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Why Apple Investors Should Pay Close Attention to This FCC Decision

By Adam Levy – Feb 9, 2016 at 12:00PM

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The FCC Chairman wants to open cable TV set-top boxes to third parties.

Source: Apple.

Tom Wheeler, Chairman of the FCC, recently shared a proposal with his colleagues that could drastically change how we watch TV. He wants to introduce measures that would allow pay-TV customers to choose whatever set-top box they want.

Currently, the average pay-TV household in the U.S. spends $231 each year to rent boxes from its cable company. The pay-TV operators have used set-top boxes to both differentiate their services, and increase revenue. But if Wheeler's proposal goes through, that revenue could suddenly shift to new hardware makers, and Apple (AAPL -1.51%) could be one of the biggest beneficiaries.

The future of TV
When Tim Cook unveiled the recently updated Apple TV last Fall, he said the future of TV is apps. Indeed, a growing number of video viewing takes place online through apps that were born of the Internet or apps created by traditional TV networks. More than half of Americans are expected to watch TV via online streaming at some point this year.

But Mr. Cook is mistaken if he believes most consumers would rather watch The Walking Dead using an app than watching it live as it airs. And there's reason to think that Mr. Cook even doubts his statement. Apple has reportedly been in talks with television networks for months to put together a streaming television service.

Those talks have come to a halt, but if the FCC approves Mr. Wheeler's proposal, Apple won't need to stream TV. It can just use the regular cable feed by working with traditional pay-TV operators. That would open up the $20-billion-a-year market for Apple, while resulting in additional service revenue, as well.

Leaning on the cable guys
One of Apple's biggest strengths is its ability to create a best-in-class user experience. That's an area cable companies, which often provide archaic set-top boxes, are severely lacking. Apple can offer to improve that customer experience dramatically if cable operators work with it.

Under the current regulations, cable operators have no incentive to work with set-top box companies. Their goal is to keep as much revenue for themselves, and that means renting out set-top boxes that are simply good enough.

Apple's brand is strong enough that it can likely get everything it needs from pay-TV operators. A cable company doesn't want to be the only one that doesn't offer compatibility with Apple. Think how big of a coup it was for AT&T when it had exclusive rights to sell the iPhone. So even if it means giving up a lot of control, pay-TV companies will likely do what they can to work with Apple.

What's more, Apple would very likely receive free advertising for Apple TV. Wireless carriers advertise the iPhone. Banks advertise Apple Pay. Why wouldn't cable companies advertise Apple TV?

No done deal
Despite several precedents that allow consumers to choose their own hardware for telephone services, it's no sure thing that the FCC will approve the measures its Chairman has proposed. More than 40 telecom and media groups are planning to form a coalition to oppose Wheeler's proposal. Additionally, previous attempts to open set-top boxes to third-party hardware makers have largely failed (see CableCard).

If it does go through, though, Apple is in a prime position to capitalize. That's why investors should pay close attention to this decision.

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

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