Apple (AAPL) gossip sites were abuzz after Foxconn Chief Terry Gou dropped a few hints about the new Apple TV, noting that it would have an aluminum body, Siri and Facetime integration. But this provides precious little detail on exactly what Apple TV will be and misses the key point - Apple TV will completely revolutionize the cable TV and TV advertising markets as we know it. How? Through TV apps.
The revolutionary aspect of Apple TV will be the apps, and these will disrupt the cable industry just as much as Apple disrupted the music industry. Currently, cable subscribers have to subscribe to a set of packages, some of which are mandated by federal and local law. But why? Why can't cable users subscribe to channels on an individual basis, or even to purchase individual shows as desired?
With TV apps, they can. The new Apple TV will allow content producers to create apps which will be used to distribute content. For example, someone who wants to watch HBO could download the app and subscribe directly with HBO, obtaining the content through the internet and completely bypassing the cable provider. All of the revenue would be shifted from the cable provider to the content provider and Apple, and the cable provider would be reduced to a commodity provider of bandwidth.
This will completely revolutionize the way people watch TV, how content is distributed and monetized, advertising, the role of cable providers - basically the entire industry. Cable companies will be reduced to providers of bandwidth for content delivered by apps over the internet. Their content delivery business will be eviscerated. Content providers will be able to segment their customers more effectively - generating revenue from subscribers who want to watch an occasional program from their premium services, but wouldn't be motivated to subscribe to a cable-based package.
Consumers would experience radical benefits - if they wanted to watch Game of Thrones but not True Blood, they could subscribe to HBO's individual shows as desired rather than having to pay a monthly subscription. And this would apply to all channels - you could literally subscribe to any individual show or sporting event you want, from anywhere. All that's needed is for a content provider to develop an app to deliver it. Consumers will even shift to viewing network channels like ABC and NBC through apps so they can view what they want, when they want.
Oh, but there is more - Apple TV apps will revolutionize TV advertising. The current problem with cable TV advertising is that you have to broadcast the same commercials to all of your cable TV subscribers. When content migrates into apps, Apple can use its iAd platform to deliver customized advertisements based on the profile of the individual user. For content providers, this allows them to thin slice their target audience and deliver precisely targeted ads via apps rather than widely targeted ads via a cable channel. For Apple, they open up the possibility of controlling a large share of the TV advertising market. Consumers benefit by receiving ads more relevant to their interests, based on their search history, purchase history, etc.
This revolution wont happen immediately - consumers are used to cable packages and it will take time for them to adopt the app model. When they do, the shift will be huge. Apple will be a huge winner in this revolution. Cable providers will be the big losers. They failed to innovate and they'll pay the consequences.
What else can we expect from the new Apple TV?
A set-top box: Apple TV will not just be an HD flat screen TV with additional features - Apple will also market a plug and play box similar to its current Apple TV offering. The reasoning behind this is simple - an Apple branded TV with Apple features integrated will be an expensive, premium product available in a limited variety of sizes and configurations. That eliminates 95% of the potential market of people who already own TVs or want to buy a model other than what Apple offers. Apple isn't stupid, and they will offer both a set-top box and a TV (which might look like this) with the features integrated to capture the broadest possible market.
Siri Integration: As anyone who has used Siri knows, Siri is a natural for television. Onscreen cable guides are archaic relics of the 1980s when cable systems had fewer than 60 channels. With the massive proliferation of HD stations, music only channels, pay-per-view, and a mishmash of channels you subscribe to and channels which are unavailable, I find browsing my on-screen guide maddening. Siri will fix that by allowing voice filtering of channels and search that will actually find what I'm looking for.
Facetime: Apple TV will have full Facetime integration. The Apple branded television will have a Facetime camera integrated, and some have reported it will include face detection software so the camera can automatically point itself towards the user rather than the user shifting their position to sit in front of the camera. The set-top box will have a camera, and mobile devices will be integrated so you can put grandma on the big-screen at Thanksgiving, and walk around the house with the iPad so she can visit with the family.
Airplay and the Apple Remote: The Apple TV will need some way for users to input voice commands, and to manage on-screen functionality. Apple can integrate a microphone into its existing TV remote, but this functionality is also available through a remote-application on an iPod Touch, iPhone or iPad. Airplay integration will continue to allow anything playable on your portable device or laptop to be viewed on your TV.
Gaming: As content shifts from distribution from a cable provider to distribution through apps, expect Airplay and the Apple Remote features to be used more for gaming. The line between movies and games is already heavily blurred (see the Modern Warfare Series and Uncharted 3, which are movies as much as they are games.) Apple's big handicap here is that an iPad or iPod touch isn't a great game controller, so expect Apple to either develop functionality to allow for third-party gaming devices, or to partner with one of the major platforms (hello Microsoft) to allow connectivity with their platforms. Even if this doesn't happen, expect more game developers to create apps specifically for use with an Apple TV and Apple mobile device.
Apple has the opportunity to radically re-shape the TV content distribution and advertising business through innovation and integration of its unique ecosystem. Most authors focus on the low margins of the TV business and completely miss the fact that Apple TV will be offered through a set-top box, and that the potential revenue streams from in-app content purchases and iAd delivery are monstrous.
And this monster will likely gobble other people's lunch. The iTV revolution will likely make slow but steady inroads against cable operators, and you can expect the top six cable and satellite TV providers - Comcast (CMCSA); Time Warner Cable (TWC); Charter Communications (CHTR); Cablevision Systems (CVC); Dish Network (DISH); and Direct TV (DTV) - to continue to lose customers.
Apple is currently trading $100 off its high, at about 11 times anticipated FY12 earnings and about 8 times anticipated FY13 earnings. These estimates don't factor in Apple TV revenues from app content sales and iAd sales. Don't be scared by large numbers - Apple is only beginning to play in a number of very large markets which can deliver significant increases in revenue and earnings over the next several years.
Disclosure: I am long AAPL.