Apple to buy Hollywood? Not a chance.

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With about $100 billion just lying around, Apple’s received a number of suggestions for how it can spend that cash. The latest comes from Erick Schonfeld at TechCrunch, who argues that Apple could use that money to invest in a new type of subscription TV service to compete with Comcast, Time Warner Cable and the like. But that suggestion overlooks a few very important facts about Apple, and about the economics of today’s pay TV business.

What Apple does and doesn’t do

For a clue to how Apple approaches the video market, you need look no further than how it’s dealt with every other part of the media ecosystem to date: It creates good user experiences across an ecosystem of great products that publishers can sell their content on.

It introduced the iPod and iTunes and allowed the music industry to sell their songs on the platform, and it took a cut. It introduced the iPhone and the App Store and allowed developers to create games, utilities, productivity tools and the like, and it took a cut. It introduced the Apple TV for the Hollywood studios and TV networks to rent and sell their movies and shows to consumers, and it took a cut. It introduced the iPad, iBooks and the Newstand and allowed book and magazine publishers to sell digital versions of their titles to consumers, and it took a cut.

You notice a trend here? Product, platform, revenue share. That model has been extremely profitable for Apple, in part because it’s had to bear little risk to collect whatever revenues and profits come from its partners’ content sales. What Apple does not do is pay upfront to have the luxury of carrying content and then shoulder all the risk while attempting to create a sustainable new business model for its partners.

The economics of the situation

But let’s talk about the actual economics of subscription pay TV. Time Warner Cable announced in its earnings Thursday that it paid somewhere around $25 a month per subscriber in content costs last quarter. Think Apple could do better? It can’t. Any new entrant to the pay TV market acquiring content licenses does so at rates higher than what others have previously negotiated. This was true when the satellite TV companies entered the business, it was true when Verizon and AT&T began offering IPTV services, and it will be true for anyone that attempts to create a virtual cable company.

Starting costs for Apple — or anyone else for that matter — to build a subscription TV service will be in the mid-$30s at the very least. Which means it’s not going to roll out a $25 or $30 subscription service or undercut your local cable company on price anytime soon.

You know how every quarter analysts dissect however many billions of dollars Microsoft has lost in its Internet services business? That would be Apple TV’s media business, quarter after quarter, if it decided to go down this road. Sure, Apple has a lot of money. And sure, Apple could bear those costs. But why would it? What’s the actual benefit for Apple or its investors?

The misplaced dream of a la carte

Money“But what if I don’t want all of the channels? That’s where Apple could really disrupt things!” It’s a familiar refrain to hope and wish and pray that a company like Apple will be able to do what others have failed at so far, and negotiate a la carte pricing for individual networks. That sure sounds good, and I’m sure consumers would love it! That is, until they saw the price tags associated with each of the networks that they would want to buy.

Even if Apple were able to convince Disney, for instance, to separate ABC, the Disney networks and ESPN’s sports networks from the bundle, it would be just like breaking up any other bundle: the cost to sell each network separately would be egregiously expensive. Prohibitively so.

As a consumer, would you pay $5 just for ABC? Another $5 each for CBS, NBC and Fox? Then $15 or $20 for ESPN? And $25 for HBO? It’s not like these guys are just going to give those channels away at a small premium over what they get from cable. If they’re going to break the subscription bundle, they’re going to want to get paid to do it. In that world, how many channels do you think you could buy before the cost became more than what you already pay for a cable subscription each month?

The actual market opportunity

Put all that aside, though, and the truth of the matter is that streaming video is still a relatively niche market. How many people are out there who actually have an interest in a streaming TV service? In theory, the addressable market is every broadband household that also pays for cable service. But take a look at the number of Apple TVs that are out there (just 4.2 million) or the connect rate on smart TVs today, and you see that very few people are actually taking advantage of broadband-delivered video. That could change with the introduction of the mythical iTV, but it seems pretty tiny today.

Sure, Apple created the modern smartphone market with the iPhone or the tablet market with the iPad. But it’s not into creating new services. And it seems unlikely that Apple would introduce a new service like this, especially one that is likely to be risky, unprofitable and targeting a market segment that doesn’t yet exist.

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