Apple as a Cable Company

Apple's recent announcement for Apple TV take 2, with movie rentals, got me thinking. This thing is basically a new sort of cable box, one where everything is on demand. I think its the direction television is going on. One day there will be no channels, just RSS feeds of shows (podcasts), with new installments posting at regular times. With all the new tech, a big strike going on, and my huge cable bill, I thought I would do some math and see what the real costs are.

First the basic assumptions, using me as an example. I pay about $180 a month for Comcast cable. About $100 of that is for the video part, which gets me digital cable and DVR on two boxes, and no premium channels. I watch about 8 shows somewhat regularly, Simpsons, Family Guy, Daily Show, Colbert Report, Ugly Betty, Heroes, Torchwood, Dr. Who. I won't count news because that is usually free podcasts already.

iTunes charges $1.99 per show. Weekly shows have about 4 episodes a month for 6 months, for a total of 20 to 24 episodes in a season. The season pass saves you a little, so the cost per month per show runs around $7.50. Since you only actually have to pay that half the year, its more like $3.75 per show. Daily shows run more like $10 per month, and air about 10 months of the year, for a cost of $8.30 per month. So my 8 shows are $39.10 per month.

So $39.10 is cheaper than the $52.50 Comcast wants for standard cable, and is taxed less. Not everything I watch is available on iTunes, and some of those shows I can watch for free online, although not on an Apple TV. So dropping the video part of my cable would save me money on regular tv.

iTunes rents movies for $2.99 to $4.99 each, depending on the age and resolution of the movie. So I'll assume $4.00 per movie. With the $60.90 I have left after getting rid of video cable I could rent 15 movies, thats one every other day, a lot more than I usually watch.

Now I am a rather light TV user. I think for the heavy watcher iTunes may cost as much or more than cable. Consider someone who watches prime time shows 4 nights a week. That is about 5 shows each night, for a total of 20 shows at $3.75 a show per month is $75 a month. Still better than digital cable. Plus you actually own copies of the shows when you are done, you can watch again whenever you like.

Network television made about $48 billion in ad revenue in 2006. So with a years worth of a $3.75 a month show costing $45 a year, and assuming the network sees 80% of that, or $36, that means to make $48 billion about 1.1 billion shows need to be watched. If the average person is me and watches 8 shows, that means about 167 million people have to watch 8 series a year for them to make the same money as they do now.

The population of the United States is about 301 million as of July 2007. We all watch TV, and a lot of it, so assuming the whole population watches an average of 8 shows network TV would make about $86.5 billion. You can see why everyone is going nuts, and why the writers strike is so important. This model of people directly paying for only what they want has a lot of potential to it. Also imagine Apple or Microsoft getting the other 20%, thats $21 billion.

The average person watches about 4 hours of television a day, or 28 hours a week. Some shows are 30 minutes, some are one hour, some are weekly, some are daily, so lets assume 45 minutes per show, and 3/4 of the shows are weekly. Things cancel out nicely, meaning this average person watches 28 shows. Lets assume 16 shows, and the rest is 2 hour movies, 8 of them, at $4 each. (16 x $3.75 + 8 x $4) x 12 x 301,000,000 = $332 billion, of which $266 billion goes to the network, and $66 billion goes to the provider.

Now things are a little more complex then this. I haven't included the effect of the loss of DVD sales. I also only considered ad revenue, which would disappear in theory, but in practice there is product placement and other revenue streams. I think having to pay for each show individually may alter viewing habits, causing less viewing, and since you own a copy, reruns wouldn't deliver any profit, and some shows like news may still be free. Someone needs to provide all the bandwidth to deliver this to both ends, and be paid for it, but networks would no longer have satellite and broadcast affiliate infrastructure to maintain, and cable would be reduced to an ISP.

So I don't think anyone is going to make such insanely huge numbers, and there are winners and losers, but the direct approach does have some enormous upside potential. Current ad revenue is only about 18% of the potential revenue I calculated, so even with rampant piracy, a decline in viewers, and other troubles, the television industry could do pretty well. Also think of the potential difference in programming if it has to serve viewers directly to get their dollar, instead of being a vehicle to deliver eyes to advertisers who usually hold more sway than the audience.

All in all, I think this gives an interesting glimpse into what the future could hold if it were allowed to happen. Media companies have to stop being so scared and just give people what they want, and the money will come.