Apple (AAPL) has had grand dreams for its Apple TV, a Web-connected streaming receiver that first shipped six years ago. Customer dissatisfaction with rising cable costs offered the iPod and iPhone maker a chance to upend the economy of pricey channel packages with apps that could stream programming on demand. Steve Jobs told biographer Walter Isaacson he’d “cracked the code” on television, and Apple Chief Executive Officer Tim Cook declared his “intense interest” in the company’s TV projects earlier this year. For years industry analysts have speculated that Apple might even roll out a full-on TV set, and the set-top box was a logical first step.
So Apple die-hards may be disappointed with the deal the company is close to reaching with Time Warner Cable (TWC). It saves little more than a click of the remote, according to two people familiar with the negotiations who aren’t authorized to discuss them. Right now, the $99 Apple TV box serves mostly as a hub for well-known online services such as Netflix (NFLX), YouTube (GOOG), and Vimeo. While the deal would add a Time Warner app, that just means viewers won’t have to switch from Apple TV back to their cable box: They’d still need to subscribe to Time Warner Cable and wait around for a technician to install it.
That’s a far cry from Apple Senior Vice President Eddy Cue’s vision of a master menu of network TV apps, on-demand shows, and a handful of live channels, primarily news and sports. Cue is still talking with at least one other major U.S. cable provider about such a plan, which could replace a conventional cable hookup, says a person familiar with his thinking who wasn’t authorized to discuss it. (Apple’s also developing ad-skipping technology, a tough sell for programmers.) Cue’s plan would extend Apple’s reach into the living room, giving it control of another screen and boosting what Cook calls its “halo effect”—encouraging users to purchase other interconnected Apple products. Spokesman Tom Neumayr declined to comment.
So far, though, Apple’s is the latest set-top box, like Roku and Microsoft’s (MSFT) Xbox, to hit a wall of resistance from cable companies and Hollywood programmers as it tries to change the model of TV delivery without severing viewers’ connection to the TV itself. It has settled for incorporating cable-subscriber-only apps such as HBO Go and WatchESPN into its Apple TV menu. “There are these fantasies in the tech industry that you can show up with a product and you’ll remake the TV industry,” says analyst Benedict Evans, who works for market researcher Enders Analysis. “It doesn’t work like that.” Like Roku and Microsoft, Apple is trying to appease and partner with studios, programmers, and pay-TV operators instead of disrupting them at a cost of many billions of dollars, says USA Networks founder Kay Koplovitz, who now advises entertainment companies.
Apple has hired Hulu Senior Vice President Pete Distad to help negotiate with media and cable companies. Time Warner Cable and other providers have been offering incentives to media companies to withhold content from Web-based entertainment services, such as a forthcoming pay-TV competitor from Intel (INTC), says Rich Greenfield, an analyst at market researcher BTIG. Intel maintains it will release a product to compete with pay-TV by yearend, but it’s unclear what programming it has lined up. “There’s a reason your cell phone 10 years ago was a StarTac and now it’s an iPhone, but your cable TV remote control looks almost the same,” Greenfield says. “The rights in the video world are much more tightly controlled and complex.”
Some analysts still predict Apple will release a TV this year, but Evans says the margins on sets are too small and the purchase cycle too long. More likely, he says, is further integration with Apple’s wireless AirPlay system, which can play iPhone or iPad videos on a TV. While Comcast (CMCSA) and Time Warner Cable are upgrading their own boxes to provide features akin to those of Apple TV and Roku, AirPlay could allow Apple to build off the popularity of its mobile devices and their myriad apps. If the company can fuse live, recorded, and on-demand programming into an interface that works smoothly with its mobile library, an Apple TV could still “incite investor excitement,” says BTIG’s Greenfield. It just won’t match the original dream.