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The Big Data Center Theory

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Amidst news about the departure of Bertrand Serlet, this morning has seen some outstanding opinions about what Apple will do with their data-center in Maiden, North Carolina. Combined with the unrelated rumors that Apple could license AirPlay to consumer-electronics makers, and we have various pieces of the puzzle that when brought together give pundits food-for-thought.

It’s stupid at this point to speculate whether Apple’s data-center is being built for delivering iTunes content and MobileMe: that answer was satisfied by COO Tim Cook at their shareholder meeting last month. Yet that’s a non-answer, because if Apple’s model for consuming iTunes content doesn’t change then why bother with a bigger facility? Scale is one thing, but you don’t invest a billion dollars in something without a game-plan. The question isn’t what the data-center will be used for, but how. Certainly MobileMe needs some help in the reliability department, but iTunes’ current model for consuming content (with a focus on downloading vs. streaming) has been well handled. Has anything recently consistently stuttered or ground to a halt on iTunes? Downloads have always been generally seamless. To instigate such an expenditure, the iTunes model would obviously move from primarily downloading content to streaming it. They’re not building a data-center because Apple can’t handle the iTunes load – they’re building it to prepare for what’s next. When you match this to today’s AirPlay rumors, I think Apple will make a huge play for the television market this year.

Apple is investing a solid chunk of cash (reportedly around one billion) into a data-center that will host a variety of content. With 200 million credit cards on file, people clearly have no problem paying for content in small chunks – instant gratification ultimately defeats time-slots on cable television. According to an earlier report from iSuppli, Apple is dominating the video-on-demand space accounting for 64.5% of consumer spending. When it comes to streaming, Apple only accounts for 4% of the market (Netflix accounts for 61%). Apple has realized for a long time that the market would eventually end up where it is today: people are slowly moving away from the cable companies and DVDs to pay for content on Hulu, Netflix, and most importantly iTunes.

Most importantly iTunes because that’s ultimately where consumers end up when they want to buy content. Sure, Amazon gives Apple a big run for their money, but if you own an iPhone or iPad I’m not going to side-load Amazon’s DRM-free songs or video into the iTunes client when I can just buy it all on the iTunes Store. The problem with iTunes is that it currently doesn’t stream everything, and that’s what the future of content is going to entail. Apple is getting ready to take your dime when you finally slam the door Time Warner or AT&T. Streaming is where Apple wants to be.

Look at the progression the Apple TV has made in the past months. It launched with Netflix, and gained support for watching MLB and NBA games in the past month. The big focus, however, is on streaming both over the local network and from the iTunes service itself with movie rentals and purchases. Have a movie on your iPhone or iPad? Stream it to the Apple TV. Don’t have a movie? Buy it and the Apple TV will play it post purchase. Bloomberg even notched the rumor belt today, adding that, “Apple would license its AirPlay software to consumer-electronics makers that could use it in devices for streaming movies, TV shows and other video content…” Do you see a master plan brewing?

The premise is this: Apple already works with third-party hardware makers to support iPod and iPhone integration in cars, within docking stations, and other vertical device segments.

Why not combine the hardware and software constructs to let consumer electronics manufacturers harness Apple’s iOS-iTunes mojo?

I think Mark Sigal from O’Reilly hits the nail on the head. The Apple TV by itself isn’t a big deal: but how easily you can access content is. The Google TV is a tremendous flop in the tech world, and Apple will go toe-to-toe by offering consumers the ability to acquire iTunes media outside the $99 puck. Cliff Edwards and Adam Satariano also make the argument that AirPlay has already been licensed for audio.

Apple’s chip vendor for AirPlay is BridgeCo., a closely held company based in El Segundo, California. BridgeCo. is working with several TV makers to build its products into Web- connected TVs, according to two people familiar with the talks.

If you want to encourage skeptical studios to bring content to iTunes, you have to start pushing iTunes outside of your ecosystem. Television makes sense (Apple already has a hold on music), and unless Apple simply plans to build their own TV, they only need to introduce the AirPlay spec to companies like Samsung and Sony. You don’t even have to build the iOS software into a television – as long as TVs are AirPlay enabled, people will just buy content on their iPads, leave it on the coffee table, and watch a movie on their big screen TV. You wouldn’t need to hook up a third-party box like a Roku or a Boxee Box because you already own a device that’s AirPlay enabled. If you don’t have an iPad, you have an iPhone. If you don’t have an iPhone, you have a Mac. Apple would still sell the Apple TV (people aren’t just going to rush out and buy new televisions for AirPlay), but pushing AirPlay everywhere starts to alleviate the issue of, “Where do I get content?”

But Apple’s data-center won’t strictly be about television. Music streaming is going to be big too, and I see Apple offering some service where music exists in the cloud and you simply stream it to your Mac or iOS device. It’s both in the direction we’re heading, and it eases the transition to solid state drives on the hardware front. I have a hunch that Apple will eventually pull the trigger on offering nothing but SSDs in their next major MacBook refresh, but that comes at a cost. A 256 GB solid-state-drive isn’t exactly cheap, and to compensate a streaming-only service would kill two birds with one stone. Not only is your media everywhere (on iTunes), but Apple can offer significantly smaller SSDs starting at 64 GB in your next MacBook purchase. The latest refresh of the MacBook Air offers SSD exclusively, and I expect all Macs except the desktop variations such as the Mini and the Pro to follow suit. I exclude those two models in particular since they’re currently advertised as being Xserve replacements, thus mass storage is still a primary benefit for these machines. As for MacBooks that require lots of storage such as the 15” and 17” models for mobile photographers and video producers, would HDDs become optional at that point as the optical drive is axed? It’ll be a storage supplement, with SSD providing a minimum for the operating system and some document storage.

Another benefit of streaming music and video consistently: you keep people in iTunes all day long. Me and you might look at Ping as a silly addition to iTunes because it doesn’t really serve a great social purpose outside of Last.fm, Facebook, or Twitter. I doubt Ping is final, and I think it’ll become more intertwined with Apple as streaming services are launched en masse. The reason Ping exists is to get you to follow your favorite artists, discover new music, and buy content. That’s pretty obvious right? But if you’re streaming content all day and exist in iTunes all of the time, I think people will start to use the service as a new social medium. Think about how Ping could be expanded to gossip with friends about a TV show or a movie – why not have the ability to follow your favorite hollywood stars? I think the role of Ping will become more apparent in the regard that it will be a service that allows us to discuss the content we’re streaming, it’s an excellent way for artists to self promote without looking like advertising, and ultimately you’ll buy more stuff. It’s not that Apple is bad at these things, it’s that they need the complete ecosystem for everything to fall into place.

How much should music streaming cost? VP of Internet Services Eddy Cue of Apple has argued that subscription services are simply too expensive, according to John Paczkowski of the Digital Daily.

“We note that an annual subscription to Napster now costs $8/month, while the paid version – unlimited, higher-quality, ad-free – of music streaming from Pandora costs $3/month.”

Philip Elmer-DeWitt on Bernstein Research’s Toni Sacconaghi claims that $5 would strike an affordable balance with consumers evading higher subscription prices. Rdio and Mog already start at $4.99 for their services, and Apple could simply price match these popular services (why leave iTunes?) with all of the record labels on board, and have more content available than the competition. Again, Apple can simply tie in Ping to match what Rdio offers as a commenting system for artists, albums, and songs.

Then there’s room to spare. Fortune’s Philip Elmer-DeWitt comments on recent ideas by (podcast favorite here at MacStories) Dan Benjamin, and also by Bernstein Research’s Toni Sacconaghi. Remember that Apple has acquired Siri and PlaceBase, which were companies focused around voice and location (maps) respectively. Apple will eventually launch a better voice-engine on the iPhone and a home-brew navigation solution to compete with Google’s Voice Search and Navigation Beta on Android. Apple’s data-center provides ample real-estate to serve this type content live just as Google does.

Says Sacconaghi, “If iAd gets traction while serving interactive, multimedia ads then Apple’s underlying advertising platform will need to be significantly larger, and at a scale comparable to Google’s or Microsoft’s ad platforms.”

Apple’s iAds came into existence partially because they couldn’t monetize off of free applications, and it’s a win-win if both Apple and developers are getting paid in the process of serving ads from advertisers. However, iAds aren’t just static banners or links to external content: these ads can be considered to be fully interactive apps by themselves that introduce consumers to new content by means of curious interaction. Ultimately iAds will stress Apple’s backend as they serve video and interactive content in these advertisements, and the data-center would easily serve this content alongside media being delivered with iTunes.

The last target to hit is MobileMe, and its future upgrade with the data-center is rumored to provide a free alternative to Google’s ecosystem on Android. Free makes sense for consumers as MobileMe syncs contacts, email, and data between all of your iOS and OS X machines at a low price, but it also makes sense for Apple as they can lock you in to the remaining offerings of their ecosystem. Apple isn’t just giving away MobileMe without any clear gain – it’s an incentive for the customer base to use their services over the competition’s. Think about this: Apple already has your credit card and email on file through iTunes, and offering additional MobileMe services (most likely storage space for documents) would only be a click away.

Apple’s data-center isn’t just about streaming affordable music and video, or providing an ample backend for MobileMe. It’s about developing an entire ecosystem of cloud-based products for customers focused on one-click purchases and always-on access to their content. Apple is preparing to face competition from Google in the music space, and Amazon is starting to encroach on Apple’s territory with video-on-demand. Apple still has the advantage, however, as they have a stranglehold on the music industry when it comes to getting exclusives for content (I can’t count the number of times I’ve seen bonus tracks exclusively on iTunes), and Amazon doesn’t have any integrated devices to distribute their content on. With every device Apple sells being heavily integrated with iTunes (Android loses here because without a default service customers flock elsewhere), you’re already a part of the customer experience. Once Apple launches its foray of streaming and data services, its grip on the current consumer base will be complete. You’ll use iTunes in replacement of On Demand television streaming, in replacement of Rdio, Spotify, or Google’s (still nonexistent) streaming services, and you’ll use MobileMe in replacement of Gmail.

Sources:

  1. Philip Elmer-DeWitt of Fortune: Apple data-center dreamin’
  2. John Paczkowski of Digital Daily: Apple’s Area 51: The Truth Is Out There
  3. Mark Sigal of O’Reilly: The magic adapter: Apple TV and the battle for the living room
  4. Cliff Edwards and Adam Satariano of Bloomberg: Apple Is Said to Weigh Expanding AirPlay for Streaming Video on Devices

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