Why Apple can't kill cable

12:13 PM PST 12/22/2009 by Andrew Wallenstein, AP

Commentary: The hidden intent of the new TV plan

Floating even the faintest possibility of Apple and Disney collaborating on the digital front is enough to have anyone salivating. When these companies came together to bring video to iTunes in 2006, it was a bona fide gamechanger.

No wonder new reports of Apple and Disney, as well as CBS Corp., entertaining the possibility of a $30 subscription TV service is whipping up a new frenzy. And while The Wall Street Journal's reporting clearly states that discussions are preliminary, it's predictable that various blogs are already in vulture-swoop mode over the cable industry. As the hilariously breathless assessment from TechCrunch is entitled, "Apple May be on the Verge of Kneecapping The Cable Industry. Finally."

Blame it on the bloodlust the cable industry practically begs for with a business model that forces consumers to spend at least $60 on dozens of channels they'll never watch just to access the handful they actually want.

But don't let all the pre-emptive schadenfreude fool you; don't expect to break Big Cable with another one of those Apple breakthroughs. Here's why.

Basic industry economics. Cable operators throw billions of dollars in license fees at media companies precisely to avoid this kind of competitive encroachment. Sure, Apple is reportedly ready to pony up higher license fees than operators pay, but that doesn't mean anything given Apple's potential subscriber base would be a fraction of the operators' footprint for the foreseeable future.

Two companies isn't enough. Sure, Hulu was able to subsist for quite a while on NBC Universal and News Corp. programming alone, but that's a free service. Thirty dollars is a lot to ask for just CBS, which has few cable assets, and Disney, which tellingly isn't offering up ESPN to Apple. (It's not a coincidence considering ESPN is far and away the most expensive cable network that operators pay to have.) On top of that, there's no sign of NBC Uni, News Corp, Viacom, Discovery and Time Warner, etc. And don't expect to see another high-profile channel, HBO, considering how conservative it has been about giving anything but archived material to iTunes.

What exactly is this product, anyway? In all the initial hoopla, it's easy to overlook that there are precious few of even the most basic details describing what this thing is. Is it more iTunes-style downloads--a mega version of the season pass--or the kind of streaming there's been speculation would take root on iTunes with Apple's recent acquisition of streaming service Lala? Or is this really just a rental offering iTunes mysteriously has in place for films but not TV? What's always been strange about that approach is Apple would surely get a bigger TV audience by not forcing consumers to permanently own episodes they'd probably rather just see once and dispose at a much lower price. Maybe that's what they're up to now, which is still a far cry from what cable offers.

Apple isn't well-poised to do anything on TV sets.
Steve Jobs has already derided his connected-TV device Apple TV as a "hobby," but now it seems a shame he didn't take it more seriously. If taking market share away from cable was the goal here, Apple needed a much stronger toehold on the living-room sets where cable is king. That means either redoubling efforts on making Apple TV a viable product or taking a different route like partnering with an existing manufacturer of set-top boxes or Internet-connected monitors.

This may have nothing to do with TV sets.
Given the highly unlikely reports that Apple is able to get its new subscription service in 2010, maybe this isn't aimed at countering cable at all. Also expected from Apple early next year is a new tablet device, which is supposedly going to be a Kindle killer and a multimedia device all wrapped into one. Perhaps Apple TV isn't even in the cards for the new service, just the tablet and/or other portable devices. It serves the cable industry right given how incredibly slow they've been about making programming accessible online, let alone on handhelds (remember Comcast's Pivot?).

What this is really all about.
The blogs may position this as Apple vs. Cable but that's not how programmers probably see it. To them, it's Apple AND Cable. And Amazon. And Netflix. Even traditionally ad-dependent hubs like Hulu, and more recently, YouTube, have pledged to get into the paid-video business.

The point here isn't that any of these options will replace cable. To the contrary, they represent an opportunity for the entertainment industry to engage in one of its most time-honored traditions--windowing--and carve out new windows behind cable.

Look for programmers to experiment with varying programming offerings among YouTube, Amazon, Netflix and Apple based on dimensions including staggered program premiere dates, access to archives, image clarity, sharing/burning limitations, etc. For the sizable portion of the population willing to pay a premium for the whole enchilada, cable will always be there and probably remain the market preference for years to come. But that share will drop as lower-priced, lower-quality options pop up.

There is a massive middle ground to exploit between the insanely overpriced bundle of channels currently being offered and the insanely unrealistic anarchy of letting consumers pay for the exact same programs on a per-episode basis.

Unfortunately, if the early indications are to be believed, Apple is going about it in all the wrong ways. First, mimicking cable's monthly subscription model is a bad idea; consumers want flexibility regardless of the $30 price point. Also, there's no way TV networks are going to agree to both a price that low AND exclusion of advertisements; it's that dual revenue stream that makes channels such a great business in the first place.

And while Apple is at it, remember that iTunes rendered the whole notion of channels an anachronism, so while the a la carte offering may have seemed progressive just a few years ago, it's passe today.

Apple et al don't represent the destruction of the existing cable business so much as the opportunity to diversify that model. It was never going to be an either-or scenario. Cable programmers can only sleep peacefully at night knowing that the license fees they live on have peaked if and only if they have established alternative buyers who can offset the coming shortfall. The golden goose isn't going to get killed; only until new fowl is found will the price of those golden eggs come down.
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