Apple (NASDAQ:AAPL) may have scored a major victory in ensuring the launch of its upcoming Internet-based pay-TV alternative. According to The New York Post, Apple has convinced the major broadcasters -- CBS, Fox, ABC, and NBC -- to negotiate with their local affiliates on its behalf.
Including local programming in its upcoming offering would set its product apart from the competition, and ensure that Apple's service is attractive to tens of millions of households, rather than just a select few.
A complex web of broadcast ownership
Major broadcasters do not own all of their local channels, instead relying on a network of affiliates. In many markets, the station that carries ABC or NBC content (for example) is actually owned by a completely separate company.
This creates a somewhat tricky situation when it comes to securing the rights to distribute those channels. Sony's PlayStation Vue service, which may prove to be Apple's most significant competition in the Internet TV space, officially launched earlier this year. PlayStation Vue offers local channels (with the notable exception of ABC) over the Internet, but the service is currently restricted to a handful of markets. In all of these markets (Chicago, New York City, Philadelphia, San Francisco, and Los Angeles) there are no affiliate stations -- the broadcasters actually own and operate the local channels.
If Apple wants to offer its service to all of its U.S. customers -- not just a few million in select markets -- it will need the cooperation of affiliates. It could establish deals with each station individually, but that could delay its service for months or even years given how many agreements it would have to negotiate.
Re/code reported in May that Apple would delay its TV service until it was able to secure the rights to local channels. If the major broadcasters negotiate with Apple on behalf of their affiliates, it should accelerate the process significantly.
Do web TV services need broadcast channels?
Other services have side-stepped the issue. Sling TV, which launched earlier this year, offers about two dozen of the more popular cable channels, but not any local channels or broadcast stations. The head of Sling TV, Roger Lynch, told CNET that Sling TV may add local stations at some point in the future. But if it did, it would do so by offering them in an additional, paid tier. "They're already getting that content...[with an antenna]," he said.
That may be true for many -- with an HD antenna, users can grab local programming for free over the air, then pair it with a Sling TV subscription. The Xbox One, with its new adapter, even offers a streamlined experience, combining content from both sources in one box.
But Apple and Sling TV appear to be after two different things. When I spoke to Roger in March, he made it clear to me that Sling TV was aimed primarily at younger, cord-cutting millennials: individuals in their 20s who lived alone and did not need a robust pay-TV package (of the sort offered by Sling TV's parent company Dish Network). And relying on an antenna isn't a perfect solution. Sling TV subscribers can access the service on any PC and most mobile devices, but if they want to watch local programming they need to be near their television.
Apple obviously has no satellite TV baggage, and wants to offer the service on iPhones and iPads in addition to the Apple TV.
More service revenue, and another win for Apple's ecosystem
How important the service could ultimately be remains to be seen. If it were priced at $30 per month, and attracted 30 million American households, it would boost Apple's annual revenue by $11 billion, or about 6% based on its 2014 fiscal year annual revenue.
The effect on Apple's broader ecosystem is likely to be more significant -- customers who want it would probably need to purchase Apple's high-margin hardware.
But in order for that to happen, it will need to offer local channels. According to Nielsen, nine of the top-10 most watched TV shows in 2014 were offered by the broadcasters.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.