Will Apple's iTV Be the Death of Netflix?

Apple (AAPL) and Netflix (NFLX) have been chummy since last year, but that may be about to change.

It is all but confirmed that Apple will enter the TV market with a line of next-generation high-def televisions later this year.
Analysts and fans alike have been dreaming out loud. An iPod-like touchscreen remote control would make sense. Surely the same Siri voice-recognition technology that has popped up in October's iPhone 4S will help couch potatoes navigate through their viewing options. FaceTime videoconferencing? Of course!

However, things really get interesting for us as consumers -- and problematic for Netflix CEO Reed Hastings and his crew -- when we begin to ponder the possibilities of what Apple will do on the content end of the TV experience.

Cracking Open the iVault

Will customers have access to the growing digital vault found in Apple's iTunes? Surely it will be available on a piecemeal basis. Folks will pay up for new movies and TV episodes the way that they do now on their iPads, iPhones, and iPods.

However, what if Apple is feeling out its content providers to gauge interest in a revenue-sharing smorgasbord with content that folks aren't exactly buying outright? You know, like Netflix.

What if Apple launches its own Web-based television service, as many, including Sterne Agee analyst Shaw Wu, have been suggesting? Wouldn't a more efficient and cost-effective programming service eat into the time left for viewers to check out Netflix?

All roads here lead to a head-on collision between Apple and Netflix this year.

Friends with Benefits

Apple and Netflix weren't always close. Hastings sits on Microsoft's (MSFT) board of directors, making the world's largest software company an early partner in Netflix's streaming efforts.

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It was Microsoft's Silverlight platform powering Netflix's streaming service when it launched in 2007, and that meant that Macs weren't invited to the party. When Netflix decided to make its streams available through video game consoles, it was Microsoft's Xbox that offered the perk a year ahead of rival gaming systems.

However, a funny thing happened. Netflix streaming became such a big hit on the iPhone and iPod that it was the top third-party app download when the iPad launched two years ago. Hastings even took to the stage with Steve Jobs later that year when Apple introduced the iPhone 4.

Netflix became a free agent that day. Was the iPad's surprising success the result of the availability of Netflix streaming on the shiny new tablet? Was the success of Netflix streaming -- until last year's stumble after its ill-advised price hike -- attributable to its visibility at iPad's launch?

Does it matter? Netflix streaming and Apple gadgetry got along like peanut butter and jelly -- but now things are getting sticky.

Stream On: 2 Billion Hours of Viewing Pleasure

Despite the Qwikster fiasco and a painful third quarter that saw Netflix lose 800,000 more subscribers than it signed up, Netflix streaming remains wildly popular.

Netflix revealed earlier this month that its more than 20 million streaming customers viewed a whopping 2 billion hours of video during the fourth quarter.

Work the math, and you'll be impressed. We're talking about an average of nearly 100 hours over the past three months for each of those 20 million global customers.

Apple knows this. It also knows that there's probably a great deal of overlap between tech-embracing couch potatoes that have set up their home theaters for Web-served content through Netflix and the early adopters that will be willing to pay an industry premium for an Apple television -- or iTV as some are calling it -- when it is introduced.

Apple has a choice to make. It can hope to co-exist with Netflix, or it can choose to top it.

Fans of a harmonious resolution would argue that Apple doesn't need to take on Netflix. It can put out a smart TV that will hand over viewers to Netflix for their 30 or so hours of monthly streaming. However, if that's good enough for the couch potatoes, why spring for an iTV?

Apple has to raise the bar, and that includes innovating on the programming end of the spectrum.

"I finally cracked it," Steve Jobs famously told his biographer in discussing the company's plans for television.

He may have, but it's going to be hard to crack the living room without cracking -- or being cracked by -- Netflix.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article, except for Netflix. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, and Netflix; and creating bull call spread positions in Apple and Microsoft.