Apple TV rebuffed by the cable guys

By David B. Wilkerson, MarketWatch

CHICAGO (MarketWatch) — There’s a reason cable-company stocks haven’t faltered on Thursday’s news that talks with Apple TV about a video service offering this year have broken down.

Cable companies — and sometimes their investors — realize that there’s no reason to make any rash decisions, when they still have firm control over how information and entertainment gets to the average modern consumer: through a broadband Internet connection.

Talks with Apple TV AAPL +0.90%  hit a snag over how the user interface would work, Bloomberg News reported, citing unnamed sources described as familiar with the situation. Among other difficulties, the two sides could not agree on how a new Apple TV set-top box would get into consumers’ homes — via direct sale or though a lease deal with cable operators, the news agency said.

“The cable companies need to maintain ownership of the subscriber,” said David Joyce, an analyst at Miller, Tabak + Co., in an interview Thursday with MarketWatch. “They’re the ones who customers deal with when there’s an issue. So they obviously would be hesitant to put anything between them and those customers.”

In recent years, the pay-television industry has worked hard to maintain its ecosystem, in which cable and satellite companies pay fees to programmers for the right to distribute TV shows and movies, those costs are passed on to consumers, and the enterprise is augmented by advertising revenues.

Various video services have emerged that could theoretically replace the role cable and satellite companies play in many homes, including offerings from Netflix Inc. NFLX +3.07%  and the Hulu consortium CMCSA +2.79% , DIS +2.11%   NWSA +3.14%   NWS +3.27%   AU:NWS +1.29% , but, while cable companies are aware that people increasingly want to see the video entertainment they like anytime, anywhere, they don’t want to rush into deals they’ll regret later.

That’s why they’re careful about providing access to live event programming, which is seen as one of the most compelling reasons for most people to keep subscribing to cable. Marquee events like the Super Bowl, the World Series or the Final Four phase of the NCAA basketball tournament have to be viewed live to maximize their impact. For non–sports fans, the Academy Awards and other events are equally compelling.

According to the Bloomberg report, Apple is trying to work out a way to give Apple TV users access to live programming through their cable subscriptions, but the details have proven to be stubborn obstacles.

“I don’t think [delaying a deal with Apple] is a risk for cable because they control the dominant data pipe in the vast majority of the U.S.,” said Jeff Wlodarczak, an analyst at Pivotal Research Group, in an email. “[And] as consumer bandwidth needs continue to explode, it is going to gravitate toward the fastest platform.”

Even as video-subscriber growth has flattened for cable, broadband has been strong. In the second quarter of 2012, cable operators added about 30,000 broadband customers, more than doubling the figure of a year ago, according to research firm Leichtman Research Group. Comcast Corp., the largest U.S. cable company, showed the most net additions, with 156,000.

The top cable broadband providers — among them Comcast, Time Warner Cable Inc. TWC +1.44% , privately held Cox Communications Inc., Charter Communications CHTR +1.43%  and Cablevision Systems Corp. CVC +2.18% , have about 57% of the high-speed-Internet market, Leichtman said, with 45.66 million customers.

As has been pointed out many times in recent years, the obstacles to a truly robust Apple TV offering that would represent a real alternative to traditional cable are staggering. Revenue-sharing arrangements must be hammered out, along with the exact mode of Internet Protocol delivery. And now that the industry is committed to the “TV Everywhere” concept, in which online video viewing is tied to a subscription to a pay-TV provider, any Apple TV product would need to fit into that paradigm, which would mean verifying who the user is so that access can’t be shared ad infinitum and how many devices content can be viewed on by that person.

To be sure, consumers love Apple products, with their sleek looks and smooth interfaces. Cable operators are said to be impressed with the interface Apple has come up with for Apple TV.

Wlodarczak pointed out that the industry’s attempts to come up with its own interfaces have been expensive — and often end up falling far short of expectations.

If Apple TV can’t get off the ground, and options like Google Inc.’s GOOG +2.74%  new video service run into insurmountable roadblocks, piracy looms as an option to users who are truly fed up and are willing to break the law.

Still, cable would rather take its time than see its profit margins dissipate the way they did for the music industry in the wake of the iTunes revolution.

“Apple,” Wlodarczak said, “would have to give up the farm to get a deal done, which is probably unlikely.”