×
You will be redirected back to your article in seconds

Apple Needs a User-Friendly Model to Face Brutal Pay-TV Economics

Apple’s surprising hire of former Time Warner Cable executive Peter Stern has rekindled speculation that the tech giant will attempt to build a pay-TV business. But there are significant challenges around the sector, particularly profitability for providers starting from scratch.

There’s a direct correlation between the percentage of video revenue used by major pay TV providers to cover the cost of programming and the scale of those companies. The largest providers, such as Comcast and DirecTV, pay the least, but even for them programming costs are rising as a percentage of video revenue.

The resulting pinch on profitability is best viewed by examining the second quarter of 2015, which gives us the broadest base of pay-TV companies to look at prior to more recent consolidation. Note that the smallest businesses here are unprofitable at an operating-margin level, and even the medium-sized businesses generate only 10%-20% margins off 10 million subscribers.

sources: Company Reporting, jackdaw research Analysis

Apple must reckon with the fact that scale matters enormously in this business. A good chunk of revenue in the traditional pay-TV business comes from equipment and other non-content fees, which Apple wouldn’t charge on a monthly basis.

Apple would likely face high and climbing programming costs due to its small scale, and would generate low margins as a result. The most lucrative pockets of the TV industry are elsewhere; broadcasters, station owners, and cable networks all generate significantly higher margins because they benefit from content exclusivity, as well as, in some cases, dual income streams of subscribers and advertising.

Apple may be banking on two things to offset these disadvantages. First, its famously superior user experience might help convince subscribers to pay more for the same content just for the privilege of finally ditching their cable company. Second, Apple might see such a service not as a major money-maker in its own right but as a way to add value to its ecosystem of devices and services, and thus to drive hardware sales.

*New Charter refers to the company after the May merger with Time Warner Cable and Bright House. The data shown here include historical information on a pro forma basis. Additionally, the original Charter continued to report through Q1 2016.
sources: Company Reporting, jackdaw research Analysis

The key here is that Apple can’t simply undercut traditional pay-TV providers — it will have little margin to work with as it is, and competing on price has never been the company’s strategy. Rather, Apple needs to focus on improving the experience of watching TV, putting its know-how to work on creating unique ways to consume the same old content and combining it with the apps on its platforms in a way that truly sets it apart — potentially justifying higher, not lower, prices.

Jan Dawson is the founder and chief analyst at Jackdaw Research, an advisory firm for the consumer technology market.

Popular on Variety

More Voices

  • Margot Robbie, Nicole Kidman, Charlize Theron.

    Charlize Theron Could Win Second Oscar for Playing Megyn Kelly in 'Bombshell'

    Charlize Theron walked on stage before a screening of “Bombshell” at West Hollywood’s Pacific Design Center on Sunday night and announced to the crowd, “I’m about to s— myself.” The Oscar winner had good reason to be nervous. The screening of the Jay Roach-directed drama about the fall of Fox News boss Roger Ailes was [...]

  • Tom Hanks Mr Rogers A BEAUTIFUL

    Tom Hanks' Portrayal of Mister Rogers May Put Him Back in Oscar's 'Neighborhood'

    Sony recently hosted a SAG-AFTRA screening of “A Beautiful Day in the Neighborhood,” the Marielle Heller-directed drama starring Matthew Rhys as a magazine writer who befriends Fred Rogers, played by Tom Hanks. While the screening didn’t include a guild Q&A with cast or the film’s creative team, the audience was greeted with a video message from [...]

  • Joe Pesci, Al Pacino, Martin Scorsese,

    Martin Scorsese and 'The Irishman' Enter Oscar Race With World Premiere at NYFF

    Even with its three-hour run time and a short 28 days in theaters before it’s available on Netflix, Martin Scorsese’s “The Irishman” is likely to be a major contender at the Oscars. The 57th New York Film Festival opened on Friday night with the world premiere of the epic real-life mob drama. Scorsese and his [...]

  • Brad Pitt Once Upon a Time

    How Much Does Hitting the Awards Season Circuit Really Matter to Stars Like Brad Pitt?

    “Do you want an Oscar?” That’s the first question one top awards consultant asks any potential contender when they first start talking. Everyone is wondering how Brad Pitt would answer that question these days. He recently raised eyebrows and made headlines when he proclaimed that he would not be campaigning this awards season. “Oh, man. I’m [...]

  • Renee Zellweger'Judy' film premiere, Arrivals, Samuel

    'Judy's' L.A. Premiere: Renée Zellweger Takes Another Ruby Step Toward the Oscars

    Renée Zellweger continues to follow the yellow brick road to the Oscars. The Los Angeles premiere of Judy on Thursday night in Beverly Hills kept the Academy Award winner on track for a possible second win come February. “We’re just so happy we’re able to share it with you tonight,” Zellweger said to the crowd [...]

  • Barry Bill Hader

    Emmys 2019: Clear Favorites and Top Challengers for This Year's Winners (Column)

    If this felt like the longest, most expensive Emmy campaign in history, you might be right. For one thing, the 2019 Primetime Emmys will be held Sept. 22, which is the latest the ceremony has taken place since 2013. That also happened to be the last year of TV’s quaint, pre-streaming era, before outlets like [...]

  • Fleabag Succession Emmys

    Could 'Fleabag' and 'Succession' Be Spoilers on Emmy Night? (Column)

    At the onset, this year’s Emmy Awards felt a bit anticlimactic, as the final seasons of “Game of Thrones” and “Veep” appeared to have this year’s drama and comedy categories locked up before campaigning even began. But that’s how upsets happen: Just when we’re pretty confident about how things might go, a couple of wild [...]

More From Our Brands

Access exclusive content