Are These Companies a Threat to Cable TV?

Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

AppleTV was introduced in September of 2006 as a digital media receiver that was designed to play content from its iTunes store, iCloud, Netflix, Hulu Plus, YouTube, Flickr, NBA League Pass, and others.  It was initially introduced with a 40GB hard disk, but a 160 GB version was born shortly after.

During a 2008 Macworld conference Steve Jobs announced a major software upgrade to Apple TV's first generation unit, which turned the iTV into an independent device that no longer required a computer running iTunes on Mac OS X or Windows to stream and sync content to it.  At the time, some of its competitors included Western Digital Media Center, Roku and Boxee.  But the biggest question I want to ask now is whether this unit poses a threat to Cable companies and their revenue stream?

Eddy Cue, Apple's (NASDAQ: AAPL) senior vice president of Internet software services, pitched its revolutionary TV idea to cable companies with an unspoken message that was quite simple – “You either follow what we say or else!” Certainly the language used by a representative of the largest tech company that holds over $100 billion in cash was not as direct, but the implied message was definitely clear. 

The approach to cable companies in hinting how viewers should consumer their digital streaming content in the future was a bit arrogant in my opinion.  The "We decide the price as well as the content" pitch was greeted with an outrage by media executives, but one needs to understand the veracity behind it. 

Let's think history for a second...

Back in the day when a diplomat of a stronger, wealthier country approached a country which barely had any gold and wanted to work together for a common goal, the disadvantaged country diplomat, despite unwilling to show weakness, would in fact find a way to compromise in order to avoid any conflict.  Is this situation any different? Not necessarily.  One difference is that cable company executives quickly showed Mr. Cue the door, dismissing the offer as one-sided benefiting only Apple.

While Apple was careful in attempting not to turn over iTV into living room computer sets as new generations were born, Google's (NASDAQ: GOOG) GoogleTV was not so subtle about it.  As a matter of fact, it admitted its intentions to replace your TV with a PC. In 2010 Google quickly partnered up with Intel to develop Google TV and release its first generation commercialized by Sony and Logitech.  Unlike Apple, which slowly increases its iTV capabilities as new generation units are born, Google TV integrated Android's operating system as well as the Linux version of Google Chrome to depict a more interactive television overlay.  You may browse the internet and watch television in tandem. 

What was not seen by cable companies and dismissed as a minor threat, has definitely come back to haunt them. Time Warner (NYSE: TWX) lost 169,000 video customers last quarter and DirecTV lost 52,000 viewers. However, the former is shrugging off those losses from its high speed internet revenue growth and the latter is seeing even a more aggressive growth from Latin American countries.  However, DirecTV also suffered from a recent downgrade and a FCC ruling that forbid satellite companies to share content from local cable companies.

Time Warner Cable is already making the right steps in ramping up its Business Segment division to offer cloud based Software as a Service.  Its business segment division easily offsets these losses as it already generated $464 million in the second quarter, which was up 28.5% from the prior year.  The latest offering of SAAS is attempting to target the high demand of the online software services business. 

Foolish Conclusion

Cable companies didn't take into consideration the fact that an average American doesn't get the full benefit of paying an X amount.  Not that they don't want to get the full benefit, but they just don't have the time.  An average viewer watches specific shows or sports spread on several prime time networks after work before going to bed.  Aforementioned Web TV providers, including Netflix, capitalized on the idea that a person should not be liable to pay extra for those unwatched hours. 

Cable companies' business model was definitely impacted and their crippled revenue from loss of subscribers was felt immediately after Netflix gained popularity, but it is a reality they've come to accept and deal with in recent quarters. Few years ago the threat was much more magnified, but currently cable companies are finding ways to tap into new businesses to diversify their revenue growth.  Nevertheless, there is still a large majority of individuals that prefer to stay loyal to their cable company providers simply because their package includes a discount for high speed internet access, phone, or a foreign channel that cannot be singled out and is not provided by GoogleTV. 


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edgarambart30 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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