There's a lot we still don't know about Apple's (Nasdaq: AAPL) oft-discussed though still mythical TV.
Some, like Piper Jaffray analyst Gene Munster, thinks a new LCD set could kill Blu-ray players and the gaming-console business. Others say Microsoft's Xbox with Kinect already gives discerning viewers all they could want and more.
Which theory makes more sense? The latter, obviously, because all the pieces are already in place, including deals with Comcast and Verizon. Meanwhile, speculation over the quality and timing of a full-screen Apple TV rests largely on two logical yet partially proven assumptions:
- The TV industry is ripe for disruption.
- Apple has proved to be a capable disruptor of every other screen; going after TV is the obvious next move.
Here's the problem. While no one doubts that the television industry is ripe for disruption -- the rise of Netflix (Nasdaq: NFLX) has already proved as much -- anyone paying attention to the data already knows that Apple didn't need its own LCD to forever change how Hollywood operates.
An out-of-this-world impact
Consider the current brouhaha between satellite operator DISH Network (Nasdaq: DISH) and AMC Networks (Nasdaq: AMCX). If an ongoing contract dispute over payments isn't resolved soon, DISH customers will be shut out of new episodes of popular programs as of July 1.
For viewers, the timing couldn't be worse. AMC is planning a marathon showing of season 1 and 2 episodes of the post-apocalyptic hit The Walking Dead early next month ahead of the Season 3 preview. Breaking Bad, which stars Bryan Cranston as meth-making former chemistry teacher Walter White, kicks off its fifth and final season on July 15.
"[There is] a very, very, very low viewership outside of a few, obviously, popular channels on AMC," Ergen said during DISH's last earnings conference call on May 7. "Those particular channels are also available to our customers through a variety of other sources like iTunes, Amazon.com (Nasdaq: AMZN), and Netflix and so forth and so on. So one of the things that programmers have done is they've devalued their programming content by making it available in many multiple outlets."
Ergen is partially correct. Viewers have options that don't include DISH, which means that customers "shut out" by an AMC blackout needn't be shut out at all. Both Apple and Amazon offer full-season passes whereby new episodes of AMC shows are downloadable to any number of devices -- including a wide range of game consoles, Internet-enable televisions, set-top boxes, tablets, and smartphones -- for ad-free playback the morning after they air. In ignoring this truth, Ergen is bargaining that consumers will remain ignorant; that's a large and growing risk.
Where the screen theory begins to make sense
How large? Think about the economics of downloadable programming. While streamed video subscription services such as Netflix now account for the bulk of online video revenue -- researcher IHS Screen Digest puts last year's total at $454 million -- transactional services combined for roughly $500 million in 2011.
Apple, Amazon, Netflix, and their peers now account for nearly $1 billion in annual TV and movie rental and purchase revenue.
We don't know what that amounts to a per-show basis, though enough data exists to make a rough guess. A Gabelli & Co. analyst told Bloomberg that AMC could lose $21 million in high-margin revenue if the DISH blackout were to last three months. Meanwhile, Nielsen says the AMC hit Mad Men typically attracts 1.23 million primetime viewers across cable networks. DISH controls 14 million, or roughly 14%, of the 100.4 million premium cable and satellite TV subscribers here in the United States.
Thus, of the 1.23 million weekly viewers Mad Men gets during its regular season, DISH probably accounts for just 172,000. And that would be a problem if Amazon Instant Video and iTunes offered unattractive economics. They don't.
At $23 per season for the standard-definition package and $35 for the HD version, 172,000 DISH customers switching to on-demand subscriptions could end up spending between $3.9 million and $6 million -- on just one show. Scale up this same math to include The Walking Dead, Breaking Bad, The Killing, and its newest winner, The Pitch, and I see Hollywood executives hedging their bets on bundled networks such as DISH by getting cozy with on-demand suppliers such as Apple.
Rewind to fast-forward
I'll grant that it wasn't until recently that Apple stopped treating its set-top box business as a hobby. The Mac maker has done little to lead Hollywood in the same way it led Motown when unleashing the iPod a decade ago.
But consider the forces at work here. DISH is only the latest in a long line of distributors to use blackouts as a blunt instrument in contract talks. That's a problem for smaller Hollywood studios in the same way that piracy was a major problem for small music labels a decade ago.
The iPod and iTunes offered a solution then. An iTV that couples a superior interface with access to brilliant content could do the same here, disrupting cable and satellite distributors in the process.
Breaking bad rules
Think I'm right? Wrong? Either way, it pays attention to study disruptions in the making. Over time, it will be a lucrative experience for investors as the market rewards those that lead the rebellions. It's these sorts of companies that we look for in the Rule Breakers newsletter service. Want in? Check out a 30-day trial subscription. If that's not up your alley just yet, you can still check out a free special report detailing the next trillion-dollar revolution.
