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Apple to buy Hollywood? Not a chance.

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With about $100 billion just lying around, Apple’s (s AAPL) 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, (s CMCSA) Time Warner Cable (s TWC) 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 (s VZ) and AT&T (s 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 (s msft) 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, (s dis) 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, (s cbs) NBC (s cmcsa)(s ge) and Fox? (s nws) Then $15 or $20 for ESPN? And $25 for HBO? (s twx) 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.

17 Responses to “Apple to buy Hollywood? Not a chance.”

  1. “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” … “very few people are actually taking advantage of broadband-delivered video.”

    How does a low usage of two streaming solutions point to a low overall usage of broadband-delivered video? This is assuming more popular solutions – Netflix and Hulu Plus for Xbox 360, PS3, iPad, etc. – somehow trend with Apple TV and smart TV usage statistics. Not to mention streaming TV shows straight to the computer. The fact of the matter is that broadband-delivered video is gigantic and Apple’s share of it is small. Perhaps that’s what you meant, but it came off as “broadband-delivered video is still small.”

  2. ishekhar

    “Never say never when it comes to Apple.”

    Very true. This article analyzes how apple can or can’t fit into the current video marketplace. Something not a typical of Apple.

    This content bundling needs to go away among others. I pay $60/month just to get some 10 different channels and 4 of them are free OTA. Reminds me how I was forced to buy a CD even if all I wanted was just one track.

    Change the example of $5/channel to 99cents/channel and you would arrive a different conclusion in this article.

  3. I’d definitely pay $5 each for CBS, ABC, and Fox, but NBC would have to pay me to get me to subscribe. I don’t want that trash in my home, which is why I’ve got it removed from my DirecTV channel guide.

    $15/month for ESPN? Yawn. $25 for HBO? Why bother, when Netflix and Redbox are a fraction of that? Personally, I’ve asked around, and out of probably 100+ twenty-somethings polled, only two pay for television service. Even a lot of thirty-somethings don’t pay for TV. It’s a waste of money, and the only reason I still have it is because my wife is so insistent.

    TV is extremely expensive, and the various providers are stuck in a losing battle: people keep leaving over the high prices, so the providers raise prices to maintain profit. This causes more people to leave, and the cycle repeats ad infinitum. If they don’t change something pretty soon, their few remaining subscribers will all die of old age and TV service as we know it will cease to exist, anyway.

  4. My only comment is that figuring the market for broadband delivery of tv/movie content by the number of Apple TVs out there really lowballs your answer. Apple TV is by far in the minority of ways used to access streaming content.

  5. SuperFed

    “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.”

    What about all those iPhones and iPads that can view movies/tv shows?

  6. Peter Csathy

    Ryan, you, as always, raise good points. But, I respectively disagree. You write that Apple is “not into creating news services.” Well, they single-handedly invented real online music services via iTunes. They forged unprecedented new license deals with the labels, and the rest is history. Yes, those weren’t subscription services, but they were services. And, Apple’s playbook always calls for seamlessly marrying the hardware with underlying services — in this case, the iTV (which most definitely is coming) with compelling premium video content (motion pictures and TV) — to create differentiated “experiences.” Apple will pay significantly more to do this than others (hence the power of their $100 billion war chest), precisely because each customer means much more to Apple than to anyone else due to Apple’s eco-system of products. Once someone becomes enters the kingdom of Apple (by buying an iTV, as one example), then they never leave — they buy iPads, iPhones, iTouches, iAccessories. That’s the point, it’s not just the TV they would be monetizing. It’s the monetization that uniquely comes with have a closed eco-system of products and services — things no one else can match. THAT’s why Apple will pay for the content it needs to pull this off. The real question becomes — will the music and TV studio execs have the will to extract the most value from Apple during licensing negotiations? So far they have said “no” — and, so far, they are not repeating their actions from the past from the music business (in which they allowed Apple to set the rules of the content licensing game).

    Peter Csathy
    President & CEO of online video company Sorenson Media
    (& former President of online music pioneer Musicmatch (where we licensed music from the lables) and 10 years at the studios (where we licensed content to others)

  7. Len Feldman

    Perhaps it’s a romantic notion, but the one entertainment company that Apple might invest in is Disney. With the sale of Pixar to Disney, Steve Jobs became Disney’s single largest shareholder, and there have been rumors that Jobs’ heirs may want to sell their stake in Disney. By having Apple purchase the shares of Disney owned by Jobs’ heirs, it would create a permanent link between the two companies. But, I agree that it’s extremely unlikely that Apple would buy operating control of any media company.

    • Ryan Lawler

      @Kevin – I almost mentioned this in the post. If you really want to ‘just pay for the content you care about,’ Apple already has a product for you. It’s called iTunes, and you can buy whole seasons of TV shows, without having to pay for all the junk you don’t want to see.

    • Ryan Lawler

      Frankly, I don’t buy the reports that Apple is interested. Apple has never paid upfront for content, doesn’t need to do so to increase sales of its devices, and is doing pretty damn well as an agnostic platform provider for others to offer their content on.

      Maybe it’s trying to convince EPL to create an app, but highly doubt it’s actually looking to license that content.

  8. Valley Bob

    “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.”

    Tell that to the Music industry, something called “iTunes”.

    • Ryan Lawler

      That’s higher up in the post. iTunes isn’t a service. It’s a product / platform for selling music. It’s purely transactional.

      What Erick is suggesting Apple do with video is a whole different model.

    • Jeremy Toeman

      Apple makes iPods for a profit. They offer iTunes and its content service to make the (profitable) hardware work better, and they do it at just slightly better than breakeven. Apple is NOT a content company.

    • Why pay them? If they quit, there are billions in line to take their place. Besides, most Americans don’t have a problem with China being union-free so long as it keeps price lower for ipad and iphone.