A lot of press today about Apple testing TV set designs – something that has been rumored about for a long, long time.  Let’s not forget that they already have a TV product (Apple TV) just not an actual TV.  I think we can all easily imagine what an Apple TV would look like (just like every other TV but maybe a little slicker).  The real trick won’t be replacing that god awful set top box Comcast “rents” to you but working through the jungle of distribution deals that stand in the way.  It’s clearly not a question of technology – it’s navigating the vested interests of cable providers, cable networks, content providers, etc. – the folks that control the industry and have the most to lose.  If anyone has a clear idea of how it will all work out, I’m all ears.

Cable networks make money by creating and selling content (shows) and selling advertisements against that content.  Their ability to make money is a function of how many subscribers they have and how popular their content is.  They basically have two revenue streams:

1. Affiliate Fees – the money the cable providers pay to carry a given network, and
2. Advertising – the money the networks make for selling ad space

But how do you compare networks you ask?  Easy – divide both revenue streams by their average subscribers:

Think for a minute how TV should be – you should be able to buy the channels you like a-la -carte but you can’t – despite a number of attempts to give consumers the options to buy the 10 channels they want, providers force us to buy packages where we get about 10 channels we don’t want for each channel we do want.  The benefits for the cable providers are somewhat obvious – they can design cable packages where you’re always tempted to pay a little bit more to get the one or two channels the next package offers.  They can also bargain harder against the cable networks if they say “we provide you 75M subscribers right now, however, if you don’t give us a good deal, we can change the packages around and we’ll only be giving you 30M subscribers”

In the example above, ESPN, despite clearly having a lot of negotiating power, will probably think twice before they upset the $400M / month gravy train from the cable providers and gamble on selling directly to consumers.  WGN on the other hand probably owes a decent amount of their ~75M subs to the fact that they are bundled into a cable package (after all, who outside of Chicago would go out of their way to buy WGN a-la-cart?).  Keep in mind subs don’t equal viewers.

You can see how this quickly does not become a question of technology or how to best serve the customer – it’s a question of navigating the heavily entrenched interests and nudging everyone to a new model.

The cable providers have the most to lose as new means of distribution are created (online TV, Netflix, Hulu, YouTube) this is why Comcast bought NBC Universal – not only to buy a valuable, content oriented media asset but to also give them strong bargaining power over their competitors (Dish Network, Time Warner, and DirecTV all really need to carry NBC’s networks or risk losing customers who want to watch 30 Rock).

This post was about 2x longer than I intended and I ventured to the fringe of my understanding – the environment is even more complex than this but you get the idea.  Vested interests are likely to bog down even the best technology for some time to come.  I’d bet Apple is spending as much time figuring out how to navigate this web of content & distribution deals as they are on the technology itself.