When Apple CFO Peter Oppenheimer said that margins were great for the last quarter, but warned about a "future product transition" adversely impacting Apple’s margins in the quarter ahead, the fundamental question suddenly became, “What’s Apple Brewing?” (For some excellent analysis, check out ‘What's Apple's Big Mystery Product?’)
Look at it this way. Taking down margin puts some of the Apple magic ‘mojo’ on the line since it immediately leads to increased volatility of the stock.
Apple is only going to do that for a solid bet that delivers knockout margins and market share over the long haul.
Theory One: Apple TV Upgrade
Initially, I had a theory about Apple TV getting a major upgrade, with the iPhone/iPod touch having a solid remote control application for managing it.
The application case I saw was reinventing the set-top box experience in the same way that Apple re-invented the mobile phone.
Would Comcast want to be their partner? How about DISH? ATT?…..iPhone exclusive US partner, ATT. Hmm!
Apple has already got iTunes infrastructure set up, right, and have decided to focus on the rental market, but with a rev, maybe they could have a front end that literally overlays on top of the TV screen.
Think about it. That would be a logical upgrade path for the Apple TV and it leverages their media and carrier relationships nicely.
Finally, the mass adoption price point feels like something that might take down margins in exchange for securing a major foothold in the living room.
They could market it as ‘Web TV That Actually Works’ (dig at Microsoft intended).
Theory Two: Form Factor #3
It makes more sense that Apple is going to grow the iPhone 2.0 Platform into Form Factor #3 (iPod, iPhone, ??).
My guess is that Apple builds a device targeted as the interactive TV, gaming and video services player for a wireless broadband living room; aka The Smart, Connected Living Room.
This theory ties in with the video chipset rumors and some pretty sage analysis by Robert X. Cringely beginning a full year ago (see 'The Eyes Have It: Last week's Apple mystery is all about video chips (I think)') that explains the video chipset imperative.
In this scenario, Apple needs to support media playback that runs in its own modal, concurrent sandbox so it can support overlays for things like dynamic ad units, in-line messaging, information feeds and other interactivity capabilities on top of video, gaming functions.
Why? Media rich applications suck a lot of CPU power. If they do not have a dedicated path to get the job done, system performance degradation can occur. One sees this with regularity if you attempt to multi-task (e.g., listen to music, surf the internet at the same time) on the iPod touch/iPhone.
Theory 2.5: Pursue the Universal Remote market
If Apple wants to think like Sony, they could delver further into the consumer electronics area and launch this new device as a true Universal Remote Control, and position it as a living room companion since it also does all of the familiar stuff that the touch and iPhone does.
Side note: since it’s just a replicated version of their iPhone or iPod touch, this is another case that showcases where the integral-ness of Mobile Me lies -- synchronization and replication for owners of multiple iPhone 2.0 powered devices.
Again, I am guessing that the Universal Remote market is a relatively lower margin business, consistent with the announcement, but it is also a segment that probably could support its own form factor given potential market size.
Basically, pursuing the Universal Remote segment gets everyone to give the platform another “category” of regular usage, and ironically, where Universal Remotes suck these days – battery life – that is a strong suit of Apple’s platform.
Netting it Out
With iPod, Apple secured the position as market leader for the “media player + media marketplace 1.0” segment. With iPhone, they extended it with a mobile Internet experience which effective re-invented the mobile phone. Now, with iPhone 2.0 Software they are converging and extending these capabilities with the first caveat-free mobile platform and marketplace 2.0 functions.
With that as a backdrop, it is easy to see where this type of living room ‘land grab’ would be harmonious with iPhone, iPod, AppleTV and Mac universe, while setting the stage for Apple to roll out increasingly specialized variants of the software and form factor over time.
Heck, they’ve got Apple Store capacity and they are building out strong channel partnerships, like Best Buy, so distribution and reach via-a-vis a highly trained sales organization is not a problem.
Finally, such a strategy has the potential to avoid carriers where it makes sense, embrace carriers where it makes sense and do ala carte deals where it makes sense (e.g., HBO to disrupt Comcast);
And, as a fixed broadband wireless play, it overcomes both battery and broadband limitations.
UPDATE 1: Union Square Ventures (Fred Wilson's fund) announces investment in Boxee, what he dubs as the Firefox of the media center software (i.e., derived from an open source software project). Boxee also has a variant that runs on top of Apple TV, which is encouraging, since in the short term at least, it seems that Apple is not going to push Apple TV line as more than a hobby (I remain skeptical that this isn't head fake, but you never know). Also, SGN releases iFun, which turns iPhone/iPod touch into Wii-like gaming controller of PC games.
- What it Means to be a "Social" Media Center: Boxee, Apple TV and Square Connect
- iPhone 2.0 - What it Means to be Mobile: a detailed summary of my experience to date with the iPhone 2.0 platform.
- iPhone SDK - Mobile Reasons for Optimism: why the iPhone Universe is a big deal.
- iPhone 2.0 - Swinging for the Fences: an analysis of the WWDC Keynote by Steve Jobs.