Apple is reportedly once again prepping a TV service—but is once again caught up in content licensing negotiations.
The story is an oft-worn one at this point—rumors of Apple getting into the streaming business stretch back for years—but it’s a perhaps more piquant one given the broader conversation in the industry around the future of media distribution.
Apple Hitting Roadblocks
Bloomberg kicked off the week with news that Apple has postponed its plans for a $40-per-month TV service—and will now look to launch in 2016 rather than this fall. Apple will however go ahead with a refresh of its TV box on September 9, goes the report.
The reasons given for the pushback include problems hammering out carriage deals with content providers, and roadblocks on the content delivery front. Apple is working on a data center strategy, the report said, rather than being content to partner further with existing CDN pal Akamai.
Regardless of the snags, launching an over-the-top (OTT) streaming service now makes sense for Apple, given the success of DISH Network’s Sling TV and the general shift by consumers towards embracing digital distribution. Bringing its brand to bear could set Apple apart; as could integration with iTunes and the massive iOS device install base.
A TV service could generate $2 billion to $3 billion in revenue by 2018, Daniel Ives, an analyst at FBR Capital Markets, told Bloomberg.
“Streaming TV would provide another future growth avenue into the next-generation consumer,” Ives said. “It represents the next frontier for Cook & Co.”
Media Jitters in the Background
Major media companies may be more motivated than they otherwise would be to deal with Apple, given the fact that investors have fled the sector of late. Put simply, Wall Street thinks cord-cutting could be an irreversible trend that will permanently eat away at profits.
One of the main components of media companies' earnings and stock prices have been the steadily rising fees that pay-TV providers give them in return for content carriage rights. But subscriber losses erode per-subscriber affiliate fees for the major programmers, and reduce the number of people who advertisers pay to reach. And cable, satellite and IPTV are losing subscribers in record numbers—a trend that, if it continues, eviscerates the growth assumptions built into media stocks and places significant pressure over time on revenue and profits.
As evidence of this, during a prolonged media stock massacre earlier in the month, shares of Time Warner fell by 9 percent, Discovery Communications shares fell by 12 percent, 21st Century Fox shares fell by 7 percent, Viacom by 7.5 percent and Disney by 9.2 percent. Comcast shares fell by almost 5 percent, and Charter, Cablevision and Time Warner Cable all fell to varying degrees in sympathy with the media stocks.
Earlier this week, Warren Buffett’s Berkshire Hathaway reduced its stake in Viacom by 32 percent, to about 5.5 million shares, or $250 million worth. In all, it sold 2.6 million shares in Viacom in the second quarter to mitigate the sell-off’s effect on its portfolio.
The selling frenzy came as pay-TV turned in its worst quarter for subscriber losses, ever. According to SNL Kagan, US cable, satellite and telco platforms collectively shed more than 625,000 video subscribers in the three months ended June 30, falling to 101.4 million combined residential and commercial subs at mid-year.
DISH Network alone said it lost 81,000 pay-TV customers in the second quarter, compared with a loss of 44,000 a year earlier. That report came even as the satellite-TV provider combined results from its $20- a-month Sling TV streaming service with its traditional pay-TV business.
Sling TV added 169,000 customers in the first quarter, so Craig Moffett, an analyst at MoffettNathanson, estimated that Dish lost 151,000 satellite TV customers in the second quarter — "almost certainly the worst quarter Dish Network ever had for satellite subscriber losses.”
As for the effect of this on media, Disney for instance said in its call "we now expect domestic cable affiliate revenue [growth] to fall short of previous expectation, but still in high single digits.”
DISH itself admits that the world is changing. "Netflix is the most powerful content aggregator in the world today, and there's nobody that's even close," DISH CEO Charlie Ergen said during the company's second-quarter earnings call. He explained, “Kids are "happy to watch SpongeBob from 2007 and that's just as fresh to them as SpongeBob from 2015. So the world has changed.”
OTT Success = Pay TV Doom?
Netflix, Hulu, Amazon, Apple TV and others appeal more to younger viewers, and there’s no doubt that a percentage of them are eschewing traditional TV subscriptions altogether. But how valid are the cord-cutting concerns, really?
Moffett said that the perception of cord-cutting eating away at profits actually blows things out of proportion.
"The real economic impact of accelerated cord-cutting is relatively small," he said. "For those looking to assess the exposure of the various cable companies to a quickening of the pace of cord-cutting, we would point you to our report in late March where we tested sensitivities in detail and concluded ... it's just not that big a deal anymore."
However, media companies still need to be open to new distribution models. Nomura Securities analyst Anthony DiClemente agreed that the concern is overblown, and that media will evolve to meet new business models. But it will take some time for that to shake out.
"What the market is saying is that these are uncertain times because we are transitioning from one form of distribution to another," he told Nasdaq. But over the long term, he said, media companies that create the best content will remain "providers of a scarce resource," and therefore will maintain their place of value in the ecosystem.
OTT services in fact could be seen as a complement to, not a replacement for, traditional pay-TV.
According to Horowitz Research, two-fifths of Internet users have a traditional and an OTT subscription. About 42 percent have pay-TV only, 11 percent have an OTT service only, and 7 percent have neither. Among OTT users, 78 percent are also pay-TV subscribers.
"For many, streaming video has become an integral part of the viewing lifestyle. The idea of an Internet TV service, at a price point and with more customizable options, is an attractive prospect," said Adriana Waterston, Horowitz's senior vice president of insights and strategy.
Further, 55 percent of Millennials who are multichannel subscribers say that if the price were right, they would subscribe to an Internet TV service instead of their current cable or satellite service, compared to 43 percent of 35+.
"I was shocked at how far the ratings across the board have fallen this spring, and you can't really explain that easily. It's not just Netflix," said Mike White, the former chief executive of DirecTV. "It's clear that the millennial generation is having an impact, and every media company is trying to figure out how to connect with them."
OTT developments from traditional pay-TV distributors — DISH's Sling TV and DirecTV's Yaveo — could point the way forward.
"For millennials, streaming is as natural as turning on the TV set, so an OTT service direct from a distributor could be a natural fit," added Waterston. "No longer tied to their physical infrastructure, OTT offerings have the potential to offer huge opportunity for distributors to reach beyond their footprint, shaking up the entire pay-TV model.”
Are you listening, Apple?
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