Allowing easy access to shows like CBS's 60 Minutes or Disney's (DIS) Desperate Housewives through iTunes and Apple TV (AAPL) could change the TV landscape. The WSJ reported of preliminary discussions between Apple and media content providers like Disney, CBS and Time Warner (TWX), that could lead to Apple offering a wider range of TV shows through its iTunes platform.
We think there are five big implications for Apple and companies in the content distribution business like:
(i) cable companies - Comcast (CMCSA), Time Warner Cable (TWC)
(ii) satellite companies - DirecTV (DTV), Dish (DISH)
(iii) online content distributors - Netflix (NFLX), Hulu
The 5 Implications:
1. Apple drives more sales of TV shows through iTunes
We believe that Apple currently sells fewer TV shows through iTunes than it does songs. We estimate that iTunes will have sold over 100 million TV shows in 2009 compared to about 2.6 billion songs.
2. Apple TV gains wider adoption
We estimate that Apple has sold about 5 million Apple TVs this year and fewer than 10 million since being introduced in 2007. In comparison, there are about 115 million TV households in the US representing a huge opportunity for Apple if it succeeds in revolutionizing TV.
3. Cable companies lose TV subscribers; become more dependent on broadband internet
Comcast has about 22% share in the US Pay TV market and as a result the digital cable business constitutes about 31% of Comcast's value. Similarly, Time Warner Cable has about 12% market share and the digital cable business constitutes 35% of its value.
If iTunes / Apple TV can attract those TV viewers that only watch a certain set of shows or channels, this could lead to subscriber losses for cable companies as those viewers decide to pay only for what they watch rather than a larger (and more expensive) bundle of channels through their cable providers.
4. Satellite companies in more trouble than cable companies due to absence of internet offering
DirecTV and Dish Network do not offer internet services themselves and instead partner with telcos like AT&T (T) to offer bundles of TV and internet. As a result, DirecTV and Dish are much more impacted by losses in Pay TV Market Share since their satellite TV businesses constitutes 60%+ of their value.
5. Wider base of Apple TV users makes iTunes a more viable threat to Netflix
Netflix is emphasizing its "Watch Instantly" feature which is included in Netflix subscriptions and allows subscribers to watch films online through Netflix. Although Apple is currently focused on increasing its offering of TV shows through iTunes / Apple TV, greater usage of iTunes / Apple TV will put Apple in a stronger position in to challenge Netflix's online film rental business.
Apple already offers film rentals through iTunes and we believe that over the long-run there is nothing stopping Apple from offering a wider range of rentals that could be comparable in scope to Netflix's offerings. Netflix's stock already factors in a significant amount of subscriber growth which could be at risk if Apple succeeds.
