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The Cable Killer

Many enlightening, interesting and even touching articles have been written since Steve Jobs’ death last week. It’s clear he had an immense positive impact on our world, and I don’t think I have anything to add to what’s been said. So why do I bring it up? One of the most...

Many enlightening, interesting and even touching articles have been written since Steve Jobs’ death last week. It’s clear he had an immense positive impact on our world, and I don’t think I have anything to add to what’s been said. So why do I bring it up?

One of the most thought-provoking articles I read about Apple (AAPL) last week explored one of its few failures: Apple TV. According to the article (in the New York Times last Thursday) Steve Jobs himself referred to the Apple TV as a “hobby” for the company. It’s not hard to see why: analysts estimate that Apple has sold about two million Apple TVs since it was introduced four years ago. Compare that to the 29 million iPads sold in the last 18 months.

The reason for the Apple TV’s relative failure isn’t hard to pinpoint. The device always lacked—and still lacks—access to competitive content. Since its introduction, Apple has shrunk the device down from the size of a hardcover book to a $99 half-pound hockey puck, but that hasn’t changed the minds of consumers since there’s nothing to watch on it. Imagine how useful the iPhone would be without any Apps.

The primary way to get content on the Apple TV is to download or rent TV shows and movies from the iTunes store. However, the iTunes store hasn’t managed to achieve the same dominance in the movie and TV business as it’s found in the digital music business. Last week’s Times article attributes that to wariness on the part of network executives who saw what the iTunes store did to the music industry, and CD sales in particular. As one expert quoted in the article said, “It didn’t work in TV and movies precisely because it did in music.” So while you can download the latest episodes of many TV shows on iTunes, there are conspicuous gaps in its coverage. And if you have an Apple TV and the iTunes store doesn’t have your favorite show, you’re pretty much out of luck.

However, the article made sure to point out that Apple hasn’t lost its opportunity to transform the way we watch TV—because no one else has won. As the article said, “Television is such a tantalizing target in part because people spend so many hours watching it, but also because the industry over all has been slow to innovate except perhaps in making screens larger. In particular, the consuming public is still waiting for television content—everything that people watch—to be delivered over the Internet in a convenient, affordable package on all the devices people are now using.”

So far, the only really popular device to change the way people watch TV has been the DVR (digital video recorder)—TiVo and its competitors. But DVRs still require a cable subscription, as well as foresight on the part of the user (you have to program it to record the shows you plan to watch later.)

So there’s a lot of opportunity to revolutionize the TV market. More and more TV shows are available online, both through networks’ websites themselves and aggregators like Hulu. But most consumers can only watch TV online at their computers—they don’t have a way to access that content through a device hooked up to their TV.

Part of the reason that no such device exists yet is the same protectionism that’s keeping networks from embracing the iTunes store—if consumers can watch TV online, they won’t need cable anymore. And while the number and length of ads interrupting streaming TV has increased with its popularity, the networks still make the vast majority of their revenues from cable customers.

However, I think that the meeting of the Internet and the television has to happen sooner or later, as consumers demand the convenience of Internet streaming on their main screens. Unlike with cable, consumers watching TV online can watch whatever they like, when they like. They can watch the last four episodes of their favorite show in a row. They can pause and rewind and stop watching and come back later, as with a DVR. And since you use the same Internet connection you’re already paying for, you’re not paying for 50 channels you never watch, as with cable.

There are already a handful of devices that let consumers have the Internet TV experience on their TV, but unfortunately none of them are perfect yet. There are purpose-built devices like the Roku box, which streams Netflix, and Boxee, which has iPhone-like Apps that let you watch content from YouTube, MLB.TV, network sites and more. And many companies are adding Internet-connected features to devices you already have attached to your TV, like DVRs, video game systems and even cable boxes. The Xbox can stream Netflix and will soon integrate with cable TV as well, according to a recent announcement.

But unfortunately, none of these devices can do everything yet. Most can’t access Hulu, or can only do so if you pay for a prime membership that lets you watch its content on a television. Other sites also restrict streaming for those watching on TVs rather than computer. And many of these devices don’t have the space or the ability for you to load your own files onto them, so if you’ve bought or downloaded digital shows from the iTunes store or elsewhere, you’re out of luck.

So far, the best device I’ve found for watching Internet TV on the TV is simply a computer. After trying several alternatives, including Boxee and the Xbox, a computer—I have a Mac Mini—hooked up to a TV monitor has proven to be the best replacement for cable. But there are still drawbacks: the interface of a computer, with all those small words and small buttons, is not ideal for a TV situation. Keeping a keyboard and mouse on your coffee table is a pain—one I’ve avoided by downloading an App that lets me use my iPad as a remote, but the App can be very frustrating sometimes.

And then, of course, there’s the content that just isn’t available online, for streaming or download, no matter how much you’re willing to pay. I haven’t been able to watch Jeopardy! for years, much to my dismay.

Whatever company manages to eventually fill this need—it could be Apple, it could be Google or Amazon, or it could be some upstart like Boxee—will find a huge market waiting for them. I just hope it happens sooner than later.

As for the market, it’s looking much better! We’re not out of the woods yet, but the market’s action since its October 4 one-day reversal has been encouraging. If you want to try putting a little money to work, look for strong stocks that are recovering faster than the broad market. Here’s one from the latest Dick Davis Investment Digest, recommended by Amy Calistri in StreetAuthority’s Stock of the Month:

Hormel Foods Corp. (HRL)—SPAM is just one of many products offered by Hormel. Dinty Moore stews, Jennie-O Turkey products and Hormel-branded chili, bacon, deli meats and side dishes are well known products around the world. Strong brand recognition and an affordable product line make Hormel resilient during tough economic times. In better economic times, when commodity prices are high, Hormel has to keep a vigilant eye on its margins. Hormel does a good job on cost management and financially hedges some of its input costs—specifically for corn, hogs, soybean meal and natural gas. But hedging only protects costs so much. As with many in the sector, Hormel had to raise product prices this year to contend with rising commodity costs. It turned out to be a prudent move. Even though commodity costs were high during the quarter ended July 31, Hormel was still able to grow net earnings by 15.4% over the same quarter last year. The price hikes kept volumes essentially flat—but revenues rose by 10.4%. Hormel’s international sales were especially robust, rising 35.4% for the quarter. If Hormel can continue to hold its prices, lower commodity costs—like those we are seeing now—could boost Hormel’s margins and bottom line over the next half-year. Hormel also recently trimmed its long-term debt by roughly $100 million, which will reduce its interest expense going forward. ... Hormel has held up reasonably well in the last tumultuous month. But even defensive stalwarts are not immune to a downdraft. Market panics can take the babies along with the bathwater. On the flip side, if healthy global growth suddenly ensues and confidence is restored, some investors may sell safer stocks like Hormel in search of higher returns from riskier, more aggressive stocks. Action to Take: Hormel’s products resonate with consumers during challenging economic times. The current drop in commodity prices should also be a plus for Hormel in the near term. Even though I believe HRL is a prudent holding for current economic conditions, I am going to spread my share purchase out over time.”

Wishing you success in your investing and beyond,

Chloe Lutts

Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.