Daniel Eran Dilger
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Why Apple & AT&T will continue to partner closer

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Daniel Eran Dilger
If you only listen to prediction-impaired pundits and amateur strategists reporting from their mom’s basement, you’d think the biggest thing holding back the iPhone was Apple’s exclusive provider contract with AT&T. They’re wrong, here’s why.

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The idea that AT&T is bad for the iPhone is actually 180 degrees wrong. Apple really needs to replicate the same kind of exclusive partnership it developed with AT&T to launch the iPhone in order to kick off sales of its AirPort, Apple TV, and new mobile Macs. Further, it appears Apple is planning to do just that. The Boy Genius Report says Apple will be releasing integration allowing the iPhone to control AT&T’s Uverse DVRs that ship with the company’s cable and Internet packages.

That’s not too interesting, as there isn’t much involved with such remote control. Apple already has its Remote app for iTunes and Apple TV, and the Tivo already allows for web based remote control from any phone, including the iPhone. What Apple really needs to do is to get AT&T to sell its AirPort wireless devices and Apple TV itself, or perhaps a custom device that can do both. Subsidizing it into AT&T’s cable service would result in major new hardware sales and entry into a market Apple hasn’t been able to crack into itself: the living room.

Report: Apple and AT&T to partner on U-Verse, $99 Netbook

The “AT&T Is Bad for the iPhone” Myth

Despite being fully aware of the other options available to it, Apple forged an exclusive partnership with AT&T to launch the iPhone in the US, and has continued that partnership through extensions that last at least into 2011. Why? Certainly not because the company doesn’t know any better.

Without AT&T, the iPhone would have struggled to find initial sales in the US. That’s not just idle speculation. Look at Nokia, the company that makes those fancy European smartphones that the US tech pundit press likes to get excited about. Despite leading the world in countries where it established an early lead, Nokia has near zero penetration into the US market because it has no real partnerships with providers here. Those pundits recommending Apple do the same were dead wrong.

Were Apple to have tried to launch the iPhone as an unlocked device that worked on any network, it would have only sold a few hundred thousand units to core Mac users, just as Nokia struggles to sell its phones “a la carte” in the US, without much success. The iPhone would have been an Apple TV, not a spectacular blockbuster big enough to eclipse the original iPod launch.

Now look at the iPod: it took several years to take off, even if its initial sales were very good for Apple given the company’s then current circumstances. The iPod had competition, but none of it was very organized or competent. Microsoft couldn’t finish its PlaysForSure DRM until around 2005, and Sony’s ATRAC was so limiting and PC sync-averse that Apple swept the market, offering a much better product with easy access to paid downloads of commercial music. Even so, the iPod didn’t pass ten million in sales until its fourth year.

The availability of commercial content in iTunes was key to the iPod, but sales from iTunes only contributed to iPod sales, it did not in itself “launch” the iPod. People bought the iPod because they wanted it; its ability to work with iTunes content was just icing on the cake. That eventually resulted in big sales numbers for iTunes, but those digital content sales were always relatively in terms of per-unit sales, as Apple has only sold around 25 to 30 tracks per iPod on average.

How AT&T Picked Up the iPhone: A Brief History of Mobiles

iTunes Only Defended the iPod Launch from Microsoft

A few iPod buyers were consuming lots of iTunes tracks, but many were buying none at all. iTunes only made users comfortable with buying an iPod. Without iTunes, potential iPod buyers would have to fear that CDs might someday be replaced with DRMed DVD-A or SACD, or fake CDs with Microsoft’s WMA DRM in place of rip-able tracks (something Microsoft was ardently pushing), or a world where the only downloads of commercial music available were un-burnable songs sold through stores licensed by Microsoft or Sony, and similarly DRM-ed up to not work with the iPod.

If you think that’s just conspiracy theorizing, consider the PC games market, where most titles only run on Windows PCs because of Microsoft’s valiant efforts to court developers with its proprietary Direct X / Direct 3D graphics APIs rather than encouraging the use of interoperable APIs like OpenGL. Direct X did to games what Microsoft’s WMA DRM hoped to do to music, what WMV was supposed to do to movies, what its opaque Office file formats do to productivity software, and what “IE-only” websites did to the web in the 90s, and what Silverlight is trying to do to the web today: attach markets to the Windows monopoly, freezing out competition.

So Apple’s iTunes’ deals with labels and studios launched the iPod defensively, making sure there wasn’t a good reason NOT to buy an iPod. It also helped defend Mac sales, ensuring that commercial content was legally available for playback on its computers. Without iTunes, we’d be in a world much like the early part of the decade where video playback offerings from Microsoft were only half supported on the Mac, and conspicuously missing the ability to play DRM content. Sony Connect, Netflix Instant Streaming, and everyone else would have had no reason to court the smaller Mac market, leaving Microsoft as a gateway to kill commercial entertainment content for the Mac just as it kills Mac gaming with Direct X.

Even today, the only way to play Netflix Instant movies on the Mac is through Silverlight. Microsoft desperately wants everyone to pay it a cut for every thing watched or listened to, including its failed HD-DVD and Sony’s struggling Blu-Ray, both of which incur WMV licensing fees. Apple’s iTunes is the only source for commercial video content that isn’t taxed by Microsoft.

Apple’s ability to corner the market for digital downloads turned out to be a fortunate turn of events, not just for Mac and iPod users, but for the world in general, as it defused Microsoft’s ability to control music, and in turn prompted the labels to offer their music as MP3s through Amazon and other outlets instead, competing with Apple’s iTunes dominance (the only way possible, by opening content even further) rather than groveling at the feet of a system devised by Microsoft to position itself as the King of DRM with broad taxation powers and the ability to selectively execute entire competitors simply by revoking their license.

iTunes Can’t Launch Apple TV

If the availability of iTunes commercial content was anything more than a defensive play, Apple TV would have launched more like the iPod, with sales that took over the segment. It didn’t. The problem is that Apple TV is a more difficult product category to sell.

While consumers immediately recognized the iPod as the “new” music player, replacing the familiar Walkman, CD, and Rio MP3 devices which were ubiquitous long before the iPod appeared, most people don’t get the idea of Apple TV being a replacement to the VCR as a movie rental box. That’s what Apple hoped users would connect. Instead, many largely thought that Apple TV was a DVR like the Tivo or Microsoft’s Media Center PCs.

That’s because consumer’s behaviors had changed between the 80s, when everyone rented VHS tapes, today, when many people buy DVDs, “stream” them through mail via Netflix, or watch content through cable TV feeds, most of which involve a DVR to capture programs from the stream of content they subscribe. Apple TV has been slow to catch on for the same reason as Blu-Ray: people have moved from a unit rental model to a subscription mindset, where they pay a cable or Netflix fee monthly and then try to gobble down enough at the movie buffet to justify those monthly fees, rather than just paying for what they want.

Apple needs to either change buyers’ behaviors, which is difficult and takes time, or find a way to make its products fit buyers’ existing expectations. Apple is better at and prefers to do the former rather than the latter. For example, rather than coming up with a cheaper PC like everyone else, Apple rolls out iMacs and MacBooks with higher end features and gives buyers software reasons to buy a better product: editing movies, making music, and so on.

How AT&T Could Launch Apple TV

Since iTunes content itself can’t launch Apple TV, Apple can borrow a card from its iPhone strategy deck: subsidize Apple TV through cable subscription fees. The biggest problem here is that Apple TV doesn’t have the must-have appeal of the iPhone, and cable providers already have boxes they subsidize.

The cable box market is so saturated and competitive that even Tivo, which users do recognize, desire and ask for by name, struggles to sustain itself. Cable providers have simply come out with simple DVRs of their own. For Apple to enter this market, it would have to offer a box that consumers demand, giving cable providers a reason to subsidize, just like the iPhone.

The biggest problem here is that cable is, in most US markets, a monopoly. There is often little competition between cable providers, unlike the mobile phone service market where Apple could successfully convince AT&T to subsidize its iPhone in exchange for the new subscribers it could steal from T-Mobile, Sprint, and Verizon.

That is changing somewhat however, as big phone companies like AT&T try to take on the big cable companies, with the AT&T’s of the world seeking to provide TV and internet access while the cable companies try to expand their offerings into phone service. Partnering with Apple would allow AT&T to offer a sophisticated product for providing AirPort wireless networking and Apple TV integration between their PC and HDTV.

Apple TV desperately needs a service partner, because like the iPhone, it isn’t worth much without a fast Internet connection. Both are also more expensive than their more generic equivalents, making both more palatable to consumers if they can be subsidized into subscription service. How does Apple do this?

It could probably add digital tuning services, in software, to Apple TV, allowing it to function as a navigation system for AT&T’s cable channels. Even if the actual tuning were delegated to the TV, Apple TV could act as an easy to navigate system for picking shows to watch. Apple could also add an optional software DVR, using a USB device for encoding video and saving it to an external storage drive.

Apple is more likely to focus on enhancing TV playback, fixing the outstanding problems of HDTV (slow channel changing, horrible program listings, atrocious navigation, parental controls, and so on) rather than trying to create a way to sift through broadcast TV as a DVR. This would naturally also sync up with Apple’s strategy for offering paid downloads and rental movies through iTunes, just as many radio devices now feature iTunes integration to buy the song you just heard.

AT&T gets a sophisticated way to woo subscribers from cable and its basic DVR box, providing a very iPhone like experience where Apple provides the hardware and software front-end and gives AT&T a high-value, sticky customer for providing a fast data pipe.

Sidebar: Why the iPhone is Stuck to AT&T Exclusively

Is Apple’s iPhone partnership with AT&T really a bad deal? Many Verizon users think so. Had Apple instead hooked up with Verizon Wireless, which it did attempt to do at one point during early negotiations, it would have been similarly exclusive.

The benefit of going with AT&T over Verizon was that AT&T’s US network uses GSM/UMTS, which enabled the same iPhone model to be sold overseas on other GSM/UMTS carriers; a Verizon CMDA/EVDO version would have been limited largely to the the US.

There are some Verizon users who can’t or don’t want to change providers, and they’ve been hoping for a CDMA/EVDO version of the iPhone since it arrived. That’s always been unlikely to happen, given that Verizon doesn’t offer Apple anything it can’t get from AT&T, and instead demands things from Apple that AT&T doesn’t.

However, given the increasing strength of AT&T’s 3G service (which wasn’t good enough for Apple to support at its original launch), and AT&T’s future outlook for remaining the fastest 3G provider over the next several years, there’s now no reason at all for Apple to do all the work to support a CDMA/EVDO model just to sell to Verizon customers over the next two years before that network technology is abandoned for LTE, the future Long Term Evolution networks both AT&T and Verizon will be moving toward.

Given the wildly successful US launch of the iPhone and then the iPhone 3G on AT&T’s network, and the intense pull it has exerted upon rival carrier’s subscriber bases, Apple has little to gain from watering down switcher demand and making the iPhone more available at a less attractive price on any other US networks, including other GSM providers such as T-Mobile and Metro PCS.

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The big 3.0: How iPhone will shift peripheral devices

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  • nat

    This is what I read RoughlyDrafted for: unrivaled, thought-provoking, analysis. Bravo is all I can say.

  • mikeg

    Excellent article as usual, Daniel. Agree with nat that RDM is thought-provoking analysis. The Apple/AT&T partnership looks like is it growing, and may just produce another dimension to the business of both entities with the U-Verse tie.

  • andycrossett

    Daniel,
    I think you have written another outstanding, insightful article. I own an AppleTV, the first model, and bought it upon release. I’ve thought this device was great, right from the beginning.

    There were many frustrations initially, loading my music library took forever, using an 802.11 g network was frustrating, the device wouldn’t sync properly, and the infrared remote decides to go on intermittent 1 minute breaks now and again (this is the only one that persists).

    The AppleTV has gotten better and better!
    Up until now, it could only be used for streaming podcasts and shows previously downloaded.

    This week, I upgraded my internet connection to ATT Uverse. There is a huge difference. Now, I can explore the podcasts and listen or watch in the living room, and there is no lag with the streaming. This makes the device much more compelling.

    I don’t know anyone who has an AppleTV that is disappointed with it. The challenge is to get a fast internet connection in the living room and install an AppleTV.

    That’s IT!

  • http://thesmallwave.com treestman

    Good stuff, Daniel.

    Less than three weeks ago I wrote a piece about what Verizon would likely do to the iPhone if they ever offered it. In my conclusion I said this:

    “The iPhone, as it currently exists, would never have been allowed on Verizon, and it’s debatable as to whether they’d even allow it now. AT&T made a bold (and risky) move in allowing Apple to change the rules of the game with the iPhone. It’s easy to take shots at AT&T, but they’re never given enough credit for that.”

    I always like to see articles that do indeed give AT&T credit where it’s due.

  • addicted44

    Wow Daniel,

    I think the idea that the Apple TV might be the Tivo for AT&T has first been speculated here by you. The difference between your “speculation” and all those others is that yours:

    1) makes sense
    2) will probably happen (if at all) in the short term
    3) will benefit the consumer in terms of a great user interface.

    Your post has lit a light bulb in my head, and I must say, its just really prescient and explains what should (will?) happen much better than anyone else.

    Good Job!

  • MarkyMark

    “…amateur strategists reporting from their mom’s basement” hah and so true. I keep running across comments in tech blogs lately where the posters swear that either 1) the iPhone is DEFINITELY coming to Verizon soon, or 2) the iPhone will DIE if it doesn’t come to Verizon soon. So clueless about the realities of dead-end CDMA technology, the domestic carrier market, and the big scary global market somewhere out there that’s happily chatting away on GSM. Even with 4G LTE coming eventually, I can’t imagine Apple working out a deal with the VerzoNazi management, who have from time to time managed to make Microsoft look sweet and cuddly by comparison – NOT an easy feat.

  • Michael

    Still, I don’t really understand why Apple HAS to be exclusively tied to AT&T. Yes, its 3G speed is great for many customers– for those that can pay. For others, T-Mobile is way better in terms of value. And although some may grumble that the iPhone is GSM, couldn’t Apple get AT&T to agree to sell an exclusive 3G version, while selling a watered down 2G version to T-Mobile for those of us that don’t need the speed? I really hate paying 30 bucks for a data plan i use only moderately during the day… 2G is better value, if you’re not concerned about loading time. I really believe that, in this sense, Apple isn’t benefiting from its relationship with AT&T, namely, they have priced themselves out of what most people would pay for a data plan with a phone. I’m going to guess what no one has guessed before, Apple will release a cheaper 2G iPhone for T-Mobile US, while releasing a 3G iPhone for AT&T! Ah, I can only dream :)

    P.S. Hey Dan, isn’t having 2 carriers compete better than a monopoly? It’s certainly better coverage for customers AND more value, as they can freely choose which suits their needs best. And AT&T doesn’t get its feathers ruffled, as it will still be selling the 3G iPhone exclusively… just not the 2G, which AT&T would rather leave to T-Mobile anyway.

  • http://blog.cytv.com cy_starkman

    I didn’t really get how the article demonstrated that AT&T will partner closer. Not that they won’t…

    It seemed a bit chopped up to me, as an article. -shrug-

    CDMA/EVDO is long gone…

    Apple needed AT&T to gain traction, get respect and get unfettered access to beta test the iPhone before it really launched in 2008. Elsewhere Apple hasn’t seen the need to use the exclusive model, because now it doesn’t need the lock in, the consumers want it.

    Australia’s Telstra, Optus and Vodaphone had ‘sign up’ websites to register interest in buying an iPhone prior to the 08 launch. They all had to shut them down as they were overwhelmed. One report suggested that 10% of the market signed up in interest.

    I am sure Apple will thank AT&T with exclusivity for some time to come. If for no other reason.

  • bregalad

    Great article. Coming here is always like a breath of fresh internet air. I agree that AT&T was once needed as a launch partner, but the iPhone has grown up quickly and doesn’t need them any longer. As you’ve suggested Apple will probably nurture the relationship in order to help launch another new product or boost a sagging one.

  • Akie

    I relocated out of the US and live overseas now. So in the US I have a prepaid phone, same in the UK, and an iPhone in the country where I live. Not very convenient, but a reasonable price.

    Daniel, can you give some thought to a global phone service sponsored by Apple? A service which has data and voice in every country where the iPhone is available. At the moment phone calls are very expensive and data outside the home country of service is either not available or staggeringly expensive. Surely it would be easy to have a shared minutes and data plan with the Apple iPhone partners.

  • DavidJHupp

    “People have moved from a unit rental model to a subscription mindset, where they pay a cable or Netflix fee monthly and then try to gobble down enough at the movie buffet to justify those monthly fees, rather than just paying for what they want.

    “Apple needs to either change buyers’ behaviors, which is difficult and takes time, or find a way to make its products fit buyers’ existing expectations.”

    Darn Netflix, being popular and supporting lots of random devices.

    Darn consumers, not supporting Apple’s a la carte video rental model. When will consumers see the light and come home to $2.99 TV shows?

    …Someone hates subscription business models. Steve Jobs kool-aid?

    The only way Apple can make the Apple TV anything other than a niche is if they use it to create an ecosystem instead of just an iTunes front-end, perhaps with an iPhone-style SDK.

    Using the Apple TV as a U-Verse STB is shockingly obvious. Oh, and Dan’s article basically rehashes my comment from February (http://www.roughlydrafted.com/2009/02/05/how-apple-tv-can-score-at-the-big-30/#comment-17249).

    I highly doubt that Apple will bake in support for U-Verse, but simply allow AT&T to offer an App Store app. AT&T announced this like aeons ago, and AT&T’s new comments are actually nothing new (Like, finally?).

    I’m somewhat surprised that Netflix hasn’t released an official iPhone app, as that also seems somewhat obvious, and I doubt that Apple would block it. Apple seems to be moving away from the iTunes-is-the-centre-of-the-universe model in favour of an iPhone OTA ecosystem.

    Oh, and how about a PlayStation 3 Bluetooth remote app? iPhone DLNA Server/Client? PictBridge iPhone app? And I could even see Amazon releasing its mp3 store as a native app eventually, although I’m not sure how much demand there is. I’m not sure how extensive the iPod music access API is in iPhone 3.0, but this might be possible.

    It seems that Apple’s concentration is now to push the iPhone as the (relatively) open platform, not iTunes as the closed platform. Apple _is_ a hardware company, right? And Netflix is a software company. And Amazon is a software company (the Kindle is just to push eBook sales). Where is the conflict again?

  • reed64

    Nice analysis. I agree that iTunes alone cannot launch ATV. However, I have some doubts regarding your specific conclusions as to how AT&T could help launch the ATV. As an owner of an ATV and a Uverse subscriber, I am familiar with the design, setup, and integrated offerings within Uverse (which is far superior my prior Comcast service). My main Uverse signal is delivered over my home’s existing coax wiring to my main/den HDTV directly into a “wireless gateway” which is then attached by an ethernet cable to the primary DVR video distribution box. This box then back-feeds over the coax to distribute recorded programming to the other TV’s throughout the house (which each have a smaller, non-DVR, Uverse component box). I believe this is one of the most attractive features of Uverse, along with the blazing fast broadband speeds (when I rent an HD movie on my ATV, it is usually ready for playback within 30-60 seconds). However, there is much overlap between the integrated video on demand offerings between Uverse and the ATV. While the Uverse VOD interface is certainly not as slick as the ATV interface, the movie selection (at least for new to 1-2 year old releases) is very comparable. The Uverse system also has VOD for premium subscription channels like HBO. The Uverse channel guide, channel switching speeds, and DVR functionality/capacity are all phenomenal and, in my opinion, are not in need of any “tweaking” or replacement via ATV.

    With that said, the ATV is an ideal complement to Uverse in that it provides key features which expand on the Uverse offerings (purchasing of TV shows, iTunes music syncing/playback on home theater, podcasts, photos, etc.). I love my ATV and use it every day, sometimes MORE than my 300-plus channel Uverse system.

    The ideas you propose above for integration of the ATV into the Uverse ecosystem don’t seem plausible in light of the current Uverse technology. As a practical matter, the ATV cannot be redesigned to replace the Uverse residential gateway. The gateway is one of the key hardware links between the home and the neighborhood telephone “CO box” from which Uverse is distributed over POTS pairs. I doubt Apple wants to take on that connectivity issue in a software redesign of ATV, nor would AT&T want to turn over that key service component to Apple. Further, upgrading the ATV to include a DVR seems redundant and unnecessary from AT&T’s perspective. Uverse is a superior product and service, and all AT&T really NEEDS is more “incentive” for more subscribers to switch their provider (just as it did when it decided to partner with Apple on the iPhone). As long as AT&T gets the new customer, I doubt that AT&T would care that said customer may choose to rent his/her movies on the ATV instead of the Uverse VOD system. The loss in VOD revenue to AT&T would be negligible compared to the revenue gains from the new subscribers who would likely see the ATV as the “final feature” that convinced them to switch.

    What I can see with the AT&T/Apple relationship going forward is something much more simple. When I signed up for Uverse, I received $290 in rebates for making the switch. In my area, that is now down to $200. Imagine a kiosk in Best Buy advertising Uverse services. Not only will AT&T give you a nice $50 dollar rebate in the mail, during the Uverse install AT&T will include (and install) a new, 250Gb, ATV 3.0, with it’s slick Apple-designed, iTunes compatible interface for your HDTV. As a result, Apple ships **millions** of ATV’s over the next several years as cable/satellite subscribers continue to flock to the more affordable and superior Uverse service. AT&T pays Apple a healthy subsidy for each ATV to cover manufacturing costs and a small profit. In turn, ATV penetrates millions of households and revenue from iTunes store purchases over ATV skyrockets. ATV would eventually become the de facto standard for the “living room set-top box” for on demand consumption of movies, music, and TV. Forget Netflix “watch now” offerings via Xbox and Roku boxes. The free ATV could be the carrot that AT&T uses to get customers to commit to a two year service agreement (I have no contract for my service).

    If Apple and AT&T launched a slick television marketing campaign touting the integration directly into your HDTV of: (1) 18 Mbps broadband downloads, (2) an unparalleled HD channel selection, and (3) incomparable movie/TV VOD selection via ATV/iTunes integration, that combination would steamroll the competition just like the juggernaut that is the iPhone. Consumers have already demonstrated that they will use a traditionally “non-preferred” service provider to get access to premium Apple hardware (iPhone). The same result should apply to “free” premium Apple hardware provided for switching television service providers.

    All that is needed for this to happen is a hardware refresh of the ATV, and maybe some new special software features and hooks that integrate the ATV into the Uverse ecosystem. No radical redesign of the ATV would be necessary. AT&T would continue to control and service their Uverse hardware, as would Apple with the ATV. Both ATV and Uverse can exist without each other, but switching to Uverse would become much more attractive with the free ATV. Perhaps Apple and AT&T could design a direct link between the Uverse DVR and the ATV, which would allow the single ATV interface to the distributed to any TV in the home. Also, the 17 million existing Uverse customers could eventually be offered a steep discount (or even a free ATV with install) in exchange for locking down a two-year service agreement.

    The Uverse remote control via the iPhone is a great idea. Apple and AT&T should take it one step further, swing for the fences, and attempt to OWN media distribution to the living room through a partnership like the one described above. Maybe Apple renews its AT&T exclusivity deal for the iPhone to sweeten the deal.

  • DavidJHupp

    “…and what Silverlight is trying to do to the web today: attach markets to the Windows monopoly, freezing out competition.

    “Even today, the only way to play Netflix Instant movies on the Mac is through Silverlight. Microsoft desperately wants everyone to pay it a cut for every thing watched or listened to, including its failed HD-DVD and Sony’s struggling Blu-Ray, both of which incur WMV licensing fees. Apple’s iTunes is the only source for commercial video content that isn’t taxed by Microsoft.”

    As compared to AAC and h.264 licensing fees, which are just soooo much cheaper than WM licensing. Not.

    OMGZOR Microsoft is the only source for commercial video content that isn’t taxed by Thomson/Fraunhofer (MP3), Dolby (AAC), or the MPEG LA (h.264).

    And what’s with the Silverlight hate? It’s more open than Flash. And it has an open source implementation.

    Okay so it was invented by Microsoft, and it delays proper support for W3C standards. But seriously? Silverlight “attach[es] markets to the Windows monopoly”? Seriously?

    Silverlight has been completely re-implemented in OSS by Novell as Moonlight (except for codecs, at least in the official Novell version). And MS is adding support for AAC/h.264 in Silverlight 3.

    Lock-in my ass.

  • GwMac

    I just checked out the U-Verse website since I wasn’t that familiar with it. It is not available in my area. I am more familiar with Verizon’s Fiber internet that also offers TV service. Is AT&T also using fiber optical? I would assume so since HDTV would require a lot more bandwidth than DSL is able to provide. We can get AT&T DSL service where I live but I think the top speed is pathetically slow at around 3 Mbps vs the 20 Mbps I get now with cable internet. But saying cable is a monopoly is pretty disingenuous since you completely ignored DirecTV and Dish. I just switched over to DirecTV a few months back and love it. The DVR is very easy to use and I am very happy with the pricing and channel lineup. You can’t take a walk down the streets without seeing DirecTV or Dish vans in people’s driveways installing their equipment, so cable is not really a monopoly anymore.

    I do agree that Apple was served well with going exclusive with AT&T at launch. It enabled them to ask for things they could not have if they had launched with several carriers. But now that the iPhone has proven itself, I think Verizon, Sprint, and T-Mobile would offer the same deal as AT&T to get the iPhone. AT&T’s 3G coverage is not inferior to Verizon or Sprint where I live, it is completely nonexistent. Verizon and Sprint have had EVDO (their version of 3G) here around three years now and AT&T still choose not to. The metro population where I live is 500,000 people so I do not live in the boonies. It is hard to justify that expensive a plan when you can only get 2.5G speed. I am no fan of Verizon because they are the great “crippler” of all their phones. Not to mention they nickle and dime users for everything and have the most expensive plans in general. What they do have going for them is their network.

    LTE and Wimax might shake things up a bit. Wimax is already available and is an open standard like wifi. LTE is proprietary and will cost more for equipment. It will definitely have more carrier adoption by the carriers just for that reason. I am pulling for WiMax to succeed because I think competition is always a good thing, I like underdogs and open standards, and I am on Sprint which supports WiMax. However I don’t think the true competition in the future will be between 4G standards, it will be between wired and wireless broadband.

    Here are two articles with a bit more info on LTE vs. WiMax
    http://www.circleid.com/posts/20090310_wimax_vs_lte/
    http://gigaom.com/2008/03/05/a-little-4g-sibling-rivalry/

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  • stefn

    Great article, Dan.

    This and the article on the “$99 netbook” converge to my thinking: I don’t agree with your idea that replacing iPod and Books sales is an issue.

    Really this is simply the inevitable shift to subsidized pricing, like the iPhone (and all phones historically), finally brought to the computer area. Partnered with AT&T, Apple can offer a “MacCloud” netbook subsidized with a service contract for 3G, like the Kindle. Say, $300 a year for three years for a base plan. Imagine how many years it would be paying service fees, given the longevity of Apple products.

    Jobs said Apple won’t produce a junky netbook. Great. But the $199 iPhone isn’t junk; it’s simply employs subsidized pricing to produce a great Mac at a very low price. In fact, this netbook is the Mac that all the Apple design vectors (lighter, smaller, thinner, safer, simpler) have been pointing at for years. The “MacCloud” can run the iPhone OS. Now that’s a computer for the rest of us: Simple, useful, uncrashable, highly secure.

    Better than the Kindle, the MacCloud can connect to MobileMe. (I’m already paying that.) So our files are available all the time with 3G/MobileMe. Again, simple, secure backup for the masses. It’s all the Mac most of us would ever need. It’s a complete, untethered iPod, with its information, communications tools, plus video conferencing perhaps.

    And it’s a monster moneymaker. The MacCloud would be a purchasing machine for video, music, need I say software?, and services like banking and investing. All of which Apple can make money on.

    And money is the ultimate content stream. Be my guest, Apple, just get me that netbook!

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  • http://www.adviespraktijk.info Berend Schotanus

    This article is America centric. Sure, great analysis if you live in USA. For the rest of the world:
    – Who is AT&T in the first place?
    – We know Nokia, why bother it doesn’t sell in America?

    The iPhone is sold all over the world through different providers and with different market models. In some countries there is one provider, in others more than one, in some countries the iPhone can be purchased unlocked. In different countries Apple partners with different providers. In a worldwide perspective Apple doesn’t have a unique close relationship with one single telecom provider.

  • http://www.adviespraktijk.info Berend Schotanus

    “Despite leading the world in countries where it established an early lead, Nokia has near zero penetration into the US market because it has no real partnerships with providers here.”

    Well, if provider partnerships are really so important (I guess they are), consider this one:
    T-Mobile is exclusive iPhone provider in Germany, the Netherlands and some other countries. Currently T-Mobile is putting near zero marketing effort in the iPhone. Instead most T-Mobile marketing goes into the Android G1. Reading this article I suddenly understand why: T-Mobile doesn’t have any interest in investing in a platform that denies them access to the American market. They do have huge interest in keeping competing platforms available, and probably Android isn’t a bad choice, because that means better opportunities worldwide. So despite having exclusive iPhone rights every G1 sold instead of an iPhone is a gain for T-Mobile.

    If T-Mobile doesn’t want to to sell iPhones, tell me who will?
    Oh yes, Apple can choose Vodaphone as it’s next partner but Vodaphone will have the exact same considerations: when they cannot sell iPhone in all their markets they have a huge interest in slowing down iPhone growth.
    The only way to get T-Mobile and Vodaphone really on board is to allow them to sell iPhone in all their markets and – you already guessed it – you end up with this GSM / Nokia kind of market model.

  • http://home.comcast.net/~daguy daGUY

    Good article, but I have to take issue with this:

    “Apple’s ability to corner the market for digital downloads turned out to be a fortunate turn of events…as it defused Microsoft’s ability to control music, and in turn prompted the labels to offer their music as MP3s through Amazon and other outlets.”

    Hm? So it was fortunate that Apple assumed total control over digital downloads, but it would have been bad if Microsoft did? What’s the difference? Aside from Apple’s DRM being slightly more permissive than most, I can’t follow the logic that it was good for consumers that Apple “cornered the market” but not Microsoft.

    The labels started selling MP3s through Amazon in order to use “DRM-free” as a selling point against iTunes’ dominance. Wouldn’t the same thing have happened had Microsoft owned the market instead of Apple?

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  • http://www.facebook.com/people/David-Hupp/1155330480 David Hupp

    @reed64
    “My main Uverse signal is delivered over my home’s existing coax wiring to my main/den HDTV directly into a “wireless gateway” which is then attached by an ethernet cable to the primary DVR video distribution box. This box then back-feeds over the coax to distribute recorded programming to the other TV’s throughout the house (which each have a smaller, non-DVR, Uverse component box).”

    The 2Wire gateway can supply the network over both ethernet and MoCA (IP over coax). The MoCA just lets you use your existing coax/cable infrastructure instead of making you run CAT5 all over your house. You can use U-Verse purely over ethernet if your house is wired for that.

    @reed64
    “As a practical matter, the ATV cannot be redesigned to replace the Uverse residential gateway. The gateway is one of the key hardware links between the home and the neighborhood telephone “CO box” from which Uverse is distributed over POTS pairs. I doubt Apple wants to take on that connectivity issue in a software redesign of ATV, nor would AT&T want to turn over that key service component to Apple. Further, upgrading the ATV to include a DVR seems redundant and unnecessary from AT&T’s perspective.”

    The 2Wire gateway is just a combination DSL modem and 802.11g/ethernet/MoCA router. The 802.11g isn’t sufficient for the video, but I’m sure that 802.11n would be. In that case, a DSL modem and an AirPort Extreme base station would replace all of the 2Wire’s functionality, save for the MoCA networking.

    The actual U-Verse Set Top Box is basically just a software client that that runs on a generic Cisco box (I think it’s Microsoft’s IPTV solution). Assuming that the Apple TV has enough horsepower, and the IPTV client software is relatively portable, the IPTV client software could be modified to run on the Apple TV, turning the Apple TV into a U-Verse STB. Again, the only thing missing hardware-wise is the MoCA support, but the 802.11n could make up for that.

    @GwMac
    “I just checked out the U-Verse website since I wasn’t that familiar with it. It is not available in my area. I am more familiar with Verizon’s Fiber internet that also offers TV service. Is AT&T also using fiber optical? I would assume so since HDTV would require a lot more bandwidth than DSL is able to provide. We can get AT&T DSL service where I live but I think the top speed is pathetically slow at around 3 Mbps vs the 20 Mbps I get now with cable internet.”

    Verizon’s FiOS runs Fibre To The Premises for all customers. AT&T only runs Fibre To The Premises for new construction. For legacy customers, AT&T runs Fibre To The Node (the cross-box at the end of your street), and uses the existing last leg of copper for VDSL. Because AT&T is using legacy copper infrastructure, their U-Verse Internet tops out at 18 Mbps, not including the bandwidth used for IPTV. Anyone who can get U-Verse can get 18 Mbps, as compared to AT&T ADSL, which tops out at 6 Mbps. AT&T ADSL uses legacy copper all the way from the CO to your house, so your available speed is highly dependant on your distance from the CO. On the other hand, ADSL is basically available everywhere, so you get what you can get.

  • http://www.facebook.com/people/David-Hupp/1155330480 David Hupp

    @reed64
    “Upgrading the ATV to include a DVR seems redundant and unnecessary from AT&T’s perspective.”

    For comparison:

    Upgrading the iPod to include a cell phone seems redundant and unnecessary from AT&T’s perspective.

  • http://www.facebook.com/people/David-Hupp/1155330480 David Hupp

    @reed64
    “The gateway is one of the key hardware links between the home and the neighborhood telephone “CO box” from which Uverse is distributed over POTS pairs.”

    FYI:

    – CO = Central Office = That big building in the centre of town with a giant AT&T logo on it and no windows. (http://en.wikipedia.org/wiki/Telephone_exchange)

    – Node = cross box = that big metal cabinet at the end of your street.

    FiOS runs Fibre To The Premises (your house). U-Verse generally only runs Fibre To The Node (except for new construction). Traditional DSL/POTS only has fibre at the CO.

  • http://Lyndell.NET/wordpress/ lyndell

    That fat pipe AT&T offers TV could feed Apple TV beautifully creating the cableTV illusion, while providing time and place shifting.

  • GwMac

    When you look at some countries like South Korea and Japan for example with nearly ubiquitous 100Mbps Fiber connections at around $25 to $40 a month, you have to wonder how we can compete. There are a number of reasons why it was much easier to accomplish their quick shift to cheap fiber including government policies, highly urbanized and concentrated cities, and a relatively small land mass. I moved from Japan about 4 years ago and was using 52/10 Mbps ADSL and paid only $25 a month for example. Now I pay over twice that for less than half the speed. (20/1.5 @ $52)

    Given the suburban sprawl and vastness of the U.S. it is going to take a massive amount of resources to roll out fiber to more than just a few large cities, not to mention a will to do so and a lot of time. It also concerns me the way Verizon and AT&T have different pricing tiers. For example Verizon charges $140 a month for only a 50 Mbps connection. I understand they need to recoup their investment cost, but that is outrageous. The upload speed in Japan at 55Mbps for example is faster than Verizon’s most expensive download speed. Pretty cool link from an American Mac user in Japan.
    http://www.dannychoo.com/adp/eng/1653/Japan+Optic+Fiber+Internet.html

    The reason I mention Japan is I was wondering if they wouldn’t be a better test market for this new Apple TV concept given their high fiber penetration. Also just longing for those speeds here at more reasonable prices, but the way things are looking we are doomed to pay far higher prices for much slower speeds for many years to come. LTE or WiMax might offer some hope, but I can just about bet they will also price their plans similar to the current competition or even higher. I used to think BPL (broadband over power lines) might be a solution, but that seems to have dies on the vine. At least Obama seems a bit more in touch with this disparity and government intervention is probably our only real hope to if not catch up, at least not lag so far behind.

  • roz

    Its silly to say, as this article does, that Apple had to have an exclusive deal for any extended period, beyond 6 months with any one carrier, in order to introduce the iPhone. Palm and RIM are two clear examples of an alternative approach Apple could have taken. It’s not rocket science. You’d have a CDMA for Sprint and VZ and the same as what we got for Tmobile. Yes, it means some engineering for the CDMA version, and, yes, you’d be later redoing this work for LTE, but if Palm and RIM can handle that, you’d think Apple could too. I really don’t see the big deal here. Its not a technology based position, its Apple’s dealmaking that ruled this.

    Apple thought that they could squeeze more rev out of a partner and maybe they did. On the other hand they limited their addressable market to only ATT customers or those willing or able to switch. This market constraining approach has a few significant negatives for Apple. One, it limits the audience of the iPhone and thus reduces sales and the reach of the platform. Not a huge deal for the iPhone we’d assume given its success but then again we don’t know how many more customers would have been there if they could choose their own carrier. I happen to know quite a few people who’d like an iPhone but are tied to VZ for work. They simply can’t change no matter what – so they all are buying Storms and Curves. Two, it props up the carrier agnostic smartphone makers. RIM, Android and Palm gain because Sprint, TMobile and VZ are desperate to have an alternative to iPhone. So one after another there is a huge effort to support competition to iPhone. If these carriers had an iPhone to sell they would not be so motivated to be negative on the iPhone and to subsidize other devices as they are today. Would we see a Pre if Sprint could sell the iPhone? Would VZ push the Storm if they had the iPhone to sell? I doubt it. So in this way the exclusive deal is creating competition for Apple. That is a negative not to be overlooked.

    The AppleTV is a great product but its also simply too limited. It does not do what people want to do with a TV, watch TV. Very few people are looking for more complexity in their living room. Most people already have a lot of devices there that they can’t use, remotes they don’t know how to handle. AppleTV does not address any of this.

    A lot of people I know are using computers instead of TVs. People who use TVs have have adopted another solution: Tivo, netflix, or a cablebox DVR. None of these are great but they are doing the basic functions that people want. AppleTV doesn’t.

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  • reed64

    @ Roz

    “A lot of people I know are using computers instead of TVs. People who use TVs have have adopted another solution: Tivo, netflix, or a cablebox DVR. None of these are great but they are doing the basic functions that people want. AppleTV doesn’t.”

    I think it is safe to assume that millions of people across the globe appreciate (and use) their widescreen HDTVs. I would also bet that those that already use the ATV in their HDTV setup appreciate the ATV for what it does provide, instead of what it doesn’t. Does anyone with an ATV kick back on their couch and watch HD Rev 3 podcasts on their 50 inch LCD? (I watch about 5 different video podcasts a week on my home theater — not just the Rev 3 staples). Does anyone listen to the Adam Carolla Podcast over their home theater while cooking dinner and laugh their as_ off? (I do.) Does anyone appreciate the simplicity of the ATV movie rental GUI and the ever improving new release and back-catalog content? (Again, I do). I am sure thousands of ATV owners have their own specific uses that they would not want to live without.

    I appreciate the breakthroughs being made by Hulu and all the other non-traditional broadcasters. However, while I sure this will pis_ many on this board off, no experience staring at a laptop on a coffee table will ever trump the regular consumption the same content from a couch on an HDTV home theater.

    I think some of the comments have missed the point of the original post — Apple’s market for the ATV is not college students who can’t afford cable/satellite and want a platform to rent movies (those users are probably using bittorrent anyway). Just like the *majority* of their products, the ATV is for high end users — those who can already afford cable/satellite and want a Set-Top-Box that augments the existing system and adds value. Sure TIVO may offer some of these features, but with monthly subscription fees and a costly hardware purchase. The basic premise of the Daniel’s post (and my alternative proposal) is that ATV needs a vehicle to spur market penetration. My view is…forget complex ATV redesigns for a specific provider. (Why shouldn’t a FIOS customer have an option to add an ATV). A subsidized Uverse/ATV bundle COULD potentially place the ATV in million of households, where it never stood a chance before.

    Daniel’s post was right on the money. I just happen to think that no radical redesign of the ATV is necessary to achieve the end result – an ATV in millions of Uverse households, serving up millions of movie rentals, song purchases, and podcast downloads every month. Who is not happy in that equation? The content producers reaping the benefit of a huge spike in VOD rentals? Nope. The service providers reaping the benefit of a huge (recurring) bump in monthly subscribers? Nope. Apple, with millions$$ in additional iTunes revenue via ATV? Nope. If there is a counter-argument as to why this is not likely or possible, by all means, I would love to hear it. I don’t have a crystal ball and can’t predict whether these two corporate behemoths can actually make this happen. I just see it as an easy to implement “SUBSIDIZED HARDWARE BUNDLING PROGRAM” that benefits both companies significantly in the long run (and probably stops several STB competitors cold in their tracks).

    I could certainly be wrong. I have been many times in the past. One aspect I may have underestimated is the revenue AT&T earns via their own VOD movie rentals. Sometimes I have the choice of renting the exact same movie over Uverse or ATV. I always choose ATV, because if I get interrupted and decide not to start the movie, I have 30 extra days to watch the rental. I suppose it is possible that AT&T would never cannibalize that VOD revenue stream. But if push comes to shove, I bet even AT&T would admit that two years of guaranteed Uverse subscriber revenue is worth far more than that same subscriber’s lost VOD purchases.

    Apple and AT&T should wake up and smell the coffee. Ramp up ATV production ASAP and BUNDLE (the all-new!) ATV 3.0 with Uverse.

  • anonymousmonk

    I’m really enjoying this blog, & this post in particular has a lot of great food for thought. I see 2 fatal flaws in the idea of pairing AppleTV & Uverse directly, though.
    1. ATV’s rental & show/movie purchase model both compete directly with AT&T’s VOD service, which is probably pretty lucrative part of their service. There’s no way both can win that space.
    2. Adding DVR capabilities to an ATV would kill a lot of the demand for buying shows. Aside from older shows (& even in that case there are reruns), there’s far less need for iTunes anymore. Apple has always said that iTunes is meant to enhance & service the iPod, etc. & not be a standalone part of their business, but it has grown from novelty music videos to a serious media hub. I can’t imagine them cannibalizing that business just as it’s getting good.

  • roz

    @reed64

    Glad you are enjoying your ATV. I just think its really a narrow audience that wants more boxes connected to their TV. People really have trouble with input selection and knowing what remote does what. As long as that is an issue, people would rather not have the complexity of more devices. So I don’ t see much value-add for ATT to bundle the ATV assuming there is no real integration. But hey companies do stupid things all the time.

  • reed64

    @roz

    Check out my original post. There would be nothing to prevent AT&T and Apple from implementing some software hooks and integration for ATV users who are also using Uverse. My Uverse remote has five inputs across the top. It shouldn’t be too hard for AT&T to work with Apple and re-program one of them to say “ATV”. Regardless, the ATV remote is one of the simplest pieces of input hardware I have ever used. On my system, HDMI Input 1 controls my Uverse. HDMI Input 2 controls my ATV. I fail to see how this is complicated beyond the comprehension of ANY average consumer, much less one seeking a 300 channel HDTV + DVR setup via Uverse. Call me crazy, but I think those subscribers would “get” the little white remote that came with their free ATV 3.0. The point would be for AT&T and Apple to market the combo as the “iPhone” for your home theater. The ATV interface is slick, just like the iPhone, and it would not be difficult to package and market the killer combination of Uverse and ATV. See post from @lyndell above.

    Maybe the proposed ATV hardware subsidy is “stupid” as you say. But there is no doubt that AT&T has benefited immensely from the iPhone exclusivity agreement with Apple. Maybe AT&T would like to entice Apple to renew that agreement via a side deal entailing an ATV hardware subsidy that *exponentially* expands the install base of ATV. THAT….hardly seems “stupid” to me (for either company).

  • roz

    Yeah I did read that over. Real integration to me is not selling the consumer two boxes to setup and switch between. If that is your vision, frankly, I think it’s bunk. But hey if they want to do it I am fine with that for now, even though I think it is a joke. I just watch how people I know use their TV and many many people already can’t use their TVs. That whole thing about switching HDMI inputs, uh….I get it. I always have. Kids get it. But for some reason there are a lot of people I encounter who simply don’t have a clue what that means…. I don’t see SJ being excited about this fix.

    Now if there was one box connected to the TV and it was an Apple UI that ran the show top to bottom, including DVR functionality, then Sir, I would agree 150%. Great combo. And maybe ATT would do that. I think its lame though. Why? Because then we’d be sitting behind ATT’s slow roll-out. Its taking forever.

    Much rather see a solution based on Tru2Way so that anyone with a cable connection could set it up. I just think that taking the leap to Apple is hard enough, don’t want to have to be dragged into changing cable providers too, especially if the service is not offered in your area.

  • http://williamfrantz.com wfrantz

    “Apple’s iTunes is the only source for commercial video content that isn’t taxed by Microsoft.”

    DivX Video On Demand has been available for years and enables commercial video content to over 100 million devices without Microsoft DRM.
    http://vod.divx.com
    http://investors.divx.com/releasedetail.cfm?ReleaseID=340248
    http://investors.divx.com/releasedetail.cfm?ReleaseID=318011

    DivX also offers a slot rental system similar to what Daniel envisioned here http://www.roughlydrafted.com/2007/12/07/how-apple-could-deliver-workable-itunes-rentals/

    [Thanks for posting this. But is DivX supplying commercial video in the sense of “things one can pay for” or “things I might actually want to watch”? The links only talk about DivX partners, without giving any real examples that I saw. There’s a big gulf between coming up with a system and actually getting access to studio content, and also finding actual customers. – Dan ]

  • NB

    Arguing that AT&T is the major selling point of the iPhone sounds like the height of folly. Wasn’t there a report that hundreds of thousands of iPhones found their way into the Chinese market, unlocked and jailbroken? The one sound I’ve heard from Americans at the introduction was “Nice device but why AT&T? That ruins it.”

    Apple went with EDGE in the original iPhone because 3G support would have given the handset really atrocious battery life rather than bad-to-mediocre. Finding a carrier crazy enough to run an older network technology for a while longer or even extending coverage for what then already essentially was a sideline of history was quite the coup. AT&T needed iPhone much more than iPhone would need AT&T in a perfect world, but going exclusive probably allowed Apple to extract several promises from AT&T regarding network buildout that it otherwise would not have gotten and that probably made the iPhone the success it was.

  • http://williamfrantz.com wfrantz

    “There’s a big gulf between coming up with a system and actually getting access to studio content, and also finding actual customers.” – Dan

    Well, DivX has the system, the footprint and access to content from Sony and WB. BTW that’s nearly 50% of all Hollywood titles. So the trick seems to be finding customers. The iTMS is the most successful vendor of digital media and even Apple admits its a break-even business with just 25 sales/iPod total. So it’s not surprising that few distributors are lining up to operate a break-even business competing against Apple online and Wal-Mart brick-and-morter.

    In fact, cable and satellite TV are also break-even business models. They have PPV but most of their profit actually comes from one category; adult video.

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