Apple CEO Tim Cook said on this week’s earnings call:
I think we’re on the early stages of just major, major changes in media that are going to be really great for consumers, and I think Apple could be a part of that.
Two weeks ago, I wrote about Apple’s potential to change the subscription music market. But, given these remarks were made in the context of HBO Now, I suspect what Tim Cook was really referring to was the expansion of HBO Now and Apple’s potential to do a TV service. I’ve written several pieces about this already on Tech.pinions. For a quick recap, see:
- A primer on TV economics
- Apple TV, HBO Now, and the Potential for Something More
- Taking Apple TV beyond a hobby
- Apple, TV, Data and Ads
The last piece about this, for now, is regarding local TV and sports content. This is easily the hardest part of Apple’s TV service and has a few implications for what Apple might build.
Local broadcasting market structure
The big challenge here is, whereas cable networks are single entities and for the most part owned by single companies, the value chain and market structure in local broadcasting is more complex. Although the major national networks do own some local broadcasting stations themselves, many others are owned by independent companies such as Gannett, Graham Holdings, Clear Channel, and Sinclair. The owned-and-operated stations are the simple part of this equation, but the stations held by independent companies are where the complexities come in. The national networks only supply a portion of the programming these stations broadcast each week, with the rest filled in with local content, re-runs, regional sports, and other content that doesn’t come from ABC, NBC, CBS or Fox. This is why CBS, which now runs its own over-the-top TV service in the form of CBS All Access, can’t provide it nationally. As you can see from this page, one of the first things you have to do when you try to sign up for the service is enter your zip code, so CBS can check whether it can provide the service to you (where I live, in Utah, the service isn’t available, because the local station is owned by Sinclair Broadcasting).
I go into all this because it’s critical to understanding the challenges Apple will encounter in launching a Pay TV service along the lines of what people are used to. As part of the classic pay TV bundle, people are accustomed to getting all the live local channels as part of the basic tier. But this is only possible because their local pay TV provider has contracted with the local broadcasters to deliver this service. If Apple were to provide a national rollout for its TV service (and I’d assume it would want to), it would have to sign contracts (directly or indirectly) with all the local broadcasters wherever it wanted to provide service.
There are over 200 CBS affiliates alone around the country, only 16 of which are owned by CBS itself. A number are obviously owned by groups such as Sinclair, but it still means doing lots of individual deals and managing the streams from all these providers across the country. And that’s just for CBS. It could potentially deal with these groups and with CBS as intermediaries, but that only makes the problem slightly more manageable.
Sports rights another wrinkle
Another challenging problem is sports content. It appears Apple has a deal in place (or at least in the works) with Disney, which would likely provide ESPN channels as it already does to Sling TV. However, a great deal of sports content in the US is fragmented across many other channels, including local broadcast channels, other cable networks such as TNT and TBS, and regional sports networks in many individual markets. Traditional NFL TV rights alone are complex, split between the four major national broadcasters, some of their affiliates (in the case of preseason broadcasts), ESPN, and the NFL Network. Baseball, basketball and other sports are even more fragmented because their audiences are more localized. Certain mobile rights for the NFL are owned by Verizon Wireless, which further complicates the picture for any service that is to be available across platforms and devices.
The role of live
Overall, consumption of live, linear content is in steady and rapid decline. Once the totality of traditional TV viewing, it’s now dropped to less than half and is likely to continue to fall. Two factors drive this: the convenience of watching at a time of one’s choosing rather than an arbitrary air time, and the ability to skip advertising. Advertising is the one element of the traditional TV business which hasn’t been officially disrupted despite all the other changes which have been forced on the industry as it has first seen threats such as TiVo, Slingbox, and piracy emerge, and then slowly adapted to provide some of the same value propositions. The TV industry is addicted to advertising, but there are several major alternatives to traditional TV now which eschew advertising, including Netflix, Amazon Instant Video, HBO Now, and of course electronic sell through offerings such as Apple’s own iTunes. Despite all this, the traditional TV industry remains heavily dependent on advertising as a revenue stream, as I demonstrated in this piece. However, these advertising revenue streams are under threat as viewing shifts from live to delayed and on-demand, where there are lower ad loads (or ads are skipped), and where the audience often can’t be accurately measured or monetized. Apple can help with measurement and monetization, but live viewing is the one form of TV where ads can’t really be avoided. This is where we come back to sports – other than a handful of reality TV shows with live voting and news programs that fewer and fewer people watch, sports remains the major form of content people still watch live. Even as everything else moves to DVR, on-demand and online viewing, sports refuses to be time-shifted.
Possible strategies for Apple
Now that we’ve reviewed some of the challenges for local, live and sports programming, let’s look at some possible ways Apple could address all of this:
- Exclude live TV. The HBO Now model is interesting because it doesn’t include a live component. Other than the occasional boxing match, HBO’s content isn’t particularly time sensitive, so this doesn’t matter a great deal. On-demand is fine for essentially all its content and it typically makes shows available through the app almost immediately after they begin airing, which is almost the same as live. One possible model for Apple to pursue is to create a bundle of similar services, as I hinted it might in my piece on the HBO Now announcement. Thus, instead of the classic bundle of channels with live TV being primary and on-demand and DVR functionality secondary, on-demand would be the only method to watch something and the service would differentiate itself to content owners on the basis of allowing them to properly measure and monetize that viewing, which in turn would require unskippable ads on most channels. Given the shift to on-demand viewing, this would fit many people’s existing patterns but it wouldn’t get rid of ads, as many other services do, nor provide a back door for skipping them such as a DVR. The other big downside is it would have to leave out sports which, as noted, was the major category of live viewing that’s resistant to time shifting.
- Exclude sports. Of course, one way to overcome this problem is to provide packages that simply don’t have a sports component, instead leaving the sports element of the bundle to existing apps such as MLB TV. This is an imperfect substitute given blackout policies and other limitations on viewing through those apps but it might be a somewhat adequate way to fill in at least some of the gaps.
On the other hand, for people who don’t care about sports, which is the group most likely to cut the TV cord anyway, this likely doesn’t matter. However, if Apple wants to do a deal with Disney, excluding ESPN from the bundle seems like something of a deal breaker, especially given the current spat between Verizon and ESPN over just this issue.
- Offer regional rather than national service. One possible solution to the local channels problem is to regionalize the service and roll it out by local market. This is the strategy Sony has adopted with its Vue service and I suspect the difficulty of getting local channels on board was part of the reason. This would be a major departure for Apple, since it has always provided its products at least on a national basis in the US (in contrast to Google and Amazon, which each have certain services or features only available in certain geographic areas). Instinctively, this feels like an un-Apple thing to do, but it’s one of the few options for overcoming the enormous challenges associated with providing live, local, and sports programming.
- Bite the bullet and do the deals. Despite all the obstacles, given the problems associated with each of the other approaches outlined above, Apple may just decide to bite the bullet and do the deals necessary to provide national service from day one, including local, live, and sports programming. It’s obviously been done before by DISH and DirecTV, which both provide services nationally, unlike the other pay TV providers which operate only on a regional basis. But this approach would be a heck of a lot of work and it will become increasingly difficult to keep the details under wraps as more and more parties become involved. But I have to think that, on balance, this is the most likely route, which may well be why we’re hearing about the service despite the fact there’s no sign of an imminent launch.
I continue to be fascinated by the potential for an Apple TV service. There are challenges aplenty, as I’ve outlined in my various pieces here on Tech.pinions over the last few weeks, but I think there’s a huge opportunity no company but Apple from outside the traditional pay TV space can likely tap into.