Apple (NASDAQ: AAPL) recently announced that Time Warner (NYSE: TWX) HBO's HBO Now, the premium channel's stand-alone streaming service, will launch in early April as a three-month timed exclusive for Apple TVs, iPhones, iPads, and iPods. The app will be nearly identical to HBO Go, but will cost $15 monthly instead of requiring a subscription to cable TV. New subscribers will get the first month free, just in time to watch the season premiere of Game of Thrones on April 12.
This deal clearly benefits Apple by giving consumers a new reason to buy an Apple TV instead of a Roku device, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Chromecast, Amazon (NASDAQ:AMZN) Fire TV, or similar product. But it also limits HBO Now's potential audience by keeping it off other set-top players, mobile devices, smart TVs, and gaming consoles. Is this a lopsided deal or actually a win-win deal for both companies?
How HBO will help Apple
Apple recently lowered the price of the Apple TV from $99 to $69. That was a clear response to cheap streaming devices like the Roku 1, Chromecast, and Fire TV Stick, which all cost between $30 to $50.
According to research firm Parks Associates, Roku devices accounted for 29% of U.S. streaming device sales in 2014, followed by 20% for Chromecast and 17% for Apple TV. However, Roku and Apple TV's market shares both declined year over year after Amazon and Google entered the market.
Apple was originally rumored to launch a redesigned Apple TV last year, but the upgrade was delayed due to stalled negotiations with content providers. Therefore, the HBO deal could encourage content providers to get on board and pave the way for the launch of a new Apple TV. Apple doesn't report Apple TV sales figures quarterly, but CEO Tim Cook announced at the "Spring Forward" even that Apple has sold 25 million units to date. Compare that to last April when Cook said 20 million units had been sold so far, and May 2013 when the running total was 13 million units.
Investors should remember that Apple TVs aren't high-margin products. Teardown.com claimed that the third generation Apple TV cost roughly $70 to manufacture back in 2012. In 2014, the site tore down Amazon's $99 Fire TV set-top box and claimed that it had a bill of materials of $93.
The second revision of the Apple TV from 2013 (the current unit) likely has cheaper components, but its margins are probably still thin. However, Apple intends to monetize the device by tethering more users to the iTunes ecosystem.
How Apple will help HBO
It might seem counterproductive to limit HBO Now to a Apple devices at launch, but it makes sense considering the way Comcast (NASDAQ:CMCSA), the largest cable and broadband provider in the U.S., interfered with the launch of HBO Go.
When HBO launched HBO Go, most ISPs allowed cable subscribers of HBO to access the app. Comcast, however, worried that HBO Go would cause its broadband costs to rise and cannibalize viewership of its cable TV counterpart. Therefore, Comcast blocked HBO Go on Amazon, Roku, and Sony PlayStation devices. Amazon and Sony didn't retaliate, but Roku filed a FCC complaint against Comcast and forced the ban to be lifted.
By striking a deal with Apple, Time Warner sends a clear message to Comcast -- that it might get away with bullying Sony and Amazon, but it should probably think twice before blocking access on Apple devices. Launching HBO Now as a timed exclusive for Apple devices narrows its appeal to less than a fifth of U.S. streaming devices, but it ensures that the app gets a focused and widely publicized launch. Additionally, the exclusivity window is only three months.
Apple's HBO deal probably annoys Roku, Amazon, Google, and other streaming device makers, but it probably won't turn Apple TV into a market leader. Meanwhile, Netflix gets three more months to shore up its defenses against HBO Now across other streaming platforms.
NPD Group estimates that 25% of U.S. homes will own streaming devices by the end of 2015, up from 16% in 2014. If Apple wants a bigger piece of that pie, it must launch a cheaper device on par with the Chromecast and Fire TV Stick, since the luxury appeal of its smartphones, tablets, and computers isn't carrying over to set-top boxes.
Meanwhile, HBO Now gets a nice promotional boost from the Apple deal, but the service could still be considered overpriced compared to Netflix and Amazon Prime, which respectively cost $7.99 per month and $99 per year. Therefore, the deal lets Apple and Time Warner help each other, but those mutual benefits probably won't be enough to boost their presence in the streaming media market.