver more than just a whiz bang interface,” Lawson noted. “The company likely will partner with television service providers, allowing Apple to cash in on subscription revenue.”

The most likely partner candidates for Apple in the United States and Europe would be the cable service operators. Similar to the cellphone market, consumers may be able to lease or purchase Apple’s television from a cable operator at a subsidized price.

Cable Entanglements
However, Apple may face major challenges in trying to sort out the technical and business issues related to such a partnership, noted Tom Morrod, head of television technology for IHS. One challenge is the fragmented nature of the pay TV market, with a multitude of operators with unique conditional access systems dividing up countries and regions. The fragmentation of the market is the reason why the cable and satellite set-top box business exists today, making it possible for any television to interface with the plethora of systems populating the pay TV market.

To address multiple pay TV operators, Apple likely would have to produce multiple versions of its television. This would be a time-intensive process, requiring as much as six months to year of development to each operator.

Finally, Apple’s move into the content side of the television market may represent an incursion into the pay TV operators’ traditional territory, reducing their incentive to enter a partnership.

“Apple may benefit from controlling the pay TV ecosystem—but it’s critical for cable operators to control that ecosystem,” Morrod said. “The television market is different from the mobile handset market. In the phone market, wireless coverage is a commodity—so Apple’s iPhone had an opportunity to create differentiation. However, the content services operated by the cable operators are the differentiator. There’s less need to differentiate on the hardware, and more benefits to find innovative services and application, like digital video recording (DVR). However, unless Apple can find and monopolize one such service, there is little incentive to share subscription revenue with a hardware maker like Apple.” Apple in the past has shown an unparalleled skill at managing the complexities and pitfalls of partnering with content providers. This is most notable in its agreements with music publishers to create iTunes, and its deals with publishers to provide access to newspapers and other periodicals on the iPad.

“Given its history of success, Apple is really the only company that can strike a deal with the pay TV providers to make a truly integrated television product—complete with content,” Lawson said.

However, if these challenges prove insurmountable, Apple has an alternative route to delivering an integrated TV product.

“Apple could simply beef up the Apple TV hardware and service and integrate it into a display,” Morrod said. “This would allow them to offer built-in content without having to integrate with a pay TV service.”