iTV, Finally? Inside Apple's Crazy Plan to Change the Way You Watch Television

Apple couldn't beat the cable companies at their own game. So, it's thinking about joining them.
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Years of halting negotiating with cable companies haven't gotten Apple much closer to its grand vision for television. But a newer strategy of talking directly to content providers seems more promising.

Apple is negotiating with production studios and networks to provide content for a television set that would emphasize apps over cable TV, according to people familiar with those discussions. Among the companies that have talked to Apple are Disney's ESPN, Time Warner's HBO, and Viacom, which owns MTV Networks, Nickelodeon, and Comedy Central.

It's unclear how close these deals are to fruition. Some people cautioned that, with the TV industry in such flux, "everybody is talking with everybody." Any deal with an internet TV service like the one envisioned by Apple is likely to be under similar terms as the networks have negotiated with traditional cable companies.

Sources say Apple's strategy could include forming its own pay TV service, essentially becoming a cable company itself, except with content delivered entirely over the internet. Intel, Sony, and Google are known to be pursuing similar tactics, and could launch their own pay TV services before Apple.

The difference is that Apple wants to release a full-fledged television set, seeking to control the entire experience of watching TV, according to sources. Apple already sells a small set-top box called Apple TV that plugs into the back of other televisions. It's an add-on device for watching apps like Netflix and video purchased from Apple's iTunes store. An Apple television set, by contrast, would attempt to usurp the role of the cable box in people's living rooms.

Apple declined to comment. So did Viacom. ESPN spokesman Chris LaPlaca, referring to talks with all potential internet TV services, said, "This is very, very exploratory in nature. There are no formal discussions taking place." HBO spokesman Jeff Cusson said, "We see our current model as our best model for now and have no plans to go over the top or to enter these markets in a different way."

The reference to going "over the top" points to a crucial distinction in the industry. Most new television programming is only available to people with pay TV subscriptions, which bundle together lots of networks for a monthly fee. Other ways of getting such content, like paying for shows a la carte, are considered over-the-top services. Streaming internet video companies like Netflix are also included in that category. But an internet-only pay TV service could occupy a gray area--not technically over-the-top, but still a threat to cable companies that fear becoming "dumb pipes" for other people's programming.

Goodbye, Channel-Flipping

The main obstacle to an Apple television set has been content. It has mostly failed to convince cable companies to make their programming available through an Apple device. And cable companies have sought to prevent individual networks from signing distribution deals with Apple.

Sources say Apple has concluded that it doesn't need all, even most, content providers on board before it can release a TV set that people would buy. It just needs enough good programming to distinguish the new product, which will try to simplify the experience of connecting internet video to the TV.

A deal with a top-tier content provider like ESPN or HBO could represent a tipping point that would encourage Apple to bring the product to market. Most networks, though, would be reluctant to strike deals without the participation of others, not wanting to upset their relationships with cable companies, which view Apple as a disruptive competitor.

Apple's TV set could shift the paradigm of traditional television watching. Instead of organizing everything around channels, it would organize around apps from networks, studios, and others that own content. Other features, like search, might help eliminate the notion of channel-flipping altogether. Cable companies, in that scenario, could become just another app that consumers choose to pay for or not, rather than the core of the TV set.

Apple is still interested in striking deals with cable companies that would allow people to plug their cable lines into the back of the TV set, bypassing a cable box, sources say. But at least two years of negotiations haven't progressed very far. The cable companies worry chiefly about losing control of their relationship with customers, as some believe happened to AT&T with the iPhone.

Apple is reportedly close to signing a deal with Time Warner Cable that would give the cable company's subscribers an app on the existing Apple TV set-top box, which is about the size of a hockey puck and sells for $99.

​The existing Apple TV.

It's not clear what would happen to the current Apple TV if Apple also releases a TV set, which would cost much more. Apple's desire to control all aspects of the experience is typical of the company, which puts a premium on aesthetics and ease of use, but it would still be a risk. TV sets are expensive, and people generally keep them longer than Apple's other popular products, like computers and phones.

Picking the Right Moment

The existing Apple TV box is essentially a conduit for Apple's own iTunes store, which sells and rents a large catalog of movies and TV shows. Apple has repeatedly downplayed the set-top box as a "hobby," but sales have picked up recently. In May, Apple CEO Tim Cook said "about half" of the 13 million Apple TV's ever sold had been purchased in the past year, and the product was recently upgraded to a "beloved hobby."

In recent months, Apple has made various small moves to build its presence in TV land. It just acquired startup Matcha.tv, which helps people find a particular program or movie on the internet. Apple also reportedly offered $280 million for the Israeli firm PrimeSense, which makes motion sensing technology that can be used as a gesture-control system for TV.

Meanwhile, competition from other set-top boxes in the US has increased. Microsoft is preparing to release a new version of the Xbox, which is used as much for watching video as playing video games. Roku recently raised $60 million of venture capital, and has struck deals with some cable companies, including Time Warner Cable, Comcast, and DirecTV. Google launched the Chromecast, a small device that plugs into the back of TV sets to stream video and music. And Amazon, not to be left out, is also working on its own set-top box.

The array of video that can be played on such devices is growing, too, and much of it doesn't require a cable TV subscription. Americans today can watch many newly released films, day-old episodes of some popular TV shows, and live network television--all without paying anything to a cable company. That has led to predictions that consumers will cut their cable cords in favor of services like Netflix, iTunes, and Amazon Instant Video. And while the causes aren't clear, subscriptions to pay TV services in the US are now at their lowest level in four years.

Still, cord-cutting isn't happening in large numbers yet, largely because cable companies have managed to secure exclusive rights to hometown sporting events and other coveted programming. For instance, Apple TV recently added apps for Disney's ESPN and Time Warner's HBO, but both require a cable subscription to use. That's partly why Apple was so keen to strike deals with cable companies before releasing a TV set.

If You Can't Beat 'Em

One alternative being considered is that Apple could essentially become a cable company itself. Under that scenario, sources say, Apple would launch what is formally known as a virtual multichannel video programming distributor. MVPD is the catch-all term for pay TV services, whether delivered over cable lines, satellites, or otherwise. A virtual MVPD would offer such content entirely over the internet. IntelGoogle, and Sony are known to be preparing virtual MVPDs of their own.

To consumers, virtual MVPDs might not seem much different than over-the-top services, but the technical distinction could help Apple and content companies in their negotiations. HBO wouldn't technically be going over the top and possibly violating its existing contracts if it struck a deal with a virtual MVPD. Viacom seems to have followed that logic in reportedly agreeing (paywall) to let Sony carry its content on an internet TV service.

SpongeBob SquarePants
Viacom's valuable content.Getty Images/Larry French

However Apple's television service is formally regarded, it will still be seen as disrupting the TV industry. In its talks with content companies, say sources, Apple notes that it has nearly 600 million iTunes accounts and is good at getting people to pay for content. It made similar claims when it negotiated with companies in music and publishing, and it has indelibly changed those industries.

If Apple or other tech companies were successful at internet TV, cable companies could see their bargaining power diminish with both consumers and content owners. That would squeeze prices in unpredictable ways. More entertainment companies could start to see advantages in selling new shows direct to consumers. Production studios, which typically work with TV channels to distribute their shows, may prefer to negotiate distribution deals on their own. And sports leagues, which sell lucrative contracts to media companies, could instead choose to offer more of their own subscription services.

Consultants hired by one cable company to examine such a scenario concluded that "value would flow up river to the content companies and away from cable, probably irreversibly," says someone involved in the study. Cable companies will, of course, attempt to prevent that from happening. They are aggressively battling Intel's efforts, for instance.

Years in the Making

"I'd like to create an integrated television set that is completely easy to use," former Apple CEO Steve Jobs is quoted saying in his biography, published in 2011 after he died. That was seen as a sign that Apple would soon release a TV set, but two years later, it hasn't yet happened, stymied by complexities far greater than other industries Apple has entered.

Steve Jobs unveiling the Apple TV in 2006.
Jobs unveiling the first Apple TV set-top box in 2006. He wanted to call it iTV.Reuters/Dino Vournas

The same, in a sense, is true for HBO. The network has long been rumored to be preparing to sell subscriptions directly to consumers, instead of doing it entirely through cable companies. It has developed a well-regarded service called HBO Go, which provides nearly all of the network's programming, including old shows, over the internet. HBO Go is only available to HBO subscribers, who also must be cable subscribers--but the network could easily use the service to cut out cable companies, if that strategy started to make more sense.

HBO has made small steps in that direction, selling HBO Go directly to consumers in the Nordic countries. But it has repeatedly said it doesn't make sense to do the same in the United States. Cable companies handle some payment processing, marketing, and customer service on behalf of HBO, which reduces costs. It's also not clear how cable companies would react if HBO or other premium networks, like CBS's Showtime, struck deals with Apple or other competitors.

ESPN is in a similar situation. Its WatchESPN apps and ESPN3 service allow some cable subscribers to view live programming over the internet. But it hasn't gone further in that direction because Disney is reluctant to risk the lucrative revenue its able to extract from cable companies for the right to carry ESPN networks--about $5 per subscriber per month, even if some of those subscribers aren't sports fans. Still, with pay TV subscriptions flatlining in the US, a new customer like Apple or another internet TV provider could prove appealing.

Another complicating factor in Apple's quest to release a television is internet bandwidth. Cable companies generally own the pipes that deliver their programming and are best at optimizing their performance. Internet-only services, like Netflix, have run into bandwidth problems that can cause delays at busy times. (Netflix says it has improved performance considerably.) That's another reason Apple is still interested in working with cable companies, according to one source, though internet speeds and bandwidth optimization may have improved enough in some parts of the US for Apple to go it alone.
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Zachary M. Seward, Gina Chon, and Kevin J. Delaney

Zachary M. Seward is a senior editor at Quartz, where Gina Chon is a reporter and Kevin J. Delaney is the editor.

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