Roger Yu, and Mike Snider

USATODAY

Apple may have finally found a TV content partner that can flex some muscle.

After years of trying but largely failing to launch its own smart TV product that can satisfy a wide audience, Apple may be joining hands with Comcast, the largest pay-TV provider in the U.S.

The two companies are in early-stage talks to offer live TV and on-demand video through Apple's set-top box — perhaps its current Apple TV device — in dedicated cables for Comcast customers, according to a report by The Wall Street Journal Monday.

The new device presumably would be offered as an option along with Comcast's own set-top boxes, now required for its video customers. The new option would allow Comcast to generate revenue from "cord-cutters," who may only want Internet service and not the pay-TV video portion of their monthly subscription.

Apple and Comcast declined to comment.

If the report is true, it's the latest evidence that cable and pay-TV companies are acknowledging and reacting to the inevitability of live-TV streaming over the Internet. Rather than being resigned to customers ditching pay TV, traditional TV service providers are becoming more proactive in finding hardware partners to stream video content, perhaps even beyond the limited geographical markets where they operate.

For proponents of net neutrality — the principle that Internet providers shouldn't discriminate against various types of content, so long as they're legal — the deal also highlights the level of influence Internet providers have in deciding how video is distributed through their pipes.

In the arrangement, the content streamed through Apple's device would "get special treatment on Comcast's cables to ensure it bypasses congestion on the Web," the WSJ report said.

Comcast would gain a hardware partner known for its elegant design in seeking to expand its TV-over-the-Net initiative. Apple, after years of failing to broaden its video menu beyond a few partners, gets access to Comcast's wide array of programming.

"A deal like this is what Apple has needed from the beginning," said Peter Csathy, CEO of Manatt Digital Media Ventures, a digital media consulting company. "It only makes sense if they get all the live-TV channels, especially ESPN."

While cable operators are currently limited to their designated markets, Comcast may be eyeing this deal as a way to offer live-TV nationally, Csathy says. There are no rules that would prohibit Comcast from offering TV-over-the-Internet in a competitor's market, he says. "Apple will be in the TV game. Comcast can either take the lead or follow," Csathy said.

Comcast's ability to stream its TV programming nationally depends on the distribution rights. While content owners generally place some limit on the markets where their shows can be distributed, pay-TV providers are increasingly seeking national distribution rights. If Comcast could use Apple TV to send programming through other Internet providers," that's a beautiful thing for Comcast," Csathy said.

The news of the talks comes at an awkward time for Comcast. The Philadelphia-based company is trying to persuade federal regulators to approve its proposed $45 billion agreement to buy Time Warner Cable, the second largest pay-TV provider in the U.S. The prospect of the two companies' merger, which would give Comcast 30% of the U.S. pay-TV market, has prompted heavy opposition from consumer advocates, who worry about the combined company's potential ability to assert influence over content makers and raise prices.

The prospect of Comcast working with Apple could send a signal to regulators that the larger Comcast "might be willing to work with people and they are not going to be a monolith that's going to go their own way on all matters," says Phil Swann, president of TVPredictions.com.

Many pay TV providers and content companies are in talks as the competition heightens to create a streaming holy grail with increased programming and robust connectivity. Others in the mix include Sony and Verizon, which recently purchased Intel's Net TV project. Most recently, satellite TV providers Dish Network and DirecTV have both said they have connected with Disney for rights to content for a streaming service.

"They are all looking for some service that can be offered as a companion to their regular pay TV service that would appeal to people who are just looking for a very small fee monthly," Swann says. "It would be a much more limited package of channels and a little more flexibility in how they get them, maybe on their mobile devices."

Comcast also struck a deal recently with Netflix to receive payment in exchange for a more direct path for the popular streaming service to send its movies to Comcast's network. The arrangement would result in quicker, smoother streaming of Netflix's content for Comcast customers.

Following the WSJ report on Apple and Comcast's talks, shares of Netflix tumbled 7% to $377.59 Monday. It was one of the worst performers in the S&P 500.



Net neutrality proponents say the deal could lead to more pay-to-play agreements that may leave smaller video providers out in the cold. Netflix CEO Reed Hastings said last week that he agreed to the deal "reluctantly" and urged regulators to establish stronger net neutrality rules.

In buying a majority stake in NBC Universal, Comcast agreed in 2011 to several FCC mandates that last seven years, including a pledge to not discriminate against third-party programs that seek access to Comcast's distribution channels.

But Comcast can get around the pledge by labeling the content streamed through Apple's device as a "managed service," which is exempt from the FCC-ordered mandates. "Those services travel on a special portion of the cable pipe that is separate from the more congested portion reserved for public Internet access," the WSJ report said.

The managed services exception was not defined clearly by the FCC, which allows Apple and Comcast to test the limits, says Michael Weinberg, acting co-president of technology consumer advocacy group Public Knowledge.

"We said in 2010 that there's always the possibility it's an exception that swallows the rule," he said. "Internet service providers can declare anything (as) 'managed services,' but hopefully the FCC can say no. It's potentially very broad."

Next week, Comcast faces the Senate Judiciary Committee in a hearing about its acquisition of Time Warner Cable. The timing of this leak, unconfirmed by either party, could be used as ammunition to shoot down that merger.

"This deal seems to draws more attention to Comcast's gate-keeping position," Weinberg said.

The incentives that would drive an Internet service provider to upgrade its network are voided if they're paid by a video content provider to get around those problems, Weinberg said.

