Can Apple and Amazon Make TV Better?

(Originally published here.)

It’s hardly a surprise that many people are excited by the prospect of Apple Inc. selling television programming over the Web. But these tech aces may not do much better than the hated cable companies.

In the popular mind, the folks who make and sell the pipes that let us watch TV and surf the Internet are evil monopolists that gouge consumers. Service would improve if only there were more competition.

Investors see something else: mounting costs, high capital expenditures and low profit margins. Cable companies must pay the networks if they want to carry live events and popular programs, even if the networks already broadcast their content freely over government-owned airwaves. Hit shows and sports ensure that the networks always have leverage to extract higher rates. They — not the owners of the cable lines — look more like the real monopolists.

Just consider how CBS Corp. held Time Warner Cable Inc. over a barrel a few months ago. This power imbalance explains why Time Warner Inc. spun off Time Warner Cable, with its lower profit margins, back in 2009. It also explains why Comcast Corp. was so keen on buying NBC Universal, a content producer, from General Electric Co.

There’s no good reason to think Apple and Amazon would do any better. Consider Netflix Inc., the current leader in streaming television and films over the Internet. Whenever its contracts with the networks and Hollywood studios come up for renewal, it has to choose between paying much higher fees and ditching a significant chunk of its content. Netflix has responded by spending hundreds of millions of dollars on original television series and movies. It’s more attractive for it to invest in new material rather than pay for content produced by others. Amazon, which also has a streaming service, has also decided to invest in original content. Hulu, another streaming service, doesn’t have these problems because it is owned by the big networks.

Perhaps the company with the best chance of making money on Internet television is Verizon Communications Inc., which is already in the telecommunication business. Over the past few months, it has boughtcompanies that give it the technology to stream existing content directly into your television through a Web connection. These may well be defensive acquisitions to remove a challenge to its cable business. A likelier explanation is that it wants to distribute programs to parts of the country where its FiOS cable service isn’t available.

According to data compiled by Bloomberg Industries, Verizon had only about one-seventh as many paying cable television subscribers as Comcast and Time Warner put together. Verizon would love to sell more subscriptions to cable television content without having to actually install more physical cable. If the prices were right, customers might choose to get Web access from one of Verizon’s competitors while paying Verizon to stream television content over the Internet. The benefit to consumers would come from increased competition among existing cable businesses, not glitzy tech companies.

Of course, Verizon’s strategy won’t be successful if it can’t win customers with lower prices. That, in turn, depends on the fees for programming charged by the networks. No wonder Bloomberg News reports that Verizon “has been asking media companies if a streaming service would require new contracts for shows.”

Whatever the answer, Verizon’s recent acquisitions were probably wise. The cost was only a few hundred million dollars, a fraction of a percent of Verizon’s $135 billion market value. It’s best to think of them as cheap options that pay off if Verizon can get a good deal on the fees it pays to carry content.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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