How Google TV Wins

In my previous post about the Apple TV 3/iTV, picked up by Business Insider, I sparked controversy by proposing that the new Apple TV 3 would succeed in areas where the Google TV has so far fallen short. Now I want to peer into my crystal ball again and predict the smart TV market a year or two ahead.

Launch Strategies for Google TV and iTV

Apple has entered the TV market cautiously, dipping its toes in the market through two generations of its Apple TV set top box. Currently the Apple TV outsells its nearest competitor, the Roku.

With its first foray into an integrated television, I predict Apple will continue to exercise some caution. Based on the most recent screen size projections of 32" and 37", Apple seems to be plotting an entry through the bedroom, dorm room and den, rather than trying to replace the entire living room setup at once.

For at least the first couple of years, Apple won't have a complete enough offering to convince people to give up their Blu-ray players, game consoles, cable boxes, and stereos. Instead, by targeting the secondary viewing quarters, Apple can introduce people more gently to the appeal of simplicity. Also, they can work out the kinks while building up enough content to wage a full assault on the main viewing room.

Even with a limited target audience, Apple can count on its superior user experience design, hype, and excitement about Steve Jobs' last great invention to drive a burst of early adoption measured upwards of a million units.

Contrast that to Google's strategy. With the first Google TV launched over a year ago, Google stepped out in front of the competition. They correctly anticipated that the most desirable solution is a simple TV with all of the software embedded. Following in Google's tradition, it went out with a beta that's more than little rough around the edges. As with Gmail, Docs and Android, the idea is to start first, improve over time. Its a strategy that has worked well in the past and will repeat itself in the TV market.

Early adopters will cast off their remotes and interconnect cables. Meanwhile, the mainstream will relegate the iTV and Google TV to bedrooms and alternate viewing spots. Over time, both will move in on the same market.

Unlike with the iPad, I don't see Apple having a cost advantage from massive scale. That spells a more competitive battle, and one that favors Google over the long term.

First to market with a beta: Google TV (last year).
In with a bang: Apple TV.

Market Share for Google TV vs. iTV

In the living room, similar industry dynamics are likely to play out again as in the iOS vs. Android battle.

Whereas the iPhone commands the best margins and has the advantage of standardization around very few models, Android's open licensing has proven very attractive to rival phone makers, who lack the software skills to create their own smart phone operating system or the market size to entice developers to write apps. As a result, Android has crushed RIM, Nokia and Windows Phone, despite the excellent reviews of the last.

Worldwide, Android phones now outsell iPhones. I suspect some of those sales come from under-powered devices that merely happen to have Android on them, and from overseas markets where Apple doesn't compete at mass market prices. Still, I believe the sales figures, and they're testament to the value of an open platform to manufacturers, more so than consumers, who aren't yet being hurt by Apple's closed platform.

Samsung, Sony, LG, Panasonic, Sharp and the others certainly don't want Apple to step on their turf. They will happily use free software from Google to prevent that from happening.

Combine them all together, with their Google TV enabled devices, and they should outsell Apple, and by a substantial margin, within a year after the iTV launch. The reason for the lag is that iTV will likely offer a superior user experience. Google and TV manufacturers will quickly copy as best they can.

Long term, the market split will not be close to 50/50, as it has been for phones. Google TV will quickly win big, in terms of having a greater presence in the living room. I predict that, although internet-connected TVs will remain a minority at the end of 2012, Google TV software will be installed on the majority of them, but as an option that's easy to ignore. Manufacturers will be hedging their bets.

Short term market share winner: Apple iTV.
Medium and long term market share winner: Google TV.

Profits from Google TV vs. iTV

The US market for televisions is 44 million units a year, with an average price that has fallen to only $460. Apple can and will sell at a premium. They will enjoy the best margins of any TV maker.

Likewise, Apple makes far more from its app store than Android. iOS developers earn 6 times the revenue of their Android counterparts, and Android app revenues may be only 7% of the iPhone's.

Also, Apple will supplement its income with iTunes video rentals, which should get a healthy boost from  iTV, especially with Netflix's many stumblings. (I wouldn't be surprised if Netflix managed to resurrect the Starz deal, but on terms vastly more favorable to Starz.)

By contrast, Google will earn nothing, or nearly nothing, from television sales by Sony et al. Google will earn less from TV apps. And Google still needs to gain broader acceptance of its YouTube Movies rental service, which has yet to catch on as big as it should, with prices below iTunes and a catalog similar to Unbox. The Android marketplace also provides a rental service. Revenue may be slow in coming.

But to all of those concerns, there's one simple answer: YouTube. Ad revenue from YouTube will be a near-term source of revenue, and Google will have a wide range of options for the future. Also, the more data Google can collect about people's viewing habits, the more Google can personalize ads and recommendations for tablet and PC-based browsing. No other company on earth knows better how to monetize browsing and search.

Hardware profit winner: Apple TV 3/iTV.
Content revenue winner: Apple TV 3/iTV. (Longer term, Google has great prospects.)
Advertising revenue winner: Google TV.

Google TV Can Win

Apple and Google have segmented the device market into distinct camps, competing for different revenue sources. Early on, Apple may win more hearts and more money, if Steve Jobs' legacy continues.

Meanwhile, Google TV will be winning big, or poised to win big, in terms of the total number of devices, funneling more searches into its algorithms, and improving its core advertising revenue stream. It will deliver higher valued ads not only on video content, but everywhere people go to search for information, whether from a web search, from a mobile device, or from their living rooms.

For a company whose business model is organizing the world's information, Google will continue to win, and big, on its own terms.

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  1. "And Google still needs to build, buy or partner with a comparable video rental service."

    Google already provides two avenues for movie rentals:

    1) The Android Market:

    2) Youtube Rentals:

    I have used the android market route seamlessly from my phone, and enjoyed the experience. I don't know if these have been tied into Google TV yet, but the infrastructure is all there to make this happen.

  2. Yes, of course you're right. I've updated the post to mention both services. Thanks!

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