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Will Apple Disrupt TV?

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July 23, 2013 – Comments (0) | RELATED TICKERS: AAPL , TWC , CMCSA

Board: Apple

Author: Goofyhoofy

There's an old joke "How do you make love to a porcupine?" Answer: "Very carefully."

It appears that's the route Apple is taking into the Apple TV business.

http://www.nytimes.com/2013/07/18/business/media/apples-move...

Google and Intel, by contrast, seem to be going for a more revolutionary approach:

http://www.nytimes.com/2013/07/17/business/media/google-is-s...

In a nutshell, "television" as we know it, is in firm lockup between content creators (Disney, Discovery, News Corp, Viacom, etc.) and distributors (Comcast, Cox, Charter, etc.) There is some incestuous overlap, with Time Warner having both cable systems and properties like HBO, CNN and more, and Comcast now owning NBC with its plethora of cable brands (Bravo, CNBC, etc.)

And since distribution tends to be monopolistic (ignoring, for the moment, satellite delivery which accounts for perhaps 20%, more in rural areas), they have a cozy little game going on, where they decide what to distribute and how much to charge for it. And while there are a few cracks in the dam, like YouTube and Netflix, those are almost insignificant by comparison.

The cable guys, of course, want to preserve their business model, since they have billions invested in fiber and coax, and being reduced to common carriers of whatever the customer happens to choose on any given day cuts them out of the lucrative profits of channel distribution. The content creators, on the other hand, are subservient to the hardware boys, since if Comcast elects not to carry your channel, you instantly become ten-times-smaller.

Oh, that's not a big risk for, say ESPN or a major brand, but those guys now have four or five "flanking brands" each - ESPN II, ESPN Classic, ESPN NobodyCares, and so on. And they get paid for each and every one: more for the big channel of course, but the flankers add up and cost little to produce.

In the days of "music", there were just five major music companies, but thousands of retail channels. Losing a WalMart or a Target might hurt, but you could get around them if you really needed to, using the thousands of independents and other major retailers. In television just a handful of companies control the distribution, and moreover, just a handful of companies control most of the production of desirable channels.

(When satellite first came along, the cable MSOs rushed to sign the content creators to "exclusive" contracts. The courts decided that was anti-competitive, since there was no way a business could both afford to launch satellites, set up a national installation infrastructure, and simultaneously recreate a competitive CNN, TLC, Food, CNBC, etc. The "exclusivities" were eliminated, and the industry sank into an uneasy alliance.)

But now there's a stranglehold from both ends, and someday, somehow it will be broken. Enter Google (and Intel) with one idea: complete disruption. And Apple with another (partnering with the industry in some manner.)

If I were to guess, I would say that Apple has the better chance to win, here, although other scenarios are possible including "nothing", or "complete disruption." But as Apple partnered with an existing cellular company rather than trying to set up its own nationwide concern (all new towers? sublease time from Sprint or AT&T? subcontract the whole business to Verizon?), they let the gatekeepers keep their gate, while working the Apple magic on the interface and user experience, not on the backroom boilerplate bullspit.

It's obviously way too premature to decide who will eventually prevail (and predictions have a funny way of coming back and biting you in the butt) but, but, but ... it's difficult to see how Google or Intel set up a completely different paradigm, given that the content producers already have a sweet thing going, and they are uber-cautious in trying to grab one gold ring while risking a bag full of silver elsewhere.

It's happening, painfully slowly. The networks are finally edging around their affiliates by allowing content to be streamed over Hulu, et. al. but with significant restrictions. The cable systems are making it slightly more convenient to DVR, but with less-than-compelling offerings to TiVo. The cable companies can't really stop Netflix and Amazon from streaming, but they can put caps on your bandwidth, making it hard (and someday harder) to eliminate their middleman role for content. (Cord cutting is vastly more talked about than done, so far it's a minor blip in the MSO's economics.)

I think Apple may be on the right track, here, but getting the cable industry, both hardware and software to move is terribly difficult, and getting them to accept a whole new idea close to impossible. It can be done. The question is: on what timetable might it happen? It won't be soon enough for me, both for the kick it would give the stock, and for the freedom from "the bundle" it would presage. 

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