Should MSOs Fear Apple TV?

Should the cable industry be quaking in its boots now that broadband-fed Apple TV system can be had for the low, low price of $299?

In a word: Nope.

Sure, the cool commercial does a commendable job showing how this whole cross-platform world can work, as long as you've bought into the Apple ecosystem, but I just don't believe consumers will be snapping these things up like iPods.

That's not just my opinion, but the finding of a fresh report from Sanford C. Bernstein & Co. Inc. that concludes cable doesn't have a whole bunch to worry about, or at least not for quite a while, thanks in part to several limitations and barriers that Apple TV faces.

"In the near term, due to limitations around content availability, video quality, consumer aversion to 'box clutter,' and download speeds, we believe... Apple TV is unlikely to see widespread adoption," the report says.

Additionally, the report sees Apple possibly taking its TV system in a couple of different directions:

• Its present play as an over-the-top "potential substitute for traditional cable TV service," whereby customers download most of their shows and movies from iTunes; or
• Apple TV could "evolve" to become a cable set-top substitute.

Of the two, Bernstein believes the second option – a set-top substitute strategy – would lower the barriers to adoption for Apple TV and allow the device to realize higher penetrations than it would with a cable displacement strategy.

The authors also suggest the strategy could be facilitated by the July 2007 ban on cable set-tops with integrated security. Save for a handful of special waivers granted by the Federal Communications Commission (FCC) for certain "low-end" set-top box models, operators must purchase and distribute set-top boxes with CableCARD interfaces starting on July 1. (See MSOs Get Waiver on Set-Top Security.)

Once those security elements are "removable" in the form of CableCARDs, the argument follows, a swath of manufacturers (like Apple) can enter the cable set-top market and compete for the hearts and minds of the consumer. Although the model looks OK on paper, it's hard to say how well it will work in practice.

Cable operators certainly would like to get some of those set-top box capital costs off the books, but at what price? The report rightly notes that cable operators "are likely ambivalent" about this idea, because they stand to lose control of important consumer-facing elements like the interactive program guide and navigation system, especially when a variety of interactive, two-way CableCARD "hosts" (i.e., digital set-tops and TVs) eventually reach the market. Also, an Apple TV box will be promoting iTunes content, and not necessarily the cable operator's vault of video-on-demand (VOD) fare.

"For the cable company, that would represent a potentially threatening loss of control of the consumer relationship," the analysts explain. No argument here.

Although the Bernstein report sees the CableCARD as a possible future route for Apple TV, I will be greatly surprised if that's a path Apple actually ends up taking. Apple, like the cable operators, isn't too keen on handing over control to anyone. With that in mind, I think Apple TV will play its over-the-top, download strategy to the hilt.

But even that strategy has some tough history to overcome. Many have come to market with "special" set-tops or boxes with Ethernet interfaces, believing customers will snap them up without hesitation. The truth is, very few have been successful at this strategy.

Akimbo Systems , for example, has stopped offering its Internet-fed content service to RCA-made set-tops, opting instead to distribute content through the AT&T Inc. (NYSE: T) HomeZone service and via other partnerships.

So confident were Cisco Systems Inc. (Nasdaq: CSCO) and The Walt Disney Company in the resurrected version of MovieBeam Inc. (which used datacasting, with a broadband strategy on deck) that they realized the best move would be to sell it to Movie Gallery, a movie rental store chain.

TiVo Inc. (Nasdaq: TIVO), of course, has a broadband content strategy that complements its bread and butter digital video recorder business, and has a sizable installed subscriber base (the company had 1.7 million "Tivo-owned" subs as of Jan. 31, 2007) to help get that rolling. But I'll be astonished if that strategy directly generates much subscriber growth, since 2.7 million TiVo customers still come by way of its phasing-out relationship with DirecTV Group Inc. (NYSE: DTV). Sure, TiVo might get some help from its relationships with Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Cox Communications Inc. , but I'm not holding my breath, because there's no proof yet that many cable customers will pay a premium for those TiVo capabilities when they can pay the operator less for a more "generic" DVR.

The latest and greatest service that's supposed to strike fear into cable and other traditional TV service suppliers is VUDU Inc., which almost broke the hype meter when it came out in late April with deals with several name studios in tow. That service, like so many before it, will require a separate box. Good luck with that.

While Apple will probably find some tough sledding with its big-screen TV play, it's still hard to discount it completely. Out of all the players mentioned here, if I had to bet on one that will find a way to make it work, I'd push all my chips on Apple TV. But I'd do so believing that the money put on the table is probably as good as gone.

— Jeff Baumgartner, Site Editor, Cable Digital News