Jefferies’ Peter Misek takes a deep dive into the problem of acquiring quality content
Amid all the chatter this week about Apple’s (AAPL) putative plans to build a standalone TV set — from Best Buy‘s leaked customer survey to the
Globe and Mail
‘s report that Canadian telcoms are already testing the thing in their labs — the 23-page report produced by Peter Misek’s team at Jefferies International stands out.
Rather than get distracted by speculation about whether it would be controlled by voice, keyboard, arm waving or all three, Misek focuses on the nut that will be the toughest for any Web-TV manufacturer to crack: how to deliver a critical mass of the best content to its users when and where they want it — which it to say, anytime, anywhere.
Misek raises and dismisses three approaches Apple’s deal makers might take — creating content, seeding content, buying exclusive access — to zero in on what he believes will be the most likely: buying non-exclusive rights in a way that doesn’t make Hollywood’s content owners nervous.
“We think an iTunes-type model is the most likely scenario as Apple will pay less for non-exclusive content, provide access to a broader range of content (creating a better user experience) and package everything with a superior user interface and ecosystem. We believe Apple thinks it can win on a level playing field for content.”
Sounds simple, but it gets pretty complicated. Below the fold: Misek’s summary of five scenarios by which Apple could acquire non-exclusive content, with their pros and cons.
- 1) Partner with carriers who have a video offering: we believe the iTV is in the labs at AT&T, Verizon, Bell Canada, and Rogers. All these carriers have fixed line video offerings in addition to the wireless capabilities that Apple desires.
- Pros: simple to implement. High quality video with wide selection.
- Cons: the carriers’ fixed line video footprint covers only a small part of the U.S.
- 2) Partner with MSOs: we are less sure if the cable companies will be involved in Apple’s iTV plans.
- Pros: high quality video with wide selection.
- Cons: while many cable companies have wireless partnerships with a carrier (e.g., Comcast and Time Warner Cable recently linking with Verizon), a seamless hand-off between different devices would be more complicated.
- 3) Apple signs its own non-exclusive deals with content owners: while we believe this would be straight forward with older content (e.g., similar to a Netflix model), we believe the content owners will be recalcitrant to sell over- the-top rights to premium content. One factor is that the content owners fear that the MSOs would respond to a new video competitor (Apple) using their data pipes by degrading the speed of their data pipes, thus degrading the perceived quality of the content by users.
- Pros: Apple gains more content control.
- Cons: content owners hesitant. Quality of service depends on pipes owned by carriers and MSOs. The carriers’ fixed line video footprint covers only a small part of the U.S.
- 4) Apple leverages the carriers’ potential non-exclusive deals with content owners for over-the-top video service: Reuters reported in December that Verizon was negotiating for this type of service (i.e., offering video service outside of its FiOS footprint); however, Jefferies Telecom Services analyst Tom Seitz views this as unlikely.
- Pros: Apple does not have to pay anything.
- Cons: content owners hesitant. Quality of service depends on pipes owned by carriers and MSOs.
- 5) Combination of OTA broadcast TV and over-the-top IPTV catalog: while most people are addicted to cable and satellite TV, the transition of over- the-air broadcast television to high definition does allow for another option. Especially with the development of new low profile antennas (i.e., no big unseemly rabbit ears), oftentimes the picture quality is superior to pay-TV options though key cable channels like ESPN, Discovery, Food Network, etc., would be unavailable. This live TV content could be combined with archive TV and catalog movies for a fairly complete offering.
- Pros: inexpensive for Apple.
- Cons: broadcast reception, even with the new-generation antennas, can vary, and Apple usually insists on a uniformly excellent user experience.