Cablevision's HBO Deal Isn't a Problem for Apple

Apple's "exclusive" HBO deal isn't so exclusive.

Next month, Time Warner will launch HBO Now, the Internet-based alternative to its popular premium cable network. In contrast to a traditional HBO subscription, almost anyone can sign up for HBO Now -- no expensive cable package is required.

For the first three months, Apple will be the exclusive device partner of HBO Now -- but it will not be the sole provider. Cablevision , one of the largest cable companies in the northeastern region of the United States, will also sell access to HBO Now.

Cablevision could undercut Apple, bundling HBO Now with its high-speed Internet service at a sharply reduced price. Yet, it's not a major threat -- the HBO deal still benefits Apple's core business model.

HBO isn't going direct to consumerIn contrast to Netflix or Hulu, it doesn't appear that HBO Now is truly a direct-to-consumer offering. Rather than subscribe to the service directly, HBO Now will be sold in a similar fashion to its traditional network: through a collection of third-party providers.

Source: Apple

One of those providers will be Apple -- would-be subscribers will be able to sign up to HBO Now through iTunes. Another will be Cablevision. Eventually, other Internet providers and digital services will likely join in.

Time Warner hasn't revealed the specific nature of these deals, but it seems likely that the companies could share revenue. Right now, if you sign up for HBO from your local cable company, only about half of your monthly subscription goes to Time Warner -- the other half is pocketed by the cable companies themselves. This stands in contrast to Netflix, which collects every dollar spent by a subscriber.

It may seem strange that Time Warner wouldn't adopt a similar model, but there are benefits to using partnerships. Time Warner can offload many of the costs associated with its HBO business to these partners: marketing, advertising, customer service, and so forth. The HBO business is more mature than Netflix, so it's not a completely fair comparison, but HBO's profit margin (around 30%) is considerably higher than Netflix streaming (13.6% last quarter), likely owing to reduced costs.

For Apple, it's all about the hardwareThis method of distribution will force Apple to compete on price or risk its customers subscribing to HBO Now some other way. Given that it doesn't offer broadband, that's a fight Apple probably can't win.

But it doesn't really matter. For Apple, the deal with HBO is more about selling hardware than collecting service revenue.

Apple's set-top box, the Apple TV, faces an increasingly crowded market. Devices from competitors, including both Google and Amazon, have pressured the Apple TV, and taken a toll on its market share. According to a report from Parks Associates, Apple TV fell to third place last year in the U.S., behind both Roku and the Chromecast.

Apple TV hasn't been meaningfully updated in more than three years. Although it still offers a competent streaming video experience, it lacks many of the features offered by its newer rivals, such as voice search, video gaming, and access to an app store.

The deal with HBO helps to close the gap. It doesn't matter which company an HBO Now subscriber pays -- Cablevision or Apple -- they will only be able to watch the content on an Apple device. For at least the next three months, would-be set-top box buyers that want to watch HBO Now will need an Apple TV.

A temporary bandageThat could help buoy sales of the Apple TV at least temporarily, and provide a nice bridge to its Worldwide Developers Conference in June. According to a recent report from Buzzfeed, Apple will unveil a new, more compelling Apple TV at that event.

It can't come soon enough. With more rivals emerging, including NVIDIA, Apple will need a better set-top box to stay relevant in the space.

I still think the Apple TV, at $69, is overpriced, and offers a worse experience than its competitors. But the deal with Time Warner is a nice bandage, one that should help it sell more Apple TVs in the immediate future.

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Sam Mattera owns shares of Nvidia. The Motley Fool recommends, Apple, Google (A shares), Google (C shares), Netflix, and Nvidia. The Motley Fool owns shares of, Apple, Google (A shares), Google (C shares), and Netflix. 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.

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