Apple Inc. (AAPL:US) engineers have been working since 2005 to reinvent TV viewing. Designing the gadget may prove easy compared with convincing media and cable companies to loosen their grip on the television industry.
This battle is nothing like Apple’s previous forays into the music and mobile phone spheres, when the maker of iPods and iPhones negotiated with weakened record labels and a fractured wireless industry. Now the stakes are even higher and the competition tougher.
Apple is vying with the likes of Google Inc. (GOOG:US), Microsoft Corp. (MSFT:US) and Amazon.com Inc. (AMZN:US) to make TVs the digital hub of people’s lives in an industry projected to reach $200 billion worldwide by 2017. Whoever wins must first strike deals with media companies or cable providers who have little incentive to cede valuable revenue streams. The result: Apple won’t be releasing a new TV product this year, as analysts had predicted, said a person familiar with the company’s plans.
“It’s not a nice, simple, easy story that Apple is going to come in and turn the world upside-down and we’re all going to live happily ever after,” said Craig Moffett, an analyst with Sanford C. Bernstein & Co., who has been studying the cable industry for two decades. Moffett added that any notion that Apple could soon unveil its TV system “ignores the business realities that make this such a complicated industry.”
In recent negotiations, the main stumbling blocks with cable companies have included a tussle for control over the software that determines the screen interface -- the look and feel of the viewer’s experience, said people familiar with the discussions. That’s also what TiVo Inc. (TIVO:US) has been offering for more than a decade with its hard drive-equipped set-top box that allows viewers to easily record broadcasts and, more recently, stream Internet fare. TiVo’s growth, though, has been stymied by fierce resistance from cable TV providers.
Apple, based in Cupertino, California, and cable providers have also diverged on whether a new Apple TV set-top box should be sold directly to customers or leased through cable providers, said people familiar with the talks.
So far, Apple’s television effort has been limited to the $99 Apple TV, a small box that streams movies, shows and other content from the Web. Unlike set-top devices from cable providers, it doesn’t deliver live broadcasts or record shows.
Since the middle of the last decade, Apple’s engineers have been working on a more advanced product to allow viewers to quickly find shows and movies, blending both live and recorded material, the people said. It would recommend content based on interests and work seamlessly with Apple’s family of other devices. An iPhone or iPad would double as a remote control, the people said.
Apple rose 0.6 percent to $674 at 10:41 a.m. in New York. The shares (AAPL:US) had gained 65 percent this year through yesterday.
Unlike successful negotiations with music companies and book publishers, Apple co-founder Steve Jobs was never able to strike a comprehensive deal to create a product fitting that vision before his death last October. He regularly told Apple executives that unless the company can get more content, especially live broadcasting, Apple’s impact on television wouldn’t be disruptive, said two former Apple managers.
“We continue to pull the string to see where it takes us, and we are not one to keep around projects that we don’t believe in and so there are a lot of people here that are believers in Apple TV,” Tim Cook, who took over as Apple’s chief executive officer a year ago, said in July.
Following Jobs’s death, much of the responsibility for securing content deals has fallen to Eddy Cue, the senior vice president in charge of iTunes, said the people.
Apple started talking with cable and media companies when it was building the first Apple TV, released on the same day as the iPhone in January 2007. Before the device debuted, talks with Comcast Corp. (CMCSA:US) fell apart because the cable company wouldn’t let Apple control the entire experience, including sharing data and giving access to all of Comcast’s video content, according to a person familiar with the talks.
CBS Corp. (CBS:US) Chairman and Chief Executive Officer Les Moonves said in a public appearance last year that he also has rejected different Apple TV proposals.
In some of its most recent negotiations, Apple has focused on cable companies that would give it access to live broadcasting without needing new content agreements. Under such a deal, Apple would release a new product for customers to access their set of channels, paid with a cable subscription, instead of leasing a set-top box from pay-TV operators for a monthly fee, a person familiar with the discussions said. Apple may also lease the boxes through cable companies, another person said. The box would be Internet-connected, similar to Comcast’s new X1 interface, which is available in Boston, Atlanta and Augusta, Georgia, the person said.
Walter Price, an investor with RCM Capital Management (NLY:US) in San Francisco who met with Apple executives recently to discuss their television efforts, said cable and media companies are concerned that a better-designed Apple product will undermine their business model.
“It’s a tough problem because the cable companies and media companies are not very enthusiastic about the prospect of Apple creating a better user interface,” said Price, whose firm owns $1.9 billion worth of Apple shares.
Cable companies are also concerned about losing their link to customers in the same way Apple overhauled the relationship between wireless carriers and their customers after the iPhone debuted, said Rich Greenfield, an analyst at BTIG LLC in New York.
Apple is furthest along negotiating with Time Warner Cable Inc., said the people familiar with the talks. Yet even if Time Warner Cable agrees to a deal with Apple, it wouldn’t represent a radical change for customers, who would still pay their monthly cable bill.
Apple may be looking to Time Warner Cable to be its first partner in a similar way that AT&T Inc. (T:US) helped bring the iPhone to market, one person said. This would be a departure from Apple’s traditional strategy of releasing products nationally. Time Warner Cable, like all cable companies, only operates in certain regions. Los Angeles and New York City are its largest markets. Under this thinking, Apple would then expand the service if it proves successful, one person said.
“Unlike other distributors, we are not religiously wedded to absolutely controlling the user interface,’ said Robert Marcus, chief operating officer of Time Warner Cable, in a telephone interview. He declined to comment on Apple specifically.
Without gaining access to new rights, Apple would end up largely replicating TiVo’s business model and relying on customers to buy a device based on how it organizes content and combining it with streaming services like Netflix, rather than unlocking content in one service.
“You need an approach where your role in the business aligns with the operator, rather than a strategy where you’re looking to insert your brand in a way that diminishes the perception of value of what the operator brings to the table,” said Tom Rogers, a veteran of such negotiations as CEO of TiVo, in a telephone interview.
Apple also would like to integrate more on-demand content for viewers to watch when they want, including older episodes of television shows, people familiar with the plans said. For that content, Apple needs to strike deals with media companies such as Time Warner Co., Viacom Inc. (VIAB:US) and News Corp. (NWSA:US)
Cable companies have released applications for the iPhone and iPad to allow customers to watch television on their mobile devices. There’s a reluctance to go further because giving a third party too much control may lessen the value of the bundles of TV, Internet and phone services that cable companies sell, Charlie Herrin, Comcast’s senior vice president of product design and development, said in an interview. He declined to comment on Apple.
“If I’m a cable company, do I really want to let Apple into my house?” said Jason Hirschhorn, the former chief digital officer at MTV and co-president of MySpace.
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