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Analyst Makes the Case for Apple-Time Warner Cable Merger

31 Jan, 2011 By: Erik Gruenwedel

Apple Inc. is a red-hot brand with billions in free cash, no debt (no joke), a stock price above $330 per share and few challenges except for an ailing CEO.

That Cupertino, Calif.-based Apple has become synonymous with re-creating the wheel of entertainment distribution is what prompted independent analyst Phil Leigh to further the theoretical argument that Apple would acquire Time Warner Cable, the second-largest cable operator in the country.

Leigh, with Inside Digital Media in Tampa, Fla., says Apple’s acquisition of TWC could put a significant dent in the pay-TV market and open up the nascent market for Internet-based content.

“Apple could provide an abundance of TV shows, movies and related digital media content directly to subscribers via iTunes,” Leigh wrote in a post. “Such programs could be rented as pay-per-view, sold as downloads or offered in subscription packages similar to Netflix streaming.”

In addition, by owning a cable service, Apple would not become a potential victim to discriminatory service fees that Comcast is imposing upon Level 3, one of Netflix’s primary backend technology providers, according to Leigh.

The analyst believes Apple could offer subscribers high-speed or high-capacity broadband Web access for $50 a month with content options catered to individual tastes on an a-la-carte basis.

“The bundling model would collapse just as it did in the music business when digital downloads circumvented the need to buy entire CDs merely to get a few desirable songs,” Leigh wrote. “Furthermore, lightning-fast ISP service would enhance all forms of Internet interaction, thereby increasing the utility of the endpoint devices such as iPhones, iPads and Macs, thereby benefiting Apple's hardware sales.”

Leigh said Apple could afford TWC’s market value of $24 billion and would have enough money left over to pay off the cable operator’s $23 billion in debt — much of it accrued after former parent Time Warner paid itself a $10.9 billion dividend when spinning off the cable operator two years ago.

The analyst admitted Apple would have to pay a premium to entice TWC shareholders but added that such a deal would upset the current pay-TV mindset among telecommunication companies and cable operators, and could send Apple’s stock even higher.

“This underscores the golden rule that cable companies historically have exercised as ruthlessly as anyone: He who has the gold rules,” Leigh wrote.

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