Did Steve Jobs crack the TV code?


Steve Jobs, the late, great Apple (Nasdaq: AAPL) CEO, famously told his biographer that he had the TV market in his sights. “I’d like to create an integrated television set that is completely easy to use,” he said. “It will have the simplest user interface you could imagine. I finally cracked it.”

Rumours of an actual Apple-branded TV have been rampant ever since. Or rather, they gained steam — the idea of an Apple TV set has been around for years. Now, analysts think that Jobs had more than a great user interface in mind — Apple might crack the business model of selling TV sets as well.

So what’s the big idea?
Peter Misek, from analyst firm Jefferies, believes that the subsidised equipment sales that made the iPhone such a huge success could transfer to the TV business as well. Misek expects Apple TVs to sell for about US$1,250 straight-up, but then a US$500 rebate from your service provider could reduce the sticker shock quite a bit. He uses Verizon (NYSE: VZ) as an example:

“Hypothetically, if Verizon offered a $500 subsidy to new FiOS subscribers (but no Triple Play discounts) along with a US$20/month Wireless video fee, the payback period would increase to 13 months.”

Under this model, the iTV (or whatever it might be called) would draw in scores of new subscribers to Verizon’s FiOS TV service. The cost of the TV subsidy would add about four months to the payback period relative to an average new FiOS subscriber, who breaks even on equipment and installation costs after about nine months. This would be worth it if the Apple-loving new customers stick around longer than others or are prepared to pay higher service costs.

The same model could work for pretty much every TV service provider. Verizon and AT&T (NYSE: T) can hawk hardware in their retail stores, but even retail-less operators like Comcast and DirecTV could simply keep the TV sets in a warehouse and ship them out along with the service installation crew.

You can’t make an omelet without breaking a few eggs
Best Buy (NYSE: BBY) and RadioShack (NYSE: RSH) would absolutely hate that model, of course. Sales would shift away from electronics retailers and into the hands of cable and satellite service providers, much like most smartphones are sold directly from the network to the consumer.

The iPhone subsidies aren’t terribly popular with the phone networks today, though. Given that the two largest telecoms in America also sell TV services, Ma Bell and Big Red might sit out a second round of Apple-powered subsidy pain. But then, the cable and satellite guys could make up the difference very quickly.

All things considered, subsidised TV sets are an intriguing idea but not a slam-dunk winner. You do this kind of thing when you’re introducing a totally new, unfamiliar, and high-priced product to consumers, like the original iPhone. Then you’re stuck with the subsidy model, because your customers might go elsewhere if prices suddenly jumped sky-high. Apple and its various sales channels might prefer a slower and steadier approach, with lower sales volumes but less pressure to stay at an uncomfortable price point.

The Foolish upshot
I wouldn’t put it past Steve Jobs to come up with an original business model to go with the TV set. One of the greatest inventions in the iPad was a low-priced data plan, after all. And new CEO Tim Cook is an acknowledged genius of business operations, so he could have thrown in some of his own brand of magic here. But again, this particular idea flies in the face of what telecom chiefs say about subsidised hardware sales right now, and the timing doesn’t seem quite right.

Either way, this long-rumoured TV set just might be the next home-run hit for the world’s biggest and most successful consumer electronics dealer.

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The Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Anders Bylund, originally appeared on fool.com

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