Apple Inc

The Future

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PREFACE
Breaking news revealed that Alphabet's (NASDAQ:GOOGL) YouTube is reportedly ready to compete with cable TV providers by offering a paid subscription bundle of streaming TV channels, called "Unplugged," as soon as next year. This news follows rumors surrounding Apple (NASDAQ:AAPL) and its ambitious goals to do the same thing with Apple TV.

Of course, all of this comes on the heels of Netflix's (NASDAQ:NFLX) unprecedented 130 country expansion announced in January. Here is the company's footprint, with the green areas of the world map representing new markets as of 2016:



Then there is Amazon's recent announcement that it will make its streaming video on demand (SVOD) a stand-alone product, unbundled from Amazon Prime.

While it appears that these four tech giants are positioning for a head-to-head battle, a deeper dive reveals that the real war is for a much larger market.


SVOD
Streaming Video on Demand (SVOD) revenue is climbing at astonishing rates. Here's a forecast from our friends at Statista:



We're looking at a segment that will grow 120% over the next five years to nearly $27 billion. This segment is dominated by Netflix (NASDAQ:NFLX) and secondly, Amazon (NASDAQ:AMZN). Here's a great info-graphic from Statista:



The market is still untapped, with 51% of American households still unable to use SVOD -- it will grow, no one is concerned about that. Not to be out done, on its last earnings call, Google announced this stunning data:


But this is nowhere near the market Google and Apple are looking to tap.

CABLE
There are 133 million households in the United States alone with a cable TV subscription and 75% of those people watch TV everyday (Source: AYTM). But, Comcast noted that nearly one quarter of its new subscribers in Q4 2015 signed up for a "skinny bundle" of channels rather than the large bundle. The big, heavy, expensive cable packages are a dying breed.

And now, here comes Apple.

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APPLE
Estimates reveal that as many as 25 million Apple TVs will be sold in 2016 in a market that shows strong growth moving forward. On the earnings call that ended 2015, Tim Cook said:


It's critical to understand that Apple and Google are trying aiming to allow a bundling of cable networks and apps and charge a monthly fee. In fact, it's the secret in plain sight if we just look at the Apple TV desktop:



Whether it's a TV channel, online video on Facebook (NASDAQ:FB), SVOD from Netflix or Amazon, it's all going to sit in one place and we all get to choose what we subscribe to. That's 133 million cable subscribers in the US alone. That's 75 million SVOD subscribers in the US alone. That's over 20 billion online video views a day from Facebook and Snapchat. And it all will have one home:

The Apple TV or Google's "Unplugged."

TECHNOLOGY COMPANY PROBLEMS
It turns out that Apple's plans were delayed earlier this year after it failed to reach a distribution deal with CBS, the No. 1 broadcast channel in the U.S. We have to assume that Google will face the same challenges.

Hulu, which is owned in part by a consortium of the major broadcasters, also recently announced its own "cable bundling" service, just like Apple and Google. Hulu's advantage is pretty clear -- the firm likely has the greenlight for distribution. So, has cable won the war?

No, it hasn't.

CABLE COMPANY PROBLEMS
If it seems like the cable companies have the power, they don't. Cable cord cutting is happening. This is a wonderful chart from our friends at Statista covering people aged 18-31:



Cord cutting is spiking and the proportion of people who will never even have a cable subscritpion is also spiking.

While the broadcasters can try to manufacture their own version of a tech giant in Hulu, they will likely fail. They cannot compete with YouTube's enormous audience, they cannot compete with one billion active device installs for Apple, they cannot compete with Netflix's 190 country footprint and they certainly can't compete with anything Amazon ever does.

The end game will be a battle, but an embarrassing loss for cable. The individual channels are already spinning off their content into apps like WatchESPN, HBO Go, Showtime, Disney Channel Apps, etc. A "skinny bundle" of hand-picked packages is coming and Apple and Google will win. Netflix and Amazon -- they too may be in trouble as their products turn from destinations to just another "app."

WHY THIS MATTERS
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