Disney Shows Why Apple Is Going Into TV

 | May 10, 2012 | 10:30 AM EDT
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Last night, Disney (DIS) reported another strong quarter. On closer look, its results suggest why Apple (AAPL) is interested in getting into the TV business. Let me explain.

Disney reported $9.63 billion in revenue and $1.14 billion in net income for the quarter. But the bulk of this revenue and profits came from its media networks business, which increased 8.6% to $4.69 billion in sales. Its profits grew 13% to $1.73 billion.

Paul Sweeney, a senior analyst at Bloomberg Industries, said, "The cable networks, principally ESPN, continue to be the growth engines for Disney. Investors have long wondered how long the ESPN growth story can continue. There is no evidence in these numbers to suggest a slowdown."

Apple is not going to get into the content production business, but it does have an interest in being in the distribution business. By distributing more efficiently, it can increase demand for its hardware and software products. That was the magic behind iTunes. It helped drive demand for the original iPod.

Many people have speculated that Apple doesn't make much money on iTunes after credit-card processing fees. However, no one knows that for certain, because Apple doesn't break out the results. We do know that iTunes accounted for $2 billion in sales last quarter.

By launching iTV, Apple could significantly increase iTunes usage for video content and also create a heck of a lot of demand for its televisions. It would also probably find a way of putting itself in the middle of the money that cable companies make from transmitting content to people.

When Steve Jobs sold Pixar to Disney, he became the biggest Disney shareholder. His wife still serves on the board, and Bob Iger serves on Apple's board. Apple is not looking to kill Disney. It wants Disney to still make all its great content, and it wants to make a lot of money distributing it.

Disney's content has been available on Apple TV for some time, and this has already made Apple TV's content more attractive than that of Netflix (NFLX).

The streaming companies are at biggest risk with Apple's entry in the market. Netflix, Amazon (AMZN) and Microsoft (MSFT) will have to hustle to keep or get a part of the streaming dollars.

Will Apple put the big broadcasters out of business? Unlikely. However, it will take away dollars that would be going to per-per-view.

I would also expect some of the smaller players such as DirecTV (DTV) and Dish Network (DISH) to want to jump on the Apple train rather than holding out.

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