Apple and Comcast Want to Revamp Television

Apple and Comcast are in talks to offer a new television service.

Mar 24, 2014 at 10:15AM

The S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) were down 0.35% and at breakeven, respectively, as of 10:15 a.m. EDT Monday. In this morning's headlines is a possible television collaboration between the world's most valuable company, Apple (NASDAQ:AAPL), and cable giant Comcast (NASDAQ:CMCSA)

The Wall Street Journal reported yesterday that Apple is in negotiations with Comcast to offer a high-quality streaming service that would represent a leap forward in its approach toward television. Apple has yet to make good on the words of co-founder Steve Jobs, who told biographer Walter Isaacson three years ago that he had "finally cracked" the solution to modernizing television. Since then, Apple's only television offer has been Apple TV, which provides users access to movies on an ordinary TV set via iTunes, along with streaming video from Netflix, Hulu, and other providers.

Even Apple executives have long referred to Apple TV as a "hobby," although CEO Tim Cook said last month "it's a little more difficult to call it a hobby these days" -- the Apple TV set-top box brought in $1 billion in revenue last year.

Based on the Journal's reporting, here are the key characteristics of the deal Apple and Comcast are negotiating.

Apple wants to partner with the nation's largest cable provider in order to separate the video traffic the service will generate from public Internet traffic -- similar to cable video on-demand. Ever mindful of the critical importance of customer experience, Apple wants to ensure users aren't frustrated by interruptions or slow service. Last month, Netflix struck an agreement to pay Comcast an interconnection fee in order to improve the quality of the service for its users.

Comcast's motivation is to ensure that its cable subscription service remains relevant in an environment in which consumers' television habits are changing rapidly. However, one of the critical points that could trip up negotiations is who "owns" the relationship with the customers, as well as their data.

Is this the innovation that Apple investors have been waiting for, which would supposedly power the stock higher? Probably not -- and it's not even assured that this deal will get done. Television would appear ripe for disruption, and Apple is better placed than almost any actor to make that happen. However, between entrenched oligopolists and a heavy regulatory apparatus, it's a tough nut to crack. It was always frustrating to have a television show end with the words 'To be continued," but that's what investors are left with in this episode.

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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of 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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