How a streaming video service could solve Apple's biggest problem

When sales of hardware like the iPhone level off, selling loyal customers monthly subscriptions is a great way to keep growing.

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When I first read speculation about Apple creating its own streaming video service, to compete with Netflix, Amazon, and Hulu, I thought it pretty unlikely. If Apple is negotiating with networks to offer their shows on an “over the top” replacement for cable TV, threatening to compete with them seemed to be like a bad move.

Then came reports that Dr. Dre is filming an Apple-financed original television series, news that seems to be a red herring: Dre’s series, Vital Signs, will be available to Apple Music subscribers, and isn’t a sign that Apple’s about to launch a massive television development program.

And yet today I’ve changed my tune when it comes to an Apple-backed video subscription service. It feels almost inevitable to me, and the reason goes back to Apple’s most recent financial results.

Growth through services

Wall Street demands growth, and with iPhone sales potentially plateauing, Apple wants to find new areas where it can show revenue growth. One path is new product areas like the Apple Watch and the much-rumored Apple Car. But another path, one highlighted in Apple’s financial disclosures, is to grow the amount of money Apple makes from its existing customers by selling them services.

Take me, for instance. I own a load of Apple hardware, and Apple loves that, but once I buy something, I use it for a while. But these days I also subscribe to Apple Music and back up my photos to iCloud Photo Library, meaning that I am currently paying Apple an additional $25 per month for its services. (And that’s not counting the apps I buy and movies I rent!)

Pat McGovern, the late billionaire founder of IDG (publisher of Macworld and my former employer), used to talk a lot about how having a monthly billing relationship with a customer was the absolute best a company could aspire to. An annual subscription provides a decision point—every year you can ponder whether you want to renew your relationship before plunking down a year’s worth of cash. In contrast, the monthly charges are smaller, so small that you may not even notice them, and they go on and on until you make the effort to stop them.

With a billion active Apple devices in the world, there’s a lot of opportunity for the company to grow revenue by simply charging a growing percentage of its user base for services that enhance their devices. Even if iPhone sales have leveled off, Apple can continue to grow by selling more stuff to its loyal customers. Expanded iCloud services, like my iCloud Photo Library backup, are a part of that strategy. A streaming music subscription service is a part of that strategy. And maybe a video service could be part of that strategy.

Imagining Apple video

An Apple video service would presumably be along the lines of Netflix, HBO Now, or the Prime Video component of Amazon Prime. HBO’s service is dominated by original material but also features a lot of films the network licenses from movie studios. Netflix offers a broader video catalog but is rapidly increasing the amount of money it spends on original content. Amazon offers a mix similar to Netflix’s but wraps it all inside a broader subscription offering that has other benefits, including a music service and free two-day shipping.

The simplest approach would be for Apple to create a service that’s more like HBO. Apple would commission original programming while possibly licensing some existing material from studios. But to create a more compelling product, Apple would probably plunge right into the competition between Netflix, Amazon, and Hulu, trying to woo existing subscribers of those services away from them, as it has done with Apple Music.

It would take time to build a new streaming video service. Apple would need to hire a team of knowledgeable entertainment-industry professionals and craft a content strategy. Netflix and Amazon started quite small with their original material, and have slowly ramped up production. Netflix had the advantage of building its streaming service on the back of its DVD delivery service (remember it?), and didn’t start charging separately for streaming until it felt that product could stand on its own two feet.

Despite Apple Music, building a streaming video service would be a bit out of Apple’s comfort zone. It’s one thing to make deals with record labels and import their music into your service’s catalog, and another thing entirely to be an active participant in the creation of the content on your service. While on the music side, it’s the job of record labels to sign talent, fund production of albums, and market those albums, an Apple video service would need someone at the helm to program it, like Netflix’s Ted Sarandos.

And it wouldn’t be cheap. Netflix will spend $6 billion on content this year: that breaks down to roughly $5 billion licensing movies and rerun TV shows from other companies and another $1 billion on Netflix-exclusive shows and movies.

So why not?

Creating a video subscription service would be a big conceptual leap for Apple, taking the company farther out of its comfort zone than ever before. And yet Apple has been a major player in the entertainment industry for years, so it’s not as far afield as you might think. Building a service would take time and cost a lot of money, and these are all good reasons to be skeptical.

And yet I just can’t muster up much skepticism anymore. Apple’s got more than $100 billion in the bank and generates huge profits each quarter. The iPhone, iPad, Mac, and Apple TV all make great video-watching platforms, depending on the context. The company has a history of working with the entertainment industry. And when Wall Street wants to know how it’s going to grow, the company’s executives all point to the growth of its services business.

That’s why I’m suddenly feeling that it’s almost inevitable that Apple will enter the subscription video market someday. It won’t be a cure-all in Apple’s quest for growth, but it will be yet another service that Apple can add to its customers’ monthly bill, another way to take more money out of the pockets of its existing customer base.

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