Broadband Cable Association of Pennsylvania

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August 22, 2012

Apple Inc. is in talks with some of the biggest U.S. cable operators about letting consumers use an Apple device as a set-top box for live television and other content, according to people familiar with the matter. The talks represent Apple's most ambitious crack at infiltrating the living room after years of trying.

Apple doesn't appear to have reached a deal with any cable operators. One obstacle may be the reluctance of operators to let Apple establish a foothold in the television business.

Apple would also need to persuade significant numbers of consumers to buy a set-top box for what could be hundreds of dollars rather than rent one from their cable operators for $10 to $15 a month. Electronics makers such as TiVo Inc. and Samsung Electronics Co. already sell set-top boxes, so far without making a big impact on the market. The talks illustrate that Apple is seeking a less radical path to expand in television than it has contemplated in the past, namely teaming up with existing service providers rather than licensing content to compete with them directly. Apple spokesman Tom Neumayr declined to comment on what he characterized as rumors and speculation.

Technology companies have long eyed the television market as their next big territory. But its gatekeepers-the television distributors and media companies-have been reluctant to let them in, worried about ceding control the same way record labels and wireless carriers have done in the past. By building a set-top box that could be used with cable operators, Apple would be following a similar playbook that it used to transform the mobile-phone industry: convincing existing service providers to marry their service with Apple's hardware and software. The approach has allowed Apple to profit by selling iPhones while carriers carry the cost burden of delivering the service but hope to benefit by selling more data to customers.

Apple Chief Executive Tim Cook met with Glenn Britt, chief executive of Time Warner Cable Inc., in Sun Valley, Idaho, last month, during the annual media conference hosted by Allen & Co. Time Warner Cable is one of the operators talking to Apple, the people say.

Apple sells a $99 Apple TV box that lets users access some Internet video on their television sets, but not live channels supplied by cable operators. Whether the device under discussion is an iteration of that hardware or a more sophisticated box is unclear. Two people briefed on the matter said the technology involved could ultimately be embedded in a television. Apple has worked on prototypes for televisions in the past, according to people briefed on the projects. Sales of Apple TV have been picking up, but are still small. The company sold 1.3 million in its quarter ending June 30, up 170% from the previous year.

In a recent earnings call, Mr. Cook said the company believes the device "will lead us somewhere." The box offers programming purchased from iTunes and some streaming apps like Netflix Inc. But it doesn't offer the conventional channel lineup available through cable and satellite operators, limiting its usefulness.

Apple contemplated building a cable set-top box more than two years ago before it launched the latest version of its Apple TV, according to a person familiar with the matter. At the time, Apple's then CEO Steve Jobs was dismissive of the idea, believing working with cable operators was problematic because they didn't have national reach-each served only defined geographic territories. Another issue: entertainment companies own most of the content, not the operators, according to two people familiar with the meetings.

The two sides have danced around each other for years, say people familiar with the cable companies' thinking. Cable operators in the past were worried that Apple could erode their relationship with their customers if Apple had a role with the box. Cable executives have also said that historically weak sales of the Apple TV meant striking a deal to put live programming through the box hasn't been a priority. Operators have put more emphasis on apps for the popular iPad tablet.

Cable operators have also been put off in the past by Apple's demand for a 30% cut on certain transactions going through the box, according to a person familiar with the situation. Apple has also discussed wanting to be the exclusive provider of set-top boxes using Internet Protocol technology, the person said. And it wanted the cable operators to service the box.

For cable operators, the advantage of a deal with Apple is that it could allow them to reduce the money they spend buying set-top boxes, which are leased to customers for a monthly fee. It could also help them hang on to customers who can watch video through a growing array of Internet alternatives, as both traditional TV and Web video would be available through the same device. Wall Street Journal; also in the Journal - Apple shares drop

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