Just as tech giants like Apple (NASDAQ: AAPL ) and Google (NASDAQ: GOOGL ) upended the traditional phone market by incorporating Internet connectivity and a smarter user interface, many tech players have spent the past several years focused on breaking into the historically staid, boring television market. The living room is filling up with newcomers and old incumbents alike seeking to capture the future of the TV market. Over the past few weeks, a few companies are showing new momentum while others are falling behind.
Leading the pack ...
One big piece of news out of this week's Consumer Electronics Show was the announcement that Time Warner Cable (NYSE: TWC ) had agreed to stream more than 300 live channels through the Roku set-top box. This was a huge win for Roku, the feisty newcomer that in 2008 launched the first set-top box player designed to stream Netflix (NASDAQ: NFLX ) over the Internet to a television.
Since then, Roku has expanded to offer popular applications such as Hulu, Google's YouTube, Amazon.com (NASDAQ: AMZN ) Instant Video, and Time Warner's (NYSE: TWX ) HBO GO, as well as content from hundreds of channels. The Time Warner Cable deal not only provides Roku with the broadest array of content channels of any set-top Internet video player, but it also marks the first time that the major cable distributor has made its Internet streaming app, TWC TV, available for use on a television, as previously it was available only on "second screens" like mobile devices and laptop computers.
This was a smart move for Time Warner Cable as well, allowing the company to hedge its bets somewhat by selling access to content through the very platforms that are threatening its traditional dominance. The company is attempting to ward off "cord-cutting," the practice of abandoning cable TV in favor of Internet video streaming, by integrating its products into the Internet video ecosystem. In the short term, the deal probably won't mean much for consumers, because the TWC TV app is available only for cable subscribers on a home network, meaning all the Roku really does in this case is to replace a cable box. The deal does show that Time Warner Cable is willing to fight and adapt to defend its turf, however.
Another big winner recently has been Netflix itself, which has been feverishly acquiring the rights to new content in recent months. After making history by beating out traditional premium cable channels to scoop up the rights to distribute Disney content last month, this week the company has scored the rights to stream eight popular Time Warner dramas, including hit titles such as Fringe and West Wing that Netflix stole out from underneath streaming-video competitor Amazon. While Netflix hasn't always disclosed the sums it pays for content, the company is certainly taking a big bet. Over the next decade, it might have as much as $8 billion in liabilities for content licenses, a sum it will be able to pay only if its first-class programming secures paying subscribers.
Gotta play to win
Amazon may have lost some valuable content recently, but for now the real loser in this space has to be Apple. The company's own set-top offering, Apple TV, has been around since 2007, yet it has failed to revolutionize the television market the way Apple's hardware has done for the smartphone and tablet markets. For years, then, observers have been waiting for Apple's flashy launch into the TV space, whether through a new and improved set-top that really captured hearts and minds, or through a much-fabled television-sized screen along the lines of a gigantic iPad: an "iPanel," if you will.
So far though, nothing. iTunes remains a valuable content distribution system, but Apple has historically won markets through the force of its integrated hardware/software consumer products, not through software alone. As the hardware space gets increasingly colonized by new competitors like Roku and old enemies like Samsung, which is already producing smart TVs, and the software-centric video distribution space gets divided up between Netflix, Amazon, Hulu, YouTube and others, Apple's window to strike out for market share is shrinking.
That's not to count Apple out. With more than $100 billion in spare cash to play with and an excellent brand, Apple could make a push into the living room whenever it wants to -- if, in fact, it wants to. The television market has notoriously low margins: Industry leader Samsung makes only about a 5% operating margin on its TVs, while Apple is more accustomed to double digits. Apple may simply choose to sit this one out.
Bet on the bookie
If Netflix, Amazon, Google, and (possibly) Apple are the horses in this race, then studios like Walt Disney (NYSE: DIS ) and Time Warner are the bookies. They make money no matter who wins. Internet video streaming is just a new method for content distribution, and that gives original content creators more platforms on which to monetize their programming. Walt Disney and Time Warner haven't been signing nine-figure content deals with Netflix out of charity. As distributors compete fiercely for the most lucrative content, they will have to bid more and more for the best programming, allowing the lion's share of economic profit to revert to the content owners.
Disney is the nation's largest media company. Time Warner, which spun off its cable distribution business Time Warner Cable in 2009, owns properties like HBO, Warner Brothers, and New Line Cinema; is the most prolific creator of hit shows and films; and is the purest play on video content. No matter how viewers will access content in the future, what they'll be watching won't be very different, and the proliferation of new distribution methods will be a windfall to the big studios.
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