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Apple to Take on Cable Operators with Web TV Service Debut - Analyst Blog

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Apple Inc. AAPL appears to be firing on all cylinders as it capitalizes on the latest trends. Following its rumored attempt to develop the Apple car, the company is now reportedly mulling over yet another business idea to popularize its not-so-famous set-top service, Apple TV.

According to Bloomberg, the company is in talks with CBS Corp. CBS, Fox, owned by Twenty-First Century Fox, Inc. FOX, and ABC Television Group, a subsidiary of The Walt Disney Company DIS, to provide a web-based TV service on Apple TV.

According to reports, around 25 channels will be offered including cable channels from famed media corporations. The company plans to announce its streamlined TV networks in June and make it available commercially by September to tap into the demand for the fall TV season. While nothing much has been disclosed on the pricing front, it is expected that the new Apple TV would offer a low-cost option for viewers willing to shift from conventional pay TV services.

We believe one of the primary reasons that are driving companies like Apple into web TV services is Nielsen Report released last year. According to the report, Viewership of traditional television dropped nearly 4% last quarter, while online video streaming rose 60%.

In addition, the U.S. population increased streaming of Web video to nearly 11 hours a month, up from nearly 7 hours a year ago. These data indicate that the future of TV is online streaming. However, we believe given only selective options available for web-based TV, options for consumer is limited. As a result, we believe such products are only suitable to a target market in which consumer is willing to lose on the margins (but bring down overall cost) by opting for fewer channels at a comparatively higher price than what payTV programmers would have offered for those limited channels.

Apple is also in talks with Viacom Inc., which offers the Comedy Central channel and MTV, and the Discovery Communications Inc. for the popular Discovery channel. We believe that these prospective collaborations will popularize Apple’s TV business, launched in 2007, and enhance the Apple ecosystem. 

Following the news, Apple’s share price rose around 1.7%. It is likely that the iPhone maker will come up with such business strategies to increase its penetration of the TV market. In this regard, Apple recently collaborated with HBO to broadcast its hit shows exclusively through its devices for $14.99 a month. (Read more: Will Netflix Be Hit by HBO-Apple Video Streaming Deal?)

Apple appears to be following the industry buzzword of “skinny bundles,” i.e., offering fewer popular channels at a reduced cost. This is a major blow to the age old practice of cable operators to pair the weaker channels with stronger ones to promote new shows.

Apple is not the only one going the “skinny” way as Dish Network DISH, a veteran, launched the Sling TV in February and is now available on Microsoft’s Xbox One console. Further, Viacom is in talks with distributors to create flexible packages for its channels to meet consumer demand.

However, we believe that the tipping point for Apple, a Zacks Rank #2 (Buy) company, would be to offer such services across all its products at a competitive price. The concept of online or web television is not new to U.S. consumers, thanks to companies like Netflix NFLX. So it will hardly come as a surprise if Apple is able to capture a major share of the market given a loyal customer base and ever-rising popularity of its devices.

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