Could Apple Spend $50B to Circumvent Cable?
- View Original
- March 23rd, 2015
Steve Jobs is famously quoted by his biographer, Walter Isaacson as saying “I finally cracked it” referring to a modernized TV experience. Most commentators have focused on the potential for innovating in user interface and experience. What if that wasn’t the main problem he’d “cracked”? Is that really the Big Hairy Audacious Goal that could redefine TV and video? The distribution of video in many ways is a much bigger problem facing anyone trying to disrupt TV. Apple could potentially address the problem and wrest control by leveraging an asset few other companies possess; ton’s of cash!
Apple recently reported $178 billion in cash and liquid assets. It is expected to continue to generate $50 billion annually and just can’t seem to spend it or return it to shareholders fast enough for many people. Much of the cash may be overseas but Apple has demonstrated and the current market has supported use of debt to get around that issue. Apple faces the daunting task of driving growth from the high base of $182B in fiscal 2014 revenue. It has to target markets that can have a meaningful impact.
There is plenty of fun to be had speculating how Apple should spend its cash hoard. Unlike Amazon, Google or Facebook, Apple does not have a history of big acquisitions. The acquisition of Beats at $3 billion was one of the largest in Apple’s history. There is a long list of good and plain silly suggestions including buying Tesla for its batteries or Twitter to enter social or Disney for content. Some assert Apple may simply not know what to do with that much cash. Apple is smart enough to invest to leverage its ecosystem, lock-in suppliers and new technologies and as a result lock-in users with design and features. Apple shows little desire to stray too far from its core markets despite rumors about building cars.
What markets have scale? Broadcast TV and paid TV is a massive market despite significant changes and redefinition by streaming companies such as NetFlix, Amazon, Hulu and YouTube. 2017 US revenue from TV subscriptions and advertising is forecast at $218B. Movie, TV and video delivery is a large potential market for Apple. It’s sale of music and movies through iTunes has been in decline. Viewers and listeners are preferring to subscribe and stream versus buying. Apple needs to embrace streaming which is one of the rumored reasons for the purchase of Beats.
Apple is not new to TV. The Apple TV “hobby” has sold 25 million units to date despite increasingly lagging behind competitive devices from Roku, the Amazon Fire TV, etc. Apple can still surprize by spending to lock up content even if only for a few months in the case of the HBO Now announcement. Despite this key content deal the simultaneous drop in the price of Apple TV to $69 feels like an acknowledgment of the competition. Why has Apple allowed Apple TV to technically and in positioning lag the competition? It may have a bigger plan in mind.
The existing TV ecosystem represents challenges to Apples demonstrated preference for control through influence and avoidance of external dependencies. Compare any effort in TV to the launch of the iPhone. With little leverage in the cellular phone industry iPhone launched in 2007 as an exclusive with AT&T (Cingular at the time) but that was the entry point that now means users can now choose almost any carrier worldwide. Apple exerts influence worldwide over the phone industry few would have predicted in 2007.
Compare this to the TV landscape. Delivering streaming video is dependent upon broadband access and most U.S. households only have one real choice of providers. The high cost of wired infrastructure and local deals with jurisdictions mean most cable providers are local monopolies. This gives companies such as Comcast significant influence over the Internet experience in terms of available bandwidth and potential for limiting broadband caps applied to streaming. Consumers have very limited or no choices when it comes to the set top box devices arguably limiting innovation.
A TV or streaming video offering with a dependence on the household broadband provider is less attractive to Apple. If the proposed acquisition of Time Warner Cable by Comcast is consummated Comcast achieves even more significant influence in U.S. TV. It would supply paid TV to about 33% of households and broadband to about 30% of US households. It is not in Comcast’s interest to support any effort to subvert its TV offering and default it to the role of a mere ISP providing broadband. Some fear that even with recent moves by the FCC Comcast and the other large cable companies will still exert significant influence and control over innovation in the space including blocking, even if for a short time, streaming video to specific devices such as the PlayStation 4.
There is an alternative to wired broadband that could represent a key strategic investment of tens of billions for Apple. The acquisition of wireless spectrum.
For decades the U.S. government has auctioned radio frequencies up and down the spectrum dial driving innovation in wireless including Wi-Fi, Bluetooth and NFC (near field communication). In January 2015 a spectrum auction expected to raise $18 billion actually hit $45 billion with 31 winning bidders including Verizon, AT&T and satellite player Dish Network. The amount committed shows the strategic importance and degree of competition for this virtual land grab. The activity around the spectrum is driving together AT&T and DirecTV as costs rise and scale becomes more critical. Others are actively in the hunt for spectrum to redefine their companies.
However, this recent spectrum auction could pale compared to the scale of the next major auction. Since early in the life of TV viewers have enjoyed ad-supported free TV delivered via antenna over UHF spectrum. The next spectrum auction is intended to unpack and redistribute UHF and free some of this spectrum for new uses. Advances in digital wireless such as LTE Broadcast could be applied to the UHF for greater utilization vs. the analog signals they carry today. It is argued that with only 10% of TV households receiving broadcast TV over the air, the time is ripe for a digital transition. Similar efforts to redefine terrestrial broadcast frequencies and usage are underway in Europe.
Apple prefers vertical integration investing heavily in material sciences, server farms to decrease dependence on 3rd party CDN’s, designing its own chips and locking up the supply chain by pre-paying for massive quantities of key parts. Acquiring wireless spectrum is in line with these strategies. Apple has not traditionally participated in spectrum auctions, preferring to rely upon carrier partners. As the technology emerges to move TV to the digital domain now may be the time for the company to participate and leverage the spectrum.
Creating a service delivering TV and video content via its own wireless spectrum would circumvent reliance on broadband providers. Such a service could create a TV Everywhere experience across all Apple devices, e.g. iPhones, iPads and a new wireless enabled Apple TV streaming device or a TV itself. This would represent a critical difference between Apple’s streaming device and the competition. Viewers could truly cut the cord.
Apple could go further and integrate the delivery of video and audio to cars through CarPlay, streaming directly to cars both digital radio and TV. There is clear competition over the idea of owning the dashboard. Apple would immediately be in competition with a number of audio subscription companies including Spotify (15m premium subscribers), Pandora (>81.5mactive listeners) and Sirius XM (>27m U.S. subscribers).
Verizon and AT&T could represent both partners and competitors in these efforts. Verizon appears to be abandoning it’s fiber FIOS TV offering in favor of acquiring spectrum. Verizon recently sold the west coast FIOS operations at the same time as committing billions during the recent spectrum auction. Apple could own the spectrum and partner to avoid having to build out all of the mast infrastructure needed. It would be possible to make access to the spectrum available to partners under license. It faces competition but has the cash and the reasons to make aggressive bids. Competitors are already staking their claims. Dish Network has acquired spectrum currently estimated to be worth over $50 billion and has gone so far as to significantly test the auction rules to maximize its bids.
Apple faces competition from other deep pocketed tech leaders. Google has been known to participate in auctions in the past but later admit it had more to do with exerting influence on policy than winning spectrum. Google has been an advocate for the auction of the UHF frequencies.
Networks and content producers will look at Apple with a wary eye given it’s impact on the music industry but they also know they need a counter to the cable companies control of broadband delivery to homes. To date content companies have been cautious about streaming rights but NetFlix growing worldwide strength may make producers more open to supporting alternatives, hence HBO’s recent deals with Amazon and Apple. Apple understand the need for product differentiation to attract consumers and the need to be an attractive content partner.
Buying wireless spectrum could represent a significant use of Apple’s funds, allowing it to redefine the TV experience and circumvent the power of companies such as Comcast. It could capture significant market share, and cement its role in the entertainment and communication ecosystems of many consumers.