Apple in 2015: Say Hello to Click TV

When it comes to television, cable and satellite operators will tell you that the Internet and new video-on-demand services have changed everything. They're wrong. Just this weekend, my wife and I searched Comcast's (Nasdaq: CMCSA  ) Xfinity archives for unseen episodes of In Plain Sight and White Collar. No luck. Nor could we get a sampling of The Big Bang Theory, a show I've heard a lot about but haven't seen. We were stuck in a Bruce Springsteen ballad -- only this time, there were 557 channels and nothin' on.

Apple (Nasdaq: AAPL  ) won't let this stand much longer. I believe, by 2015, the Mac maker will reinvent the way we experience television in a manner similar to how we experience music and software: in cheap, bite-sized chunks delivered on command. Call it Click TV -- a my-viewing-style-fits-me approach that keeps ads but cuts out the stuff I don't care about.

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What's this sort of speculation doing at a site dedicated to great stock ideas? Good question. I write these sorts of stories because, as an investor, I know that disruption occurs when deep-pocketed sufferers decide they need relief. Nothing leads to greater long-term returns.

Defining disruption and the opportunity it creates is harder than it sounds. For me, the process begins with three questions:

  1. How painful is this headache? (Define the size of the problem.)
  2. What will sufferers pay for relief? (Calculate the potential upside.)
  3. Is this the best aspirin available? (Assess the proposed solution.)

Let's tackle each question in order.

Tuned in but turned off
As headaches go, not being able to watch our favorite TV programs doesn't mean much. But think about this problem from the advertiser's perspective. Researcher eMarketer says spending on TV ads grew 9.7% to $59 billion last year but is expected to slow to just 2.9% annually from now through 2015.

At the same time, Facebook should double revenue in the year ahead and should continue to see increased commitments from big ad buyers who prize the engagement that social ads bring. (Example: You can't "like" or forward a clever TV ad.)

And while overall viewership is on the rise, consumers appear happy to be spending more TV time away from the tube. Nielsen cites attitudinal data that says consumers would give up their regular cable or satellite service if most of their programming choices were available online. The appeal of on-demand models such as Hulu Plus and Netflix (Nasdaq: NFLX  ) is undeniable.

The challenge of low-cost models
Unfortunately, the story gets a lot more complicated once you introduce pricing models. As my Foolish colleague TMFBreakerTAllan pointed out on our Motley Fool Rule Breakers discussion boards recently, the large-scale nature of cable and satellite systems and their all-you-can-eat models allow specialized networks such as The History Channel to co-exist with CBS (NYSE: CBS  ) , NBC, and Disney's (NYSE: DIS  ) ABC. Disrupt the economics of aggregation, and programming costs skyrocket, the thinking goes.

Fair point. But I'd also submit that Comcast, DISH Network (Nasdaq: DISH  ) , and their peers are already forcing structural changes in distribution pricing through hardball negotiation tactics. Like a ballplayer stuck in arbitration, producers argue with distributors over their relative value all the time. Sometimes, the head-butting results in a channel being pulled off the air. Cablevision (NYSE: CVC  ) did exactly that to Fox last fall. Everyone seems to have a stake in reinventing pricing and delivery models.

Channels? We don't need channels where we're going
The natural question, then, is whether the iTunes model can work for TV. But I actually think that's the wrong question. Instead, I wonder whether the iOS model can work for TV. Every "channel" becomes an app available via an intuitive interface onscreen, and controlled via a simple touch-screen interface. Apple TV would become a server rather than a set-top box, broadcasting content wirelessly to any home screen seeking content.

With channels as apps, Cablevision, Comcast, Dish and others could continue to sell all-you-can-eat packages. Buying their pipe would also get you their app. But with Apple TV as the primary interface, you could also buy smaller apps that represent a single show, or a season of shows, or anything else a developer might imagine. Stick a programming interface between a content library and a network and then get to coding.

But again, this sounds simpler than it is. The point is that customer pain creates a need for relief. In TV, producers and distributors have tried passing off limited on-demand and meager apps as relief when all they're really offering is a placebo. Consumers want real medicine. I believe Apple, whose iPad already aggregates more media than any other device of its kind, will be the one to create the right aspirin.

Do you agree? Disagree? Let us know what you think about the race to transform TV, Apple's offerings, and what else might disrupt the medium using the comments box below.

Want to read more about Apple? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple and Disney at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Netflix, Apple, and Walt Disney. Motley Fool newsletter services have recommended buying puts in Netflix and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 23, 2011, at 4:34 PM, ericAZ480 wrote:

    I agree with the concept. I think we all know where things are headed, but as usual we're dragging the distribution channels, the middle-men, kicking and screaming into the next generation of media content delivery.

    The issue is control and the cable companies are losing it. Instead of blocking solutions and limiting choice, they should charge more for better broadband, still make something as the middle-man distributor and offer choices. Everyone wins...content producers, advertisers and the currently top-heavy component (the distributors) will have to _share some of the wealth_ if they don't, the consumers and advertisers, and content producers WILL find a way around them and instead of losing a little in the short term, they'll lose everything in the long term.

    I believe the rule is "adapt or die."

  • Report this Comment On May 23, 2011, at 11:56 PM, nshamapant wrote:

    wow....this idea is impressive, and it would totally work. well thought out

  • Report this Comment On May 24, 2011, at 10:18 AM, Amerrican wrote:

    The ABC Player for iPad is great. All we need is an app store for AppleTV with an ABC player. But why havent CBS, Fox or NBC doing their own apps for iOS?

  • Report this Comment On May 24, 2011, at 11:00 AM, newsmeister wrote:

    Great idea, Tim!

    Now let's talk about the real world where we actually live. In RL, people love to hate the cable company for forcing a big bundle upon them. In fact it's the CONTENT OWNERS (Comcast/NBC, Fox, Viacom/MTV, Discovery Networks, Turner Networks, Scripps Networks, Disney/ABC/ESPN, A&E Networks, Rainbow Media) who are fighting to preserve the bundled distribution cable model at all costs.

    Do you understand that the content owners will not allow cable or satellite providers to sell their channels, let alone their shows, a la carte? Notwithstanding the fact that they they put ad-supported episodes on their websites for free? If people actually start cutting the cable cord in large numbers, the networks will change their online pricing strategies in one hell of a hurry.

    The content owner now has a dual revenue stream (subscription fees from cable subscribers and advertising revenue). They can't survive if they trade it for a single revenue stream (subscriber or advertiser, but not both) that's only a fraction as big.

    Online per show distribution is a great idea. But in my observation, people are only interested in consuming online video if it's free (i.e. Hulu and broadcast and cable network websites). Or it can be subscription based like Netflix IF there are no commercials.

    Remember that Netflix is cheap today only because programmers gave it initial sweetheart deals which won't be renewed anywhere near as cheap. Programmers viewed it as a way to make money on back-list content. If it turns into a cable replacement, Netflix's wholesale costs for programming will quickly escalate so that its cost structure looks just like that of a cable company...and just like cable companies, it will raise its fees to pay for the programming.

    The content owners are many things, but not stupid, and they are very, very good at getting paid. You may one day enjoy the great convenience of the distribution model you long for, but if you think it's going to be cheaper in the end you're smoking something. Per program fees and higher internet service costs (to support the HUGE network investments ISPs are making to deliver online video) will quickly and fully replace the cost of cable if such a model comes to pass.

  • Report this Comment On May 24, 2011, at 4:30 PM, varleo wrote:

    The FDA warnings must be taken into account because it is the regulator of all drugs entering United States. Mentioned in the blog of Findrxonline that prescription drugs - hydrocodone, vicodin, lortab - must be taken so modest and reserved because they can cause problems due to side effects.

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