Will Comcast Abandon ARRIS Group for Apple?

Apple's  (NASDAQ: AAPL  )  television plans may be taking a step forward, after previous plans with Time Warner Cable fell through.. The Cupertino company is reportedly in talks with Comcast (NASDAQ: CMCSA  ) to bring Internet-delivered TV to subscribers using an Apple set-top box.

While this is exciting news that moved both Comcast's and Apple's stock pre-market, ARRIS Group (NASDAQ: ARRS  ) investors felt the pain as its future with Comcast, and the cable industry in general, comes into question.

Is this iTV?
Despite being pressed on the subject multiple times, Tim Cook maintains Apple TV is still just a hobby. (Apparently a product bringing in $1 billion in revenue is just a hobby at Apple.)

The talks with Comcast entail plans to bring Apple's set-top box front and center in the living room. The plans are reportedly similar to those Apple had with Time Warner Cable before Comcast's proposed buyout offer to the second largest cable operator. Apple now has the opportunity to launch its service into a market of 30 million-plus homes.

There are a few hurdles to get over first. Primarily, Apple still needs to secure content rights. Comcast's rights do not include IP-streaming like Apple desires. Several companies have already made deals to offer IP-based streams in addition to traditional cable or satellite delivery.

What's more, Comcast is pressuring Apple to acquire these rights for a price that allows it to offer the service for a similar price to traditional cable. This task proved difficult for technology companies in the past. Intel was unable to secure content rights for its OnCue service, leading it to sell the unit to Verizon. A partnership with Comcast, however, would give Apple a huge addressable market to show media companies.

The only other thing Apple would get out of the partnership is a separate pipe to deliver content. Under the agreement, Apple would avoid the public Internet pipe, and deliver its service over the same portion as Comcast's VOD or phone service. In this way, Comcast avoids the net neutrality issue while providing Apple with an express lane to deliver content.

What about Arris?
With its acquisition of Motorola Home from Google completed, Arris offers leading edge set-top box technology. What's more, as part of that deal, Comcast acquired a 7.85% stake in Arris. Comcast tapped Arris to provide its X1 set-top box, which offers its own cloud-based and Internet-delivered services.

Comcast welcoming potential competition from Apple, however, is not a good sign, to state the obvious.

Comcast accounted for 18.6% of Arris' sales in the fourth quarter. Time Warner Cable was about 6.9%. Arris has continued growing sequentially since acquiring Motorola Home, but losing this sizable market as it comes up against tough comparables will be a double whammy for Arris' revenue growth figures.

It's probably not going to happen that way though.

Apple and Comcast are still a long way from reaching an agreement, and Apple has work to do on its own. Even when Apple does get everything squared away, Comcast probably isn't going to sell the Apple set-top box for it. It's going to sell its own Arris box.

Meanwhile, Arris is one of the companies facilitating Internet-delivered television. The company's home gateway equipment allows operators to deliver content to any Internet connected device (including an Apple set-top box), and help them switch to true IPTV once the rights are in place.

Delivering the kind of service Apple envisions will require significant networking equipment on both the back-end and in the home. Arris is poised to capitalize on that even if it doesn't make the set-top box considering its relationship with Comcast.

Is this a game changer?
Apple changed the wireless market landscape with its iPhone, but Apple TV doesn't seem to offer cable operators as large of a benefit as Apple's data chugging smartphone. In fact, Comcast could potentially lose additional revenue as Apple competes for VOD customers, asks for a piece of subscription fees, and takes control of the living room experience. Sure, it might help Comcast retain subscribers and attract new ones at a time when growth in the cable industry is hard to come by, but at what cost?

Nonetheless, if Apple wants to do the legwork to gain the rights from media companies to stream content over the Internet, it will progress the transition to IPTV. Arris stands to benefit from that transition even if it doesn't control the set-top box.

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