Could Apple Make the a la Carte HBO Fantasy Come True?

Apple is in talks to provide a streaming service for Comcast. Is a la carte HBO in the cards?

Mar 27, 2014 at 6:30PM

Despite outspoken protests on the Internet for Time Warner (NYSE:TWX) to offer a stand-alone HBO service, the parent company has been hesitant to break ties with the cable industry and go over the top. With the news that Apple (NASDAQ:AAPL) is in talks with Comcast (NASDAQ:CMCSA) to provide a live TV streaming service, Apple could provide a new avenue for HBO to reach viewers.

An over-the-top HBO service could help the company compete against Netflix (NASDAQ:NFLX) and negate the effect of cord cutters. Before Netflix investors go running for the hills, however, let's explore if Apple is the company that can make such a dream a reality.

HBO is ready to go
HBO Chief Executive Richard Plepler made comments earlier this month that the premium channel is willing to offer a stand-alone service as soon as the numbers make sense. Presently, however, there are less than 10 million broadband-only households in the U.S. Comparatively, there are roughly 100 million pay-TV households.

Moreover, competition with Netflix is almost a non-issue for the company. Plepler noted that HBO does well in homes that subscribe to Netflix and vice versa. While Netflix is often seen as the scourge of cable companies, it's often complementary to most cable packages -- not a replacement.

HBO relies on cable operators to market its product and provide customer service. This allows it to focus on making great content. A stand-alone service may require it to invest in sales and marketing, customer support, and additional infrastructure to ensure service.

Netflix spent about 20% of revenue in 2013 on marketing and technology and development. To go it alone, HBO's expenses would surely rise to a comparable level, considering the similar size, reach, and business of the companies.

Is Apple the perfect partner?
Apple is reportedly in talks with Comcast to provide a streaming TV service that would use Apple's set-top box and rely on a dedicated portion of the cable pipe. Comcast is leaving the content licensing up to Apple, as the cable operator doesn't have the rights to stream television over the Internet.

Apple could potentially make a deal with Time Warner to offer HBO. The two companies worked together previously to bring the HBO GO app to Apple TV. Jason Lynch, writing for Quartz, suggests Apple needs to offer HBO for its new service to compete with other over-the-top services.

Apple is, after all, the company that broke up the music bundle -- i.e. the album -- and sold songs individually. Could it be the company that breaks up the television bundle and sells channels individually?

As great and consumer-friendly as that sounds, it's probably not going to happen. For one, media companies, including Time Warner, love the bundle. It allows them to sell more content. Unbundling would mean that Apple would have to pay a higher cost per channel, and Comcast wants Apple to offer the service for a similar price to a regular cable subscription. Second, cable companies, including Comcast, love to bundle those bundles. It allows them to pay for all that content the media companies are forcing on them.

For now, Netflix seems safe from doom.

The biggest roadblock
Apple is relying on Comcast to provide it a quality-of-service guarantee for its proposed streaming service. As such, Comcast has a pretty big say in what Apple can and cannot offer. It's unlikely a cable company is going to support a service that promotes a la carte HBO. That represents a direct threat to its business.

That said, Apple may be able to strike a different kind of deal with Comcast, similar to the one Netflix made with the company last month. Under the agreement, Comcast ensures Netflix a certain level of quality. Such an agreement was a win-win, as Comcast improves its service for a product that's been bogged down on its network.

Comcast is in a position to make sure another cable competitor never gets off the ground, yet it's supposedly exploring facilitating such a service from Apple. If Apple is to make a deal with Comcast, Comcast's requirements may be much more stringent than those for Netflix.

Still just a dream
For now, a la carte HBO is still a dream for cord cutters and Internet protesters. HBO has long championed providing access to its viewers, but still relies on the support of the cable companies for service. Apple has the means to promote HBO and may be able to provide customer service if it plans on offering other streaming content as well. There's just one big road block in the way -- cable companies.

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Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple and Netflix. 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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