AAPL Apple Inc

By Shalini Ramachandran and Daisuke Wakabayashi 

Apple Inc. executives had every reason for optimism when they approached Walt Disney Co. in early 2015 to join the streaming television service Apple planned to launch. Disney Chief Executive Robert Iger is an Apple director and had said he was keen to strike a deal.

Disney, which owns channels such as ESPN and ABC, was stunned, though, when Apple executive Eddy Cue made demands that would have upended decades of cable-industry and Hollywood practices, people familiar with the discussions say.

In particular, Apple wanted to freeze for several years the monthly rate per viewer it would pay to license Disney channels. TV channels usually get annual rate increases and rely on them to fuel profit growth.

Disney balked. Similar talks with media giants that included 21st Century Fox Inc. and CBS Corp. also stalled. When Apple debuted its newest Apple TV set-top box last September, it announced no streaming TV service.

Television is an important part of Apple's strategy to reignite growth now that sales of the iPhone, the most popular and profitable product in the Cupertino, Calif., company's 40-year history, have fallen for two quarters in a row. New devices like the Apple Watch, introduced last year, aren't popular enough to pick up the slack. Apple's overall sales fell 15% in the latest quarter.

Yet some of the same tactics previously used by Apple to such success have hurt its efforts to revolutionize the TV-watching experience, raising pointed questions about how it can revive its growth.

For the past 15 years, Apple has barreled into industries from music to mobile phones, persuading established companies to go along with Apple's way of seeing the world. In the early 2000s, Apple co-founder Steve Jobs muscled music labels into selling songs online for 99 cents apiece instead of CDs for $15. Apple gained huge influence in the music industry, which saw sales fall but found a way to battle the existential threat from digital piracy.

When the iPhone made its debut in 2007, Apple bucked tradition by excluding carrier-specific software features. Eager to carry the iPhone, wireless carriers agreed, which made Apple's phones easier to use.

In online TV, Apple wants to combine a selection of popular live channels with an on-demand library stockpiled with full seasons of hit shows. The streaming TV service pitched to Disney would have cost $30 a month.

Apple's roaring success and assertive negotiating style are kinks in that strategy. Media companies worry that agreeing to Apple's sweetheart terms could allow traditional cable-TV distributors to demand the same deal and make it harder to recoup their investments in original shows.

"We're challenged in a lot of ways, but we're not waiting for this white knight to come racing in the way music was," one senior TV executive says.

Apple executives have said television companies should embrace their strategy, given the technological shifts sweeping through the TV business.

Dish Network Corp.'s $20-a-month Sling TV and Sony Corp.'s PlayStation Vue have live channels and on-demand programs. Amazon and Alphabet Inc.'s YouTube are exploring similar internet-delivered cable-TV services, while Hulu, owned by Fox, Disney and Comcast, aims to offer a service early next year for roughly $40 a month.

For Apple, the TV business remains a drop in the bucket. It generates more than $1 billion in annual sales, compared with a total of $233.72 billion in its latest fiscal year.

Apple has eyed TV for a decade, trying multiple strategies with little success. In addition to the set-top box and delivering channels over the internet, Apple considered building its own TVs but then dropped the idea.

These days, Apple touts apps as "the future of TV" and is moving to develop its own programming.

Apple's point man for TV is Mr. Cue, 51 years old, the company's senior vice president of internet software and services. He grew close to Mr. Jobs after starting as an intern in 1989. Mr. Cue favors bright shirts and fast cars, is on the board of directors at auto maker Ferrari NV and often spotted courtside at home games of the NBA's Golden State Warriors.

Mr. Cue is also known for a hard-nosed negotiating style. One cable-industry executive sums up Mr. Cue's strategy as saying: "We're Apple."

By 2009, Apple executives were considering a subscription streaming-TV service. To entice media companies, Apple offered higher fees than pay-TV providers for their broadcast channels. But Apple wanted only certain channels, so the effort fizzled.

Two years later, Time Warner Cable Inc. approached Apple with a plan to offer a joint TV service over an Apple set-top box to battle satellite and telecom rivals, say people close to the talks. Apple Chief Executive Tim Cook and Mr. Cue began talks with Glenn Britt, then the cable provider's CEO, and other executives.

Mr. Cook also approached Brian Roberts, the head of Comcast Corp., the largest cable-TV provider in the U.S., and promised that Apple's set-top box and service would be offered exclusively through cable companies.

Apple sought payments of $10 a month per subscriber from the cable providers and refused to rule out seeking an even higher share of each monthly subscription in the future, according to people involved in the talks. It also wanted users to sign in with Apple IDs, even though Comcast and Time Warner Cable would handle billing and customer service.

Some people close to the talks say Apple was reluctant to share important details, including how subscribers would navigate the channel menu. Comcast's Mr. Roberts didn't see Apple's proposed user interface.

"How about you sketch it on the back of this napkin?" Apple was asked at one meeting, say former Time Warner Cable executives. An Apple official replied that the software would be "better than anything you've ever had."

In 2013, Mr. Cue met with Mr. Britt, Time Warner Inc. CEO Jeff Bewkes and other executives in Mr. Britt's office overlooking Manhattan's Central Park. Time Warner owns HBO, TNT, CNN and other channels.

Apple's Mr. Cue arrived 10 minutes late and was wearing jeans, tennis shoes with no socks, and a Hawaiian shirt, says a person familiar with the meeting. The other executives were wearing suits.

The talks dragged on. Apple wanted full on-demand seasons of hit shows and rights to a vast, cloud-based digital video recorder that would automatically store top programs and allow ad-skipping in newly aired shows.

TV-channel owners "kept looking at the Apple guys like: 'Do you have any idea how this industry works?' " one former Time Warner Cable executive says. Apple has said doing new things requires changes that often are unsettling.

By late 2014, the discussions had gone cold. Apple changed directions again, hoping to assemble a "skinny bundle" delivered over the internet.

Apple's Mr. Cue began pitching Disney, Fox, CBS and other media companies on the streaming-TV service. The goal was to attract consumers who have dumped their cable-TV supplier with 25 popular channels, anchored by the broadcast networks.

Apple sought access to full current and past seasons of hit shows, as well as some global rights so the service could work outside the U.S., say people familiar with the talks.

To give subscribers access to local affiliates, Mr. Cue asked the big broadcast networks to cobble together deals with TV station owners. Traditional cable and satellite companies usually negotiate such deals on their own.

Channel owners typically want all their networks carried for the highest monthly subscriber fees possible. Instead, Apple worked backward from its desired $30-a-month retail price.

Apple predetermined that Disney's programming was worth $13 a month per subscriber and asked Disney to pick which of its networks to include, according to people familiar with the talks.

Time Warner's Mr. Bewkes urged Mr. Cue to include more content and charge more to the service's users, a person familiar with the matter says.

Disney gets about $10 billion a year in revenue from pay-TV providers, and its executives worried that agreeing to Apple's terms would entitle other distributors to the same treatment, according to people familiar with the talks. When Disney asked about including channels from its partly owned A+E Networks Inc., Apple wasn't interested.

Some media executives thought Mr. Cue was trying to bluff them when he said: "We've got Disney and Fox. Are you guys in?"

Last summer, Fox and Apple agreed on a rate for channels like Fox News and regional sports networks and began contract talks, says a person familiar with the talks. Disney was moving toward licensing just ABC, ABC Family (now called Freeform), Disney Channel and a digital amalgam of all the ESPN channels called WatchESPN, but didn't reach a final deal with Apple.

Mr. Cue has said the TV industry overly complicated talks. "Time is on my side," he has told some media executives.

Apple now is trying two new approaches. It has revamped the Apple TV device to allow TV networks and others to develop apps and is working to make those accessible through a single login. Apple also is beefing up its original programming.

The programming push includes the planned reality series "Planet of the Apps," CBS spinoff "Carpool Karaoke" and a miniseries tied to rapper Dr. Dre . Most of the programs promote Apple's streaming music service and App Store.

Apple executives have had preliminary discussions with Hollywood executives about making premium original shows on par with "House of Cards." Apple also has discussed premiering original shows on iTunes, with Apple guaranteeing a level of sales revenue to producers.

Original programming could bolster iTunes' video-download business, which has suffered as Netflix-like services gain popularity.

Apple turned to little-known producer Chris Contogouris, who worked on the movie "Spring Breakers," as a middleman in negotiations for some projects, people familiar with the matter say.

When he made a bid on Apple's behalf for a spinoff of the British hit "Top Gear," Hollywood executives were bemused because negotiations for high-profile shows usually involve high-level executives from all sides. Mr. Contogouris wouldn't comment.

A person close to Apple says the company bid only to increase the price for Amazon.com Inc., which ended up winning the "Top Gear" spinoff. An Amazon spokeswoman wouldn't comment.

After Apple reported a profit slide Tuesday, Mr. Cook, the CEO, said the company's TV efforts are just starting. "You shouldn't look at what's there today and think we've done what we want to do," he said.

(END) Dow Jones Newswires

July 28, 2016 12:10 ET (16:10 GMT)

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