Barclays Capital’s Anthony DiClemente this morning takes a look at the implications for the U.S. cable industry of Apple (AAPL) potentially introducing a television set, along with input from his colleague Ben Reitzes, who covers Apple.
Concludes DiClemente, “We think Apple TV is unlikely to displace the pay-TV content model, but it could pose some risk to MSOs� on- demand and set-top box revenues, although we note that the economics of these ancillary services are less favorable to the MSOs to begin with.”
As DiClemente sees it, the “addressable market” for Apple’s iTunes business is the $18 billion yearly market made up of DVD sales and video-on-demand.
The larger market of $62 billion in TV advertising over cable, broadcast, and other venues, and the $29 billion annually in cable affiliate fees, the “over-the-top,” or OTT video market, what you think of as broadcast TV and cable, is likely beyond the company’s reach, he concludes:
In short, we think an Apple TV could penetrate the $345B TV hardware market, and via iTunes accelerate sales of on-demand digital content, which has been taking share of the $18B home video market and capturing declining DVD dollars. However, the $62B TV advertising market and $29B TV affiliate fee pool are unreachable, in our view.
There is some prospect the telephone carriers could assist Apple, thinks DiClemente, but the traditional “MSOs,” such as Comcast (CMCSA), and the cable networks themselves, are likely to resist as an Apple video delivery poses several threats to their business model:
From the content providers� perspective, it is difficult for any contemplated video offering to generate incremental affiliate and advertising revenues, not to mention the logistical challenges of securing the digital and cross-platform rights from the respective content owners (since networks do not necessarily own all of the content they air).�From the perspective of the distributors, the multi-system operators (MSOs) view owning the video experience as key, so if they saw a potential threat from an over-the-top (OTT) platform, they could transition to a usage-based pricing model that makes OTT more expensive than pay-TV, or institute data caps that limit online video consumption. However, telcos, which are still relatively new to video service, could be more cooperative, since Apple TV could act as a differentiator.
Reitzes expects a television set could come from Apple at some point, though likely not this year, as the iPad and iPhone are the company’s focus for the moment.
Reitzes writes that such a device could be “so much more than a TV — including gaming, video communication, content delivery, apps, computing and al the capabilities of the current Apple TV.”
And the two note that a TV set could use the “cablecard” peripheral to receive standard cable service, as do many other television sets.
The two believe the decision by Apple manufacturing partner Hon Hai Precision Industry (2317TW) to take a 10% equity stake in display maker Sharp Electronics (6753JP) “could be indicative of an Apple TV being on the way.”
Apple shares today are up $11.38, or almost 2%, at $610.93.
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