Apple to Partner with Cable Companies, Offer TV at Subsidized Rate?

If you like two-year cell phone contracts, get ready for a two-year commitment to Comcast CMCSA. According to IHS iSuppli Home & Consumer Electronics research, Apple AAPL has the (obvious) opportunity to develop a “lucrative new business model” despite the “weak market conditions of the TV market.” Here's where things get interesting: IHS IHS speculates that Apple may not partner directly with content providers. Rather, IHS believes that the most likely partner candidates for Apple in the United States and Europe are cable service operators. “Similar to the cell phone market, consumers may be able to lease or purchase Apple's television from a cable operator at a subsidized price,” says IHS. “To make money in the low-margin television business, Apple's product is going to have to be different from every TV that's on the market today – and it will have to deliver more than just a whiz bang interface,” said Randy Lawson, a principal analyst for display and consumer electronics at IHS. “The company likely will partner with television service providers, allowing Apple to cash in on subscription revenue.” But would Comcast really be interested in sharing some of its profits with a tech company? How about Time Warner Cable TWC? I find it hard to believe that either of these companies – or any other cable or satellite provider – would be willing to sacrifice some of their profits just to join forces with Apple. If, however, they were to embrace Apple's proposal (whatever it may be), cable providers would instantly gain access to promotional opportunities within every Apple Store, within several Apple commercials, and on Apple.com. They'll get every Apple employee – from corporate execs to in-store specialists – to talk positively about the idea of spending $100 a month for cable. You know, in the same way that they convinced consumers to spend $100 a month on a minutes and data plan from AT&T T or Verizon VZ. Apple is the king of convincing consumers that there is no such thing as spending too much. Considering the situation that cable providers are currently in (many consumers are toying with the idea of abandoning cable for Netflix NFLX and Hulu), Comcast might actually benefit from an Apple deal. “Apple is really the only company that can pull off partnerships with operators, allowing it to offer a television set that's completely ready to watch when a consumer buys it, requiring no additional hardware like a set-top box, or a subscription for service from a third party,” said Lawson. Cable Innovation? Frankly, I'm starting to wonder if, considering the growth of on-demand cable technology, it would be possible to circumvent the need for a broadband connection and download TV apps directly through your cable service. The benefits would be two-fold: it would save on data (remember that most broadband Internet providers have a monthly data cap), and it would further simplify the experience. That said, Apple has quite a few hurdles to overcome. According to IHS, global television shipment revenue (which has slowed to the low single digits in 2011 and is expected to remain slow next year) will stagnate in 2013 before declining in 2014 and 2015. Comparatively, global pay television subscription revenue is expected to continue to rise in the coming years. This is quite a different picture from the one tech enthusiasts have been painting, in which everyone drops their cable service for streaming video websites. “In light of these diverging trends, if Apple does enter the television market, it will have to make its money not on hardware, but rather on subscriptions to content,” said Lawson. “This is a similar model to the wireless communications market, where cell phones are sold to consumers at a breakeven price or even at a loss, and the profits are all made on mobile service subscriptions. Apple has achieved major success with this model with the iPhone in the wireless market and could bring a similar business model to the television business.” Actually, Apple no longer sells the iPhone at a loss. While it may have started that way to build its customer base, the company now profits from every iPhone sold. Thus, it is wholly possible that Apple will start out taking a loss on its television sets and eventually work its way to hardware profitability through reduced costs and improved manufacturing practices. Challenges Ahead Manufacturing costs aren't the only issue. IHS says that the pay TV market is a bit fragmented, “with a multitude of operators with unique conditional access systems dividing up countries and regions.” “The fragmentation of the market is the reason why the cable and satellite set-top box business exists today, making it possible for any television to interface with the plethora of systems populating the pay TV market,” IHS wrote. “Apple may benefit from controlling the pay TV ecosystem – but it's critical for cable operators to control that ecosystem,” said Tom Morrod, head of television technology for IHS. “The television market is different from the mobile handset market. In the phone market, wireless coverage is a commodity – so Apple's iPhone had an opportunity to create differentiation. However, the content services operated by the cable operators are the differentiator. There's less need to differentiate on the hardware, and more benefits to find innovative services and application, like digital video recording. However, unless Apple can find and monopolize one such service, there is little incentive to share subscription revenue with a hardware maker like Apple.” But there are alternatives. “Apple could simply beef up the Apple TV hardware and service and integrate it into a display,” Morrod explained. “This would allow them to offer built-in content without having to integrate with a pay TV service.” In addition to the mountains of speculation provided by virtually anyone you can find on Techmeme, IHS has shared its own view of what the first Apple television could be like:

• It may offer a screen that is at least 50 inches wide.
• It could use LCD technology (the standard format for most HDTVs).
• Current rumors suggest the TV will ship in the fall of 2012 (six months later than the initial March 2012 prediction).
• “I'd be surprised if an Apple television came without Siri,” adds Jordan Selburn, principal analyst for consumer electronics at IHS.

ACTION ITEMS: Bullish: Investors who expect the best from Apple's TV should consider the following:

• If Apple teams with Comcast, Time Warner, DirecTV DTV, Dish Network DISH and other pay TV providers, they will likely see their profits increase.
• But if Apple goes against pay TV providers by forming an alliance with Netflix, Hulu, or some other firm (or by starting its own a la carte cable service), the traditional pay TV providers could suffer.

Bearish: Those who are fearful of Apple's future in television manufacturing should consider this alternative:

• Google GOOG, which is slated to acquire Motorola Mobility MMI, could be hurt by Apple's success in the TV field. If Apple were to fail, however, Google could use Motorola (which manufactures cable boxes) to gain some control in this space.
• However, Selburn does not believe that this is the path Google will take. Rather, he expects Google to spin off the cable box manufacturing portion of Motorola Mobility.
• If Google were to keep that aspect of the business intact, Selburn said that the company would have to offer an incentive to convince cable providers to buy a cable box that featured Google technology.

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