This Could Be the Biggest Threat to Apple Inc.'s Next Product

Apple (NASDAQ: AAPL  ) plans to release several new products in 2014, according to CEO Tim Cook. If Cook's recent comments about Apple TV are any indication, one of those products could bring Apple's iOS ecosystem to the living room in a big way -- either through a full-featured Apple-made TV, or a dramatically improved version of Apple's set-top box.

But Apple's attempt to dominate the living room could be stymied by one of the industry's largest players: Comcast (NASDAQ: CMCSA  ) . Increasingly, the cable giant is emphasizing its own digital content ecosystem, and if it adds Time Warner Cable's (NYSE: TWC  ) subscribers, Comcast could make life difficult for Apple's next product.

Apple's deal with Time Warner
Last month, Bloomberg reported that Apple was in negotiations with Time Warner Cable to support its forthcoming TV product -- presumably, Apple's solution would replace Time Warner Cable's traditional cable box, offering an alternative interface for accessing paid-TV content.

When Comcast announced that it would be purchasing Time Warner Cable, a number of commentators, including myself, pointed out the potential issues in relation to Apple. For Time Warner Cable, doing a deal with Apple would make sense -- Time Warner Cable's set-top box technology is second-rate at best, something the company seemed to be admitting when it allowed its subscribers to replace their standard cable boxes with compatible Rokus last year.

But unlike Time Warner Cable, Comcast has been investing heavily in its own set-top box -- its newly released X1 platform offers a cloud-based interface with access to web apps, show recommendations, and voice-commands, the sort of features you'd expect from Apple's forthcoming product.

Comcast's new store
The X1 platform also ties in heavily with Comcast's new Xfinity Store (basically Comcast's version of iTunes), which allows subscribers to rent or purchase movies and TV shows. Earlier this week, Variety reported that Comcast had struck a deal with Sony Pictures and Lionsgate to sell episodes of Netflix's original series House of Cards and Orange is the New Black, in addition to offering new movies ahead of their official VOD release date.

This is obviously a challenge to Netflix, but it could also be an issue for Apple. Comcast seems committed to building out its own video ecosystem, one where the X1 platform delivers subscribers all the video content they could ever want -- not just cable channels, but movies and premium TV shows as well.

It's easy to see why Comcast would want to do such a thing: If a Comcast subscriber buys a lot of movies and TV shows from the Xfinity Store, they'd be unlikely to cancel their Comcast subscription -- switching to DirecTV, for example, would be much more difficult if it meant giving up your movie collection.

Dueling ecosystems
But this also puts Comcast in direct competition with Apple -- although the addition of streaming apps like Hulu and Crackle have made the Apple TV more popular, it's still fundamentally a distribution platform for iTunes-purchased content. Supporting Apple's next TV product, then, would amount to Comcast ceding potential Xfinity Store sales to Apple's iTunes.

Apple bulls, including analysts at Morgan Stanley, have argued that Apple's TV solution could meaningfully boost the company's earnings per share in future quarters, but until Apple formally unveils its TV product, investors should remain skeptical.

With Comcast moving to aggressively compete with iTunes, the next Apple TV could face a challenging environment -- especially because, with the addition of Time Warner Cable's business, Comcast is poised to control nearly one-third of the paid-TV market.

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  • Report this Comment On March 13, 2014, at 6:32 PM, johnluma wrote:

    Is there any good reason why Apple might want to own Comcast? Buy Comcast?

  • Report this Comment On March 13, 2014, at 8:13 PM, RobertC314 wrote:

    @johnluma

    I'm sure you could come up with one or two, but there are also plenty of good reasons why it might not want to own Comcast, and even more reasons why a merger/acquisition would be doomed to start with - primarily because the cultures are incompatible and Apple has no experience managing that type of business (technicians and call center reps are a bit different to manage than your typical silicon valley engineer).

    It's not a small purchase either... they'll likely be paying around $150B, and since most of their cash is out-of-country it will primarily be debt and stock financed which, since Comcast is a mature dividend stock while Apple is still a growth play, is likely to do more harm than good by almost any metric: multiples, growth expectations, investor sentiment, EPS/margin accretion, and so on... though I cringe when people use that last one)

    Interesting question though :)

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