The Ultimate Apple TV Could Be Further Off Than You Think

  • Apple has been trying for years to launch a streaming TV service.
  • But high content costs and hardball tactics during negotiations with content providers is not helping its efforts.
  • Investors might have to be content with the current Apple TV.

The TV market landscape continues to be in a state of flux as new entrants such as Apple  Inc. (NSDQ:AAPL) and Amazon.com, Inc. (NSDQ:AMZN) are jockeying for strong positions while old players struggle to hang on. TV represents a massive marketplace from an advertising point of view, and Apple has been trying for years to build a cable-style streaming service, but with nothing to show for its efforts. While looking for new growth avenues, Apple has not disrupted or innovated enough in the TV arena.

Now it also appears as if Apple is doing its best to make it even harder to achieve its dream. Apple is busy negotiating itself out of TV deals with cable providers. Early last year, Apple was in talks with Walt Disney (NYSE:DIS) but ended up scuttling a potential deal after it demanded that Disney grants it an extended invariable monthly per-viewer rate for Disney's channels. The current cable industry pattern involves yearly rate increases for channel licenses. Similar negotiations with Twenty-First Century Fox (NSDQ:FOXA) and CBS (NYSE:CBS) hit a snag after Apple made tough demands.

Apple has been making aggressive demands partly out of necessity because programming costs can be prohibitively expensive. Eddy Cue, Apple's senior vice president of Internet Software Services, is on record saying that Apple has time to wait and it will eventually get its way. Investors might not have that kind of patience and Apple's style of negotiations will certainly not help the company or investors. Meanwhile, networks fear that making specialized deals with Apple could mean making less money from traditional cable distributors.

Apple, however, is not alone. Alphabet Inc-C (NSDQ:GOOG)  has been trying to build a web version of cable TV on YouTube unsuccessfully for years. There are reports that Google is planning to soon launch an online TV service called Unplugged. Like Apple, Google has been trying to negotiate content deals with a number of media companies. But this is not the first time that Google is trying to bring TV to YouTube--the company has been at it since 2012.

Just like Apple, Google's efforts have been hampered by high programming costs. Both Apple and Google want to offer a TV service equipped with a selection of channels from a variety of networks. Both companies are reportedly shooting for a service that costs around $30 per month or less because otherwise not many people might be eager to sign up. Dish Networks already has a SlingTV skinny bundle that goes for $20 a month while Sony's PlayStation Vue costs $30 per month.

Apple HDTV?

There have been persistent rumors amongst investment circles that Apple could be contemplating a TV set. Whereas this might provide a decent growth runway for Apple, it just doesn't seem very likely that the company would be keen on getting into the low-margin TV hardware business. TV hardware sports very thin gross margin of around 10%, which is only a quarter of Apple's GM of 40%. Many manufacturers only manage breakeven after factoring in marketing and other ancillary costs.

Another big downside of selling TV sets is because unlike smartphones and computers, people don't buy TVs that often. A smartphone upgrade cycle typically lasts 2-3 years whereas the average person will hold on to his TV set for maybe a decade until it dies off or the introduction of a new standard forces his hand.

Although Apple has no shortage of television-related patents, they are all for features such as motion control remote and glasses-free 3D, and might not be enough of a differentiator to make getting into the highly commoditized  HDTV industry worthwhile.

As far as hardware goes, Apple might not see a compelling enough reason to go beyond Apple TV (the little set-top box hockey puck) which is ranked fourth best-selling in the streaming devices market with a 20% market share. Recent hardware refreshes for the 4th generation Apple TV including Siri remote has helped Apple see 50% sales growth.

Investor Takeaway

It might be years before Apple manages to cut itself a respectable niche in the streaming TV industry. With content costs so high, people might have to make do with the likes of Netflix (NSDQ:NFLX) and Hulu. Apple investors might have to look elsewhere for the next big opportunity for the company.

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