Over the weekend, the WSJ reported that Apple and Comcast are working on a deal to streamline the use of Apple TV to Comcast users, where Comcast would provide the bandwidth to the device via a different ‘channel’, allowing the Apple TV content to be protected from the buffering and quality issues that plague other video services relying on the public internet. This is in sharp contrast to the recent Netflix-Comcast deal, whereby Netflix is directly paying Comcast for bandwidth to Comcast’s customer base.

There are three fundamental issues that come into play with delivering cable television to the home, and this type of arrangement between Apple and Comcast could end up being mutually beneficial in each of these areas.

‘The Pipe’

The capabilities and options to deliver TV to the home depend largely on the infrastructure in place. The historical approach to video was to deliver an analog ‘broadband’ connection, where all TV channels are simultaneously transmitted to every home. The intelligence of which channel to display from that stream of all channels was left to the STB – set top box – that connects the TV to the cable network. In order for advanced services like time-shifting or pay-per-view to function in this type of environment, the majority of the intelligence was sitting on top of the customer television set.

As digital cable has expanded and become ubiquitous, the supporting infrastructure has evolved. In systems like AT&T’s U-Verse, the ‘full stream’ of cable channels are no longer sent to the home simultaneously. Instead, only the channels being watched or recorded are sent, down the same pipe that the home internet uses. The difference is that a portion of this bandwidth is reserved for the ‘TV’ portion of the traffic, and is protected from bittorrent, Netflix, and other internet traffic.

With Netflix using approximately 1/3 of all internet traffic, this becomes a huge sticking point for them to grow. A single Netflix HD stream uses approximately 7 Mb/s of bandwidth, and this bandwidth comes out of the customer’s ‘pool’ of bandwidth. Assuming Apple delivers similar quality, Comcast could colocate the servers delivering this content directly on their network and provide this bandwidth over their reserved ‘TV’ bandwidth, guaranteeing this bandwidth available to their customers regardless of whether or not everyone else in the neighbourhood is streaming Netflix or going crazy on bittorrent.

In order for Netflix to deliver a consistent and high-quality experience to their customers, they have decided to compensate Comcast directly for their bandwidth usage, and provide direct connections from their servers into the Comcast network, but their bandwidth is in no way guaranteed, and can and will be impacted by the number of simultaneous users and what they are doing.

This does bring up some interesting questions around net neutrality. However, it is not unreasonable to think that Comcast has an obligation to their customers to deliver a quality television experience, and providing reserved bandwidth is likely the only way to accomplish this. As long as the rest of their internet traffic isn’t filtered or prioritized in a way that unfairly punishes or rewards competitors, they may be able to steer clear of these issues since their customers are paying for television service as a separate, although bundled, service.

 ‘The Smarts’

With the cable companies acting like the slow-moving behemothly monopolistic utilities they are, companies like TiVo came to help give the end user a more intelligent and capable experience. This was a requirement in the old days of analog cable and over-the-air television, and has largely remained in place today. Even in the case of smarter television systems, the hard drive storing the buffered television usually sits in the STB. Really advanced systems can share this hard drive between different receivers, but the intelligence is still contained in the home.

This is not an ideal situation for anyone for many, many reasons. Hard drives fail, people don’t provide a clean, temperature-stable environment for the hardware, and the traditional vendors haven’t always prioritized end-user experience, or even been able to spell end-user experience, leading to a very frustrating customer experience.

For Comcast, the concept of having their end-user experience defined by Apple may be appealing. Apple has created a device that is inexpensive at $99, and that could conceivably provide a much better user experience than what exists today. The biggest problem with the Apple model is that it relies on a very intelligent cloud to deliver the content, and the cable companies have historically operated on the exact opposite of this model.

For Comcast to replace their user experience with Apple TV, they would have to create a very significant internal server infrastructure to deliver live content to millions of users. Luckily, the migration to digital and intelligent television has already accomplished a significant amount of this upgrade, but the DVR/time-shifting capabilities still primarily exist in the home today, and this capability would have to be moved to Comcast’s data centers.

When looking at the infrastructure Apple has been investing in for their content delivery networks, a reasonable theory to consider is that they may be preparing either a reference infrastructure for the cable companies or even preparing to host a significant amount of the infrastructure themselves, and just put in a pipe to the cable providers’ networks.

‘The Content’

Most of the recent rumors and discussions on Apple’s difficulties in entering the home TV market have centered around content contractual issues, and with good reason. The cable companies have used every legal option at their disposal to maintain their stranglehold monopoly over their users. One of the most effective ways of doing this is to “own” the content and channel broadcast rights for their user base. These contractual ties are so tight that as many content providers have created iOS, Apple TV, and Android apps, they are only available with full functionality to cable subscribers.

While this is likely not a viable long-term strategy to stop the ‘cord-cutters’, it certainly is a significant impediment to going cable-free in the short term. If you enjoy broadcast television, premium cable, or nearly any sporting events, you must have a subscription to cable TV to legally view the content through the network’s own applications.

By partnering with the cable companies, Apple sidesteps this issue for the time being. If Comcast is ‘just another app’ on the Apple TV, THEY are responsible for the contractual obligations, and they already likely have all of the necessary rights. Nothing in the Apple TV ecosystem is fundamentally that different from how cable content is delivered today, and will likely fall within the current contracts or require minimal changes.

Long-term, it is likely the content providers will move more ‘upstream’ and the premium channels will market directly to their consumers like Netflix does today, but that is many years and many contract renegotiations away. Today, cable is the in the driver’s seat.

The Biggest Winner: Everyone

Comcast wins because their customers get a better user experience, and they are paid whether the user is watching their cable content, a movie on Netflix, or buying a movie on iTunes.

Apple wins because they own the living room, which is all they really want in the first place.

Netflix wins because every home with an Apple TV installed, they have another device with their app available.

This may be the wave of the future, and the biggest losers would be the current STB providers. Based on how terrible their products are, will anyone care?

Also read:

• Will Apple TV 4 come with Comcast subscriptions?
• Opinion: How Apple can improve the TV experience without the “TV”
• Opinion: Where is Apple taking the TV in 2014?

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Yesterday Apple released their 2013 Q4 numbers and spoiler alert – they sold a lot of stuff. Specifically, they sold a lot of iPhones, iPads, iPods, Macs, and iTunes content, providing specific sales numbers for each of these categories. What wasn’t detailed is how many Apple TV’s were sold.

Very little is done without a reason at Apple, and the lack of clear communication surrounding the Apple TV may well be strategic. The last announcement of Apple TV sales was in May 2013 at the D11 conference, when Tim Cook stated that 13 million had been sold, with half sold in the prior year. Eight months have passed, and assuming the sales have held somewhat steady, it’s difficult to see how Apple can justify calling a product that has sold in the neighborhood of $2 billion a “hobby.” So why the silence?

Perhaps it’s time for Apple to “disrupt” the television space. If that is the plan, they are doing it in a classic Apple way, quietly building an installed base of around 20 million Apple TV’s. While that number pales in comparison to the number of iPhones, iPads, and iPods, it is a fairly significant number of larger screens. Let’s put it in perspective:

The top 5 US cable companies are:

Based on market share (numbers of subscribers)
Currently – January 2013 (numbers are approximate)

1. Comcast Corp.: 23 million
2. Time Warner Cable: 12 million
3. Cox Communications: 4.595 million
4. Verizon: 4.592 million
5. AT&T: 4.3 million

[source: Wikipedia]

Apple now has nearly the power of Comcast in terms of subscribers to their television service, and just like they did with music, they are going to the content producers instead of the retailers. Think of PBS, ABC, Disney, and HBO as analogous to the music labels, and Comcast and TW are today’s Blockbuster Video. Give the customers what they want, at a reasonable price, and remove players that add no value.

Everyone hates their cable company. Everyone. They are “safe” today for one reason and one reason only – most of the content producers are contractually tied to only offer much of their content only to paid cable subscribers. That is why most of the Apple TV “networks” require you to sign in to AT&T or COX before you can view live content, although we are seeing a trend to offer more and more content without this login requirement where possible.

As Apple reaches critical mass, they will have the same negotiating power that Comcast has, and those contractual handcuffs will fall by the wayside. The content producers will quickly realize that, in order for them to survive, they can’t ignore 20 million TV’s and 700 million smaller iOS screens that Apple brings to the table. Those numbers make Comcast seem pretty insignificant in comparison, and if they aren’t scared, they should be.

The other disrupting force in this market is Netflix. By provoking exclusively on-demand content, and branching out into original productions, Netflix has grown to 33.4 million subscribers, certainly giving HBO and Showtime pause. Netflix is able to build a direct relationship with its customers, and leverage rapidly evolving technology to satisfy their early-adopter customers and support 4K years before the cable TV companies will have upgraded their infrastructure. The combination of Apple TV and Netflix will force HBO and Cinemax to make changes to their business model, and that combined pressure will become an unstoppable force forward.

Apple has created a premium market and product suite for entertainment. Music, movies, books, and casual games exist on large part with Apple as one of, if not the, primary market and source of revenue for many developers and content producers. To date, Apple has limited Apple TV gaming to AirPlay from another iOS device or, more recently, OS X. So the final interesting possibility here is the A7 chip and it’s 64-bit capabilities. Few would argue that the iPhone 5S and iPad Air are unable to make full use of this chips possibilities, primarily due to power and space concerns. When these constraints are removed, the gaming possibilities of this platform become very interesting as well. Rumors are circulating, as they have before, that Apple is going to release an Apple TV SDK and open the platform to developers.

Apple has been quietly adding select content providers to their Apple TV ecosystem. This has allowed them to accomplish a few specific goals: stay under the radar of the cable providers, allow the device to gain more marketshare and approach that “critical mass,” and mature their API in infrastructure. There is a very big difference between selling a 4-minute song and streaming live video to tens of millions of devices. But don’t think for a second they they don’t have a plan and that they will, as they have done time and time again, disrupt an entire industry in the guise of releasing a product.

It’s what they do.

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