Back in June 2009 I conceived of what Apple’s, then rumored, touchscreen device might look like and how it might be used. One month ago Apple finally unveiled the iPad ; it only mildly resembles my conceptual model but it does embody a simple yet versatile multimedia device with a lot of potential. Since its introduction some have dismissed the iPad as nothing more than an oversized iTouch and while this description is relatively accurate it fails the recognize its intrinsic utility and why it will be such a huge success.

My presupposition of the iPad on the left and Steve Jobs’ actual product on the right.

The iPad’s intuitive user interface will appeal to less tech-savy users. As mentioned in the January 31 podcast of Six Pixels of Separation the device will remove a lot of “metaphors and architecture… inherent to laptops that deter many older users from using those devices.” For similar reasons, as well as its compelling gaming and media apps, the iPad will also attract younger users, even perhaps pre-adolescents. It was probably with this segment in mind the Paint App was demoed during the iPad presentation. The next generation of children will probably be mastering a touchscreen interface long before a keyboard or mouse. With its lower price point and conformability for recreational purposes, I also think that the iPad will become the cool, if not the standard, educational tool for younger users, replacing laptops as the device students tote from classrooms to recess. Therefore it should come as no surprise that a recent AdMob survey indicates that the Pad will be particularly popular with both the young and the old.

I also believe that the iPad will find fans in other segments such as at-home moms or dads, and sales people; as said on the Marketing for Coffee February 3 podcast, “(the iPad) will be a sales machine in a box… a good presentation tool,” echoing my similar prediction in June.

Although these segments will likely provide the initial demand for the iPad, I sincerely believe that it will find a very broad acceptance in the long run, and that it will become the device for consuming media on a personal level, just as a television is the device for group consumption. How often have you seen somebody use a laptop or BlackBerry while watching television? It is pretty much commonplace but neither device is ideal- a laptop is large and sometimes unwieldy, and a BlackBerry or any other “phone” device  is too small and limited. Although the iPhone and iTouch greatly expanded the range of the latter category, they are still a bit too small. The iPad is the “Goldilocks” solution that fits the situation just right.

So if the iPad is so great, how many will Apple sell? Pricing is the critical factor to consider. Apple announced six different initial models, probably to give options for every budget and to increase market penetration. The lowest priced model, a 16GB Wifi iPad, will cost $499 while the high end 64GB 3G model will cost $829. It is worth remembering that the iPod Touch sold over 13 million during its first 15 months, and began at price points of $299 for 8GB and $399 for 16GB, not too far from the low end iPad model. It is also worth noting that the iPod Touch is Apple’s undercover hit- iTouches are estimated to be 40% of the 58 million iPhone OS devices sold worldwide. Given it genuine utility and the market performance of the iTouch , I believe that the iPad will exceed most analysts’ sales predictions, which range from 1.1 to 7 million units for the first year.

An article today in the Financial Times mentions how Apple is supposedly pressuring TV networks to cut their episode pricing on iTunes in half, from $1.99 to $1. The price cut indicates that television sales have been lackluster. While exact iTunes sales information isn’t offered, it is known that Apple had accumulated sales of 15 million TV episodes in February 2006, 50 million in January 2007 and 200 million in October 2008. Based on this, in a recent in November 2009 I projected that Apple should have then reached sales of 86 million episodes.

I extrapolated the videos sold at December 2008 and 2008 on the speeds implied between official announcements. For example:

(200MM at Oct 16, 08 - 50MM at Jan 10, 07) = 150MM/645 days = 230K sales/day

50MM at Jan 10, 07 + (230K sales/day x 355 days) = 132.6MM sales at December 31, 2007

Utilizing this information I then calculated the average sales per user. Based on my calculations these average sales have dropped since 2007.

The bottom line is that Apple needs to rework its video strategy. The price cut attempts to address the issue. Why should iTunes customers pay $1.99 for a one-hour TV episode when they can spend the same amount for a game that they can play hours with? Apple understands that iTunes customers make this comparison, and that a TV episode, which is watched perhaps twice or three times, especially when repeat viewing require a user to store the video, taking up half a gigabyte of drive space, resulting yet another deterrent.

It’s also possible that Apple’s current roster of video platforms (iMac, MacBook, iPod Classic, iTouch, iPhone, Apple TV etc.) are simply not “fantastically great” enough for video watching due to portability (in the case of the computers) or screen size (in the case of the portable devices). Tomorrow Apple is presenting a new device, which could turn out to be the perfect device for video watching. It might finally convince iTunes customers to buy more TV episodes. It may also persuade Apple’s TV production partners to go along with the new iTunes pricing plan.

I wanted to follow up yesterday’s note on cable carriage fees by imagining a model that would determine such fees, at least partly, on the relative amount of audience that a channel attracts.

It occurred to me that such a model would be well suited for a digital subscription service, since it could faithfully measure the viewing audience for each channel on its lineup.  I decided to try and create such a model based on the parameters of the new TV subscription service that Apple is rumored to be developing. Supposedly Apple is offering broadcast networks a carriage fee of somewhere between $2 to $4 per subscriber while cable networks are being offered between $1 and $2 per subscriber. These top end of these fees run more than double what cable pays; a necessary compensation since the service will not carry advertising, eliminating a key revenue source for the networks, especially the broadcast nets.

Paying $4 per broadcast network would total $16 in programming costs to Apple. Also paying $2 per cable network with a 10 channel lineup would add on $20 in costs, totalling $36 per subscriber, well past the $30 price tage the service is rumored to have. Therefore, a viable business model for Apple’s service requires lower average carriage fees, but still needs an high upside to convince the networks to join.

An audience-based model that distributes fees according to viewership would allow for:

1. High ceilings for the carriage fees to the networks.
2. Fair compensation to networks for ad-based television viewing audiences cannabilized by Apple’s service
3. A lower total programming cost to Apple.

My proposal is to give each broadcast network a $2 base fee, with an additional $10 distributed among the four networks based on the share of viewing a subscriber gave to each one. Each network could have the possibility of reaching $4 per subscriber if they received 100% of the viewing for a given subscriber. A 25% viewing share would add $0.50. The following two examples demonstrate how it could work.

A similar model could also be implemented for the cable networks by simply substituting lower fees: a $1 flat fee per channel and a smaller distributed fee of $1 among 10 channels.

I realize that this model does not allow for much room in growing the channel lineup since it would incur significant new costs, but this could be planned for depending on Apple’s programming strategy.

In any case I do believe that this type of value-based fee pricing follows the spirit of business models espoused by Google (I am currently reading Googled by Ken Auletta), which efficiently allocate cost to value, and is the approach that will win out in the digital distribution of media.

The digital video market, being nascent, promising and hot, is the equivalent of a precocious young celebrity. They both attract a lot of attention, press coverage, and debate concerning which projects and relationships are worth pursuing. Of course, I have my own opinion, but just about digital video and not celebrities.

If you divide the digital video market by delivery methods (streaming or downloaded) and business models (consumer paid or ad supported), four sectors emerge.

Companies within the ad-supported streamed quadrant (upper left-hand corner) have received a lot of criticism lately for basically giving away for their content. Although YouTube attracts between 40 to 60% of total internet video streams the company places ads in only about 9% of these streams. Hulu has been somewhat more successful since it’s selling about 60% of its ad inventory, but the site has much less traffic, and runs only two minutes of spots per 22 minute program (a quarter of the standard amount on television). Hulu’s annual sales are running at about $120 million, a third less than estimates at the beginning of the year.

Unsurprisingly, there is much speculation about Hulu beginning a subscription service option, which would extend its presence towards the lower left-hand quadrant, along with the likes of Netflix and the “TV Everywhere” project currently being developed by Time Warner and Comcast. Such a business model might offer Hulu a greater revenue per viewer than what advertising currently yields, even at a high $50 CPM. Interestingly Amazon’s versatile Unbox service offers both paid streaming and downloaded options, placing it across both the lower left-hand and right-hand quadrants. Just within the paid downloaded quadrant iTunes is probably the biggest player.

Most of these companies do not yet have mobile video platforms. The only options seem to be YouTube, iTunes and Podcasts. Hulu may have an iPhone App in the works, but it seems to be on hold until their subscription service launches. This would leave Podcasts as the only mobile ad-supported downloaded service. It seems to me that this is an opportunity worth exploring.

Mobile video content has a strong value proposition. It offers portable viewing of video, anywhere and at anytime, and doesn’t require a network connection which can very unreliable or inaccessible in many situations. Mobile video also offers a higher level of viewer engagement than with television or computers where consumers can change channels or application windows. The only catch is that in order to make the most of this, you would have to “pause” or disable the fast-forward button during commercial breaks. Of course, the downloaded content would also have to an “expiration date,” as is the case with any video content, but this could be easily implemented with mobile devices just as Apple has restricted the length of time for viewing rented movies from its iTunes store.

I posted my idea for an ad-supported downloaded video on a recent article by Dan Rayburn concerning Hulu’s possible iPhone app, and how Hulu could opt for this route . His response:

Sure, it’s possible, but I don’t think likely as the consumer experience would suffer and the content would not be available instantly.

I respectfully disagree since consumers do want to be able to watch video content without relying on AT&T’s 3G network. Perhaps in the long term when mobile networks switch to 4G downloadable content would not offer the same value, but it remains to be seen how quickly mobile networks upgrade, and how data pricing plans also evolve. I also believe that consumers would be willing to temporarily cede their FF button in return for the right to see the latest episode of their favorite TV show anytime and anywhere. Viewers don’t mind sitting through the unskippable commercial breaks in Hulu and this proposition would be fairly similar.

The most important thing to remember is the immense market potential of mobile video. According to Nielsen, consumers currently spend about 3.5 hours per month watching video on a mobile device; that’s only 1.8% of the total time they spend watching video. Everybody is expecting this market to explode and the sooner or later a diversity of video options will be offered to satisfy a range of demands. Perhaps the downloaded ad-supported models won’t be the majority, but they will certainly be available. The only question is which companies will offer the service.

Last week Nielsen released the most recent version of its Three Screen Report, which measures consumption of television, internet and mobile media. As in releases since 2007 the study demonstrates television’s dominance in terms of time spent with the medium. On average a consumer will watch 278 minutes (4.6 hours) of “traditional” (non time-shifted) television per day.

New screen options may have a higher penetration rater but yield a fraction of television time. On average internet is used less than an hour a day. This time is also shared with television as the report highlights report that “the average consumer’s online experience at home is in front of the television almost a third of the time.” Other screen options like time-shifted television, internet video, and mobile video are each used less than 15 minutes per day.

Studying the latest report by age demographic it is obvious that television’s strength lies with the older groups. People over 65 watched traditional television almost twice as much as group aged under 18. The heaviest user group of both time-shifted video and internet usage was the 25-34 demo. The heaviest mobile video user group was the 12-17 demo.

Looking at the results by share of consumption give a slightly different perspective. Although younger age groups do not consume as much television as older groups, the relative share they spend with that medium as as high. This would be an important consideration for marketers trying to reach these groups. For all groups traditional TV reached above a 75% share of consumption time.

How long will users watch so much television and will there eventually be an equal footing in the market between these screens? It is difficult to say since there are many unknowns regarding consumer behavior, market participants and technology.

• Will today’s teenagers shift away from mobile as they grow older and buy their own HD-TVs?
• What is the behavioral ceiling for watching time-shifted TV?
• How will new products like smartphones and Net TVs affect the marketplace?
• How will content producers delineate the “windows” of movies and shows among the various screens and their distributors?

Again, it is difficult to predict the answer. I still expect the market to declare outcomes every quarter.

Last week Morgan Stanley (MS) published a paper written by a 15 year old intern in their UK office exploring teen media consumption. Morgan Stanley concedes that to not be “claiming representation or statistical accuracy” given the casual nature of the report. It is interesting to compare this paper’s beliefs to “How Teens Use Media,” a recent teen study conducted by Nielsen on a global basis. The two studies have substantial differences in certain areas, three of which I highlighted three in the following chart.

These discrepancies probably stem from the fact that the Morgan Stanley paper is basically inferred from a single perspective while the Nielsen study is worldwide survey. Furthermore it is probable that the UK cultural nuances differentiate the Morgan Stanley paper; it is also possible that it is skewed towards the younger end of teens since the writer is 15.

Still the personal nature of the Morgan Stanley paper gives it a certain appeal; it is filled with anecdotal nuggets, granting personable insight into how and why teens use media.

• “Teenagers visit the cinema more often they are in the lower end of teendom… this is due to pricing; at 15 they have to pay the full adult price, which is often double the child price.”
• “Many teenager use YouTube to watch videos (usually anime which cannot be watched anywhere else)…”

What is truly needed is a more thorough study of media consumption, directly comparing all age demographics from Preteens (10-12) to adults. The Nielsen Three Screen Study comes close to this, but the youngest demographic included is 18-24. It would also be greatly useful to categorize the media consumption not by age, but by birthdate, and to also conduct the study annually in order to judge how generational media consumption evolves.

This past weekend Apple launched the new iPhone 3GS, beating analyst expectations while selling over one million models. This is especially remarkable since the 3GS matched the 1 million sales tally of last year’s iPhone 3G launch, while only selling in only eight countries; last year the 3G was launched in 21 countries. During the next two months the iPhone 3Gs will be rolling out to 66 more countries. Given the 3GS’ sales potential demonstrated this weekend, as well as the lower $99 price point for the 8GB iPhone 3G, it will be interesting to see what Apple’s total iPhone will be this quarter. The iPhone 3G launch resulted in a considerable bump in third quarter sales last year.

It will also be interesting what happens in the rest of the smartphone market. According to Gartner Research, mobile phones sales dipped 8.6% in 2008, while smartphone sales went up 12.6%. Research In Motion (RIM) has had a strong hold in the smartphone market so far, but last week RIM forecast second quarter sales figures below analysts’ expectations. It’s difficult to say how much this has to do with the new iPhone 3GS but a Piper Jaffray’s analyst Gene Munster did a survey this weekend of new iPhone 3GS customers, indicating that the BlackBerry defectors were 12% of the 3GS customers, double the 6% found last year. All signs point to a tighter race this year between RIM and Apple.

UPDATE (June 23): An interesting article today in MediaPost mentions another smartphone study conducted by the firm CrowdScience, which further illustrates the challenges RIM is facing. The study indicates that 40% of smartphone users would don’t have an iPhone would switch to one, while only 14% of non-BlackBerry users would switch to the RIM device.

This week’s new iPhone launch piqued my interest again in Apple’s 10-inch touchscreen device, which is rumored to be released before the end of this year.

This device, let’s call it the iTablet iPad (Microsoft has a hold on the “tablet” category name), will be like a larger version of the iTouch. See below for what I estimated the size and shape to be, and how it would relate to Apple’s existing lineup of small electronic devices; from left to right: Shuffle, Nano, iPod, iTouch and iPhone.

The device can be seen as an extension of the iPod family, but what will it do? The iPad will probably have the following features:

• Multi-touch user interface, similar to the iTouch and iPhone.
• Accelerometer, although the functionality of this will be somewhat different given the larger size of the device.
• Rear or side external audio speakers, similar to iTouch.
• Video and audio output, a first for an Apple small device, but necessary in order to support many of the functions I believe this device will fulfill.
• Wifi for web browsing and connecting to iTunes and the App Store.
• Bluetooth for external devices (headset, keyboard, mouse, game controllers) and for peer-to-peer applications.
• Run on the new iPhone OS 3.0, which offers a variety of new functions including direct App Store movie and TV show downloading, In-App purchasing, Peer-to-Peer connectivity, Voice over Internet functions and Push Notification.

Given these features the iPad will transcend all current product categories since it will fill a variety of functions:

• Game Platform: The iPhone and iTouch have clearly demonstrated their ability to compete in the portable gaming market. I believe that Sony’s latest PlayStation Portable (PSP), the 3.8 inch screen PSP Go, revealed last May and releasing in October, is a direct response to Apple’s smaller gaming products. A 10-inch screen will extend Apple’s presence in the gaming market, towards the higher end. Also, since the iPhone OS 3.0 communicates with many accessories, the iPad may probably support Bluetooth gaming controls, which will make the iPad Apple’s first entry into the console game market. There are also rumors of Apple launching a premium game section in the App Store, which might be the direct software component of this strategy.
• E-reader: Clearly the Kindle is a device that has received great reviews and acceptance in the marketplace, but while its black and white digital ink technology facilitates text reading, it is not ideal for color periodicals. Apple is already beginning to cater to this market with iTouch and Iphones Apps like Iceberg Reader which offer both subscription or single pay systems through in-App purchasing. While the Kindle will probably remain the staunch choice for book readers the iPad could take the majority of the color periodical subscription market.
• Multimedia Display: I expect the iPad will become the choice device for multimedia-to-go. It would be much more practical and comfortable for watching movies on trips, instead of carrying around a portable DVD player or a laptop. It could also be shared for viewing between two people unlike an iTouch or iPhone. The new iPhone OS supports direct movie and TV show downloading, signaling where Apple might be going with the iPad.
• Presentation Device: The portable size and touch screen capabilities of this device will make it an innovative device for animated presentations. Just see how much touch screen technology is in vogue now, popping up every day on CNN’s Situation Room and in movies like Quantum of Solace. Salespeople who want show clients some extra pizazz will use the iPad.
• Sporty computer: I also believe that the iPad will be used by many as their ‘second computer.’ I am thinking about businesspeople who already have a company laptop. The iPad will fit that need as their fun computer, for using Facebook, reading Golf Digest online, and watching videos. For all the reasons I listed above, iPad will be the device that they take on vacations. Similar to how some people have two cars; iTablet will be the sporty roadster they use on the weekends.

There are probably a number of other functions I haven’t thought of; I never expected the iPhone to be used a medical device for example. All in all, the new versatile device is sure to overturn many established parameters about electronic device categories, which will appeal to many different consumer segments. If it launches before the Holiday season Apple has another breakout hit on their hands.

Yesterday Apple announced the latest addition to the iPhone lineup, the iPhone 3G S, which will be offered in two models, 16 GB and 32 GB configurations, priced respectively at $199 and $299. Simultaneously, Apple dropped the price for the existing 16GB iPhone 3G from $299 to $99. This is a heck of  a deal. Given the amount of talk regarding Apple releasing a low priced $99 phone I was wondering if they were going to introduce some sort of bare-bones “shuffle” iPhone. I should have realized that they would simply drop the price on an existing model. Price drops have repeatedly occurred during the iPod’s family history.

The area of the bubbles denotes the storage capacity of the devices. There seems to be three repeated trends here:

1. Maintain existing product lines at lower price points.
2. Introduce new luxury product lines with new features (iPod Video, etc.) at higher-end price points.
3. Introduce new economical product lines with less features (Shuffle) at lower price points.

The iPhone family, although just over two years old, displays similar trends.

I do believe that Apple is being very conservative in their pricing, probably as a result of the economic pressures most consumers are facing. This is clearly indicated by the new prices for an iPhone 3G ($99) and a MacBook Pro ($1,199). Interestingly enough Apple is maintaing the prices for their iTouch family (starting at $229). I believe that these will drop once Apple finally releases the new 10-inch computer tablet that has been catching a lot of press.

Last week the Council for Research Excellence (CRE) released the results of a new $3.5 million study sponsored by Nielsen titled “Media Behavior in America” focused on media usage and behavior, or more basically the amount of “consumer exposure” to “any of four categories of screens.”

1. Traditional television (including live TV, DVR playback, DVD/VCR).
2. Computer (including Web use, e-mail, video, etc.).
3. Mobile devices (including Web use, text messaging and video).
4. “All other screens” (including display screens, in-cinema movies and GPS navigation units).

Given the multiplatform focus of this blog, I wanted to quickly cover the results of this study.

Jack Wakshlag, chief research officer at Turner Broadcasting and member of the CRE, remarked that the results are “amazingly consistent across all the ages.” Overall over 67% of media time is spent with a television, close to six hours a day on average with just over five hours dedicated to live TV viewing. At 16 minutes of commercial time per hour this means that an average viewers sees over 80 minutes of commercials and promos each day, demonstrating the medium’s importance to advertising.

Computer and mobile usage was much less frequent, occupying less than a third of the total media activity. According to this study on average viewers saw only 1.2 hours of video online per month. Another recent study, by comScore, gauged that viewers saw five hours of video online per month. I am not sure how to explain this difference between the two studies. The CRE study was sponsored by Nielsen and was overseen by an independent board of advertisers, television executives and other industry experts. Regardless, both studies demonstrate that monthly online video viewing is a fraction of daily television viewing, indicating that television will probably remain the dominant advertising medium for quite some time.

Perhaps most importantly, this study demonstrates that the public is consuming media at a greater rate, perhaps since there are so many more options for them to choose from. From an advertising point of view this is both an opportunity and a challenge; an opportunity since their targets are more accessible than ever; a challenge because campagins will require coordination across different screens along with precise segment targeting.