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Is Apple Working on the Ultimate Cable Box?

By Adam Levy – Feb 13, 2014 at 3:00PM

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Is this what Apple investors have been waiting for?

Rumors have long circulated that Apple (AAPL -0.34%) is working on a television set. With the promise of 2014 being a year of new product categories for Apple, many expected to received more details about the so-called iTV this year. Instead, it appears the tech giant has gone a different direction, and is revamping its Apple TV product.

Apple is reportedly in talks with Time Warner Cable (NYSE: TWC) to bring additional content to its set-top box. The strategy makes sense for both companies. Apple gets access to premium video content, while Time Warner Cable is able to differentiate itself from the competition like Verizon's (VZ -0.39%) FiOS. That is, unless Comcast (CMCSA -1.16%) buys it out first.

Is this Apple's iPhone strategy all over again?
When Apple released the iPhone, it needed to partner with a wireless carrier in order to unlock its full potential. AT&T was the second biggest wireless carrier in the U.S., so it gave Apple a relatively large market to sell and the support of a carrier to include features like visual voice mail. (The subsidized pricing helped sell iPhones too.)

A partnership with Time Warner Cable looks like it could provide the same benefits for Apple TV. Time Warner is the second largest cable provider in the U.S., but it's struggling mightily in the face of competition from telecom companies like Verizon. Still, a partnership with the cable operator will open a market of 11 million customers for Apple and might just help Time Warner turn things around.

Moreover, Apple gains access to the content deals TWC has in place. As a result, it can turn its little over-the-top box into a full featured cable box. Perhaps Time Warner will allow Apple to control the entire television experience, which could be extremely valuable to the Cupertino company. It would provide Apple with the opportunity to integrate its iTunes and AirPlay services, as well as further integrate the television experience with the iPhone and iPad.

Competing with Verizon
Verizon is currently one of the biggest threats to Time Warner Cable. In a relatively short amount of time Verizon has gained 5.3 million customers at the expense of cable giants like Time Warner and Comcast.

The company's acquisition of Intel's OnCue technology last month makes it a stronger competitor going forward with an innovative way to deliver and consumer television programming. Not only is this what Time Warner is dealing with, Apple will have to compete against it as well. Getting out ahead of Verizon by partnering with one of the few pay-TV providers with a larger subscriber base will help.

Intel's technology is very interesting, and provides a path to true IP-based television -- delivering the signal over the Internet. This would allow Verizon to expand much faster, and pose a bigger threat to the cable giants as well as Apple in its potential partnerships. After all, Verizon probably isn't too interested in another set-top box after it paid a few hundred million dollars to acquire one.

What if Comcast buys out Time Warner Cable?
Comcast and Time Warner have reportedly come to an agreement to "merge" the two companies. The merger still needs to be reviewed by the antitrust regulators and FCC, and it needs to be approved by shareholders.

Comcast has spent heavily on R&D in developing its X1 platform in order to differentiate its product. In all likelihood, Comcast would not be as interested in partnering with Apple, as management is open to the idea of licensing its X1 technology to open another revenue stream. Apple, in fact, could be seen as a competitor to the company.

In that case, Apple may be relegated to much smaller providers. Perhaps Apple can strike deals with Charter, Cox, or AT&T among other smaller providers to make up the critical market mass it would need to launch a new product, but Apple will have to decide if it's worth the effort.

Changing channels
The television landscape is changing quickly, but Apple has an opportunity to revolutionize another industry ... if it can find the right partner. There are about 100 million pay-TV subscribers in the U.S., which represents a huge opportunity for Apple's TV product. It just needs to find the best way into those households.

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

Stocks Mentioned

Apple Stock Quote
Apple
AAPL
$147.81 (-0.34%) $0.50
Verizon Communications Stock Quote
Verizon Communications
VZ
$38.18 (-0.39%) $0.15
Comcast Stock Quote
Comcast
CMCSA
$35.86 (-1.16%) $0.42

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