New Apple TV May Benefit Both Cable Networks and Cord-Cutters

shutterstock_appleThe proposed Apple subscription model could provide a much-needed revenue source for the Cable Networks industry, presenting new opportunities for growth.

Overview

Apple announced a significant overhaul of its Apple TV set-top box during the company’s media event on Wednesday. While much of the product introduction focused on the device’s new user interface and increased functionality, the Apple TV may also signal an important step in the introduction of a new television subscription model negotiated between set-top box manufacturers and cable content producers.

The methods by which consumers have watched cable television have drastically changed over the past decade in response to online original programming providers such as Netflix and Amazon, as well as a range of set-top boxes, such as Roku, Google Chromecast, Amazon Fire TV and Apple TV, that enable consumers to stream exclusive online content directly to their television. An increasing number of consumers, commonly referred to as “cord-cutters,” have embraced this new technology and canceled their cable packages entirely. This has intensified competition for the Cable Providers industry, while creating new opportunities for the Cable Networks industry.

Impact

Although negotiations between the tech giant and cable networks have reportedly been tenuous, Apple’s planned subscription TV package would bridge the gap between the increasing number of cord-cutters and cable content producers such as CBS, 21st Century Fox and Walt Disney by creating a small but comprehensive list of TV channels at a lower cost than the traditional cable packages that cord-cutters regard as being bloated with unnecessary content. Although the Cable Networks industry is expected to grow at an annualized rate of 3.6% over the five years to 2015, revenue is projected to grow by a slim 0.3% this year, in response to mounting declines in viewership. This has been particularly evident in the industry’s changing revenue streams: in 2015, revenue generated through the Cable Networks industry’s advertising sales is estimated to eclipse revenue generated from licensing contracts, which have decreased in value following ratings declines and growing carriage disputes. A proposed subscription partnership with Apple could provide a much-needed new revenue source for cable networks, many of which have begun to depend on advertisers as the primary source of revenue growth.

Outlook 

Participating cable networks would be a major beneficiary of this new subscription model, as programming would be available through Apple TV in addition to traditional means. IBISWorld estimates that the Cable Networks industry is currently in the mature stage of its life cycle. Provided that the trend of consumer cord-cutting grows over the next five years, the proposed Apple subscription model may provide resurgent growth for the Cable Networks industry through a content delivery model.

Conversely, smaller cable networks that did not participate in the Apple TV negotiations will be adversely affected by this new subscription model. Smaller cable networks have opposed alternative subscription models in the past, on the basis that a la carte subscription models or an Apple TV type of model would drastically reduce the number of consumers who voluntarily buy access to their content. Major operators in the Cable Providers industry, which negotiates with cable networks to provide standardized cable bundles, such as Comcast, Time Warner Cable and Cox Enterprises, may suffer as well. Over the next five years, IBISWorld estimates cable TV subscriptions will fall at an annualized 0.9% to 94.7 million, greatly damaging one of the industry’s primary revenue streams by breaking down the bundling business model. Moreover, because many cable providers actually own the networks, they have reportedly avoided negotiations with Apple to keep their content unavailable to Apple subscribers, in an effort to make a la carte subscriptions less attractive to consumers.