It's been a year since Apple made its first original video hires and released its first original series, yet the company's strategy remains opaque and confusing. The most likely answer is one that will lead the company to reinvent not another device category, but itself.

Nearly a year after Apple announced the hiring of Jamie Erlicht and Zack Van Amberg, then the co-presidents of Sony TV, Apple’s video ambitions remain opaque. This is despite a widely reported hiring spree, the release of two Original series (Planet of the Apps and Carpool Karaoke) and greenlights of another 14 series. If this wasn’t enough to prove Apple’s commitment, the talent behind these shows (which includes the likes of Reese Witherspoon, Steven Knight and Damien Chazelle) and prices paid to win them (Apple was typically bidding against top-of-market buyers such as Netflix, Amazon and HBO) should be sufficient. Still, we know virtually nothing else about Apple’s video plans, from how these series will be distributed to how the company plans on monetizing them, or why Apple’s entering the business in the first place. With each passing day, this becomes more curious.

 

The four major theories (and whether they make sense)

There are four dominant theories of Apple’s video strategy. The first supposes that Apple, having failed to develop its own low-cost virtual MVPD and largely missed the opportunity to buy Netflix, is planning to launch its own SVOD service. The second theory posits that Apple plans to convert Apple Music, which is fundamentally undifferentiated from on-demand music services like Spotify and is structurally limited to break-even profitability, into a multimedia “Apple Media” subscription. The third theory suggests Apple needs to build out its software and subscription-services businesses, and sees video as a potential addition to its existing portfolio of iCloud, iWork (which has been essentially free for years), Apple Music and others. Operationally, this is similar to the first option, but the monetization is more indirect (i.e. ecosystem based) and the business is likely to look more like a modest video add-on than a full-fledged standalone service (theory one). Notably, software is typically seen as one of Apple’s weakest areas – and one that is becoming more important as our digital lives expand. The last theory suspects Apple will at least partly restrict consumption of Apple Originals to its devices to enhance hardware sales. For example, you might need an AppleTV or iPad to watch Apple Originals – or, more modestly, episodes might binge-release on iOS devices but be weekly for non-iOS devices or users.

The SVOD argument is unconvincing. Apple is not licensing library TV content (and no major film deals are even available until 2022), nor is it investing in the volume of Originals needed to sustain usage for a paid, standalone service. Instead, Apple’s programming investments have focused exclusively on a dozen high-budget, high-profile series – significant, but a fraction of the number of Originals offered by the major OTT providers (each of whom also offers large libraries). This suggests Apple video is primarily a brand-related effort.

Using video to convert Apple Music into an expanded “Apple Media” subscription seems sensible, in part because Apple’s original series are likely to be distributed through (the currently branded) Apple Music app (Planet of the Apps and Carpool Karaoke were released on and remain on the service). Not only does this channel already exist and boast growing scale (40MM+), but it’s in need of differentiation from other on-demand music services – namely market leader Spotify. In addition, diversifying the Apple Music subscription into other content categories would help Apple improve the business’s margins and gain additional bargaining power with labels. Today, Apple pays at least 72.5% of Apple Music revenue to labels and publishers, which the company’s executives admit means running the service at or nearly at a loss (a far cry from Apple’s 35%+ gross profit margin). Transitioning Apple Music’s customer acquisition, engagement and brand positioning away from music would help Apple renegotiate its royalty rates and payment structure. In addition, the alternatives to distributing through Apple Music are not great. Apple could push/pre-load content into user libraries, but this same strategy produced consumer hostility when it was tried in 2014 with the U2 album Songs of Innocence. Alternatively, Apple could release another Apple-branded app, but no one is asking for more apps – especially one that’s native (i.e. can’t be deleted) and lacks the volume of content needed to be regularly used. Theory two makes sense.

Theory three is too abstract to rule out entirely, but as the thin explanation suggests, it’s flimsy. Premium video is an expensive way to accomplish this goal and means seeking differentiation through a hyper-competitive, saturated marketplace that Apple will be years late entering. And if Apple does distribute its video through Apple Music (or an evolved Apple Media offering), it’s not clear how that aids its subscription and software ambitions. This strategy would, at minimum, seem to require theory one (a standalone SVOD service) to also be true. But even then, it’s unlikely that consumers would fundamentally rethink Apple’s software chops because it has great video content. Finally, it’s not clear how much benefit this provides Apple versus continuing to sell the likes of HBO, Netflix and Hulu, potentially with discount bundling (as is rumored and has been successful in traditional PayTV) and aggregated via the search layer on Apple TV / Siri.

Option four is a common thesis – and one that continues to pick up momentum – but it doesn’t make much sense, generally or for Apple. It’s hard to monetize AAAA-priced content (which is what Apple is buying) by limiting audiences (total viewership matters regardless of whether revenue is generated via advertising or subscription fees). Even if Apple chooses to “monetize” this video as a marketing expense or customer acquisition cost, this challenge will remain. How many incremental Apple TVs or iPads are going to be bought because Apple invests $70MM producing and $30MM marketing a 10-episode half-hour comedy, even if the series is great and stars Reese Witherspoon and Jennifer Aniston? What’s more, it’s not clear how an ongoing series would lock users into the Apple brand more effectively than Apple’s already unparalleled ecosystem functionality and device penetration. Most critically, the user experience would inevitably frustrate consumers as it would essentially force Apple’s existing customers (i.e. anyone who has an iPhone) to spend hundreds of dollars replacing hardware they may be satisfied with (such as a Windows PC or Roku) just to continue watching something they already paid for. Not only is this inconvenience very un-Apple, it would stand in stark contrast to the seamless every-device experiences offered by the company’s OTT competitors. To this end, this strategy would further limit the reach and engagement of the company’s content, conflict with its industry-leading brand, and likely undermine Apple’s broader software/services ambitions (theory three), which exist irrespective of video.

While Apple Media is the most logical answer, the complete version is likely to look like a blend of options two, three and four (and allow Apple to justifiably claim option one as well). That is to say, Apple is likely trying to develop (and then ultimately transition into) a subscription-based offering that spans its entire business – and video will be a core part of this effort.

Apple already offers three core subscriptions: iCloud drive storage and sync, Apple Music and, since 2015, the iPhone Upgrade Program. In this last subscription, customers pay $35-56 a month for a brand-new iPhone (the range represents different models and hard drive sizes), which is replaced annually and comes with a warranty (one that includes two accident-related breaks). And earlier this year, Apple bought Texture, a digital subscription services that provides all-you-can-eat access to over 200 magazines.

As awareness and value grow, Apple’s software-based services are likely to be bundled into a single-price, partly discounted subscription, with an expanded version including individual device add-ons. It will combine cloud storage, music, video, magazines and productivity tools with, at the user’s election, devices (smartphones, tablets, computers and watches as needed) and potentially even health and proprietary credit card services coming later. In short, households may soon find themselves sending $100 or more to Apple on a monthly basis, rather than spending $1000 every year or two. A subscription plan could even help Apple realize its long-rumored desire to sell wireless talk/data plans as an MVNO – after all, the company would already be covering most (if not all) of a family’s wireless devices and many of their most used apps.

 

What an “Apple Prime” subscription would mean for Apple (and its competitors)

This model provides benefits across all of Apple’s business. Service adoption and usage would likely increase (why pay for Spotify if you’re already getting Apple Music for free, or functionally free), as would device retention rates (suddenly the cost of switching to a competitor’s device goes up and you no longer encounter the decision process of getting a new device). Monthly fees and bundle-related discounts would also make it easier to add additional iOS devices to an iOS household ($35 a month is easier than $800 outright; why not add an AppleTV for $5 more?) and stop “mostly Apple” households from using one or two devices from the company’s competitors. This last point is particularly important. As Apple’s penetration grows, it’s getting harder to increase device sales without sacrificing pricing. In addition, Apple’s flagship devices (iPhone and iPad) are believed to be facing elongating replacement cycles (i.e. consumers are replacing these devices with newer models less frequently or quickly than in years’ past). A subscription model places refresh rates under Apple’s control. Finally, this sort of offering enables the company to defend against the broader “bundlization” strategy that’s being pursued by competitors, whether that’s a bundle of internal products and services (e.g. Amazon Prime) or one based around 3rd party partnerships (such as the new Spotify-Hulu partnership, which bills at $13 a month together versus $18 apart).

On a conceptual level, an Apple Subscription allows the company to use its existing ecosystem, reach and brand to de-risk new business, out-compete in undifferentiated ones and create a rich, proprietary experience that its competitors will struggle to match (due to either their more modest cash reserves or scope of services). Operationally, this model also aligns with the company’s famously broad P&L and organizational structures.

One can justifiably argue that video isn’t a necessary component of this subscription offering. However, video remains the most intensely consumed and valuable media category worldwide. It also generates outsized (and recurring) press attention and fandom. As part of a broader marketing strategy that’s based on the scope of an Apple Subscription’s value, video is a natural fit. This also explains Apple’s content investment strategy (i.e. a handful of high budget, high profile Original series and no library content) and its willingness to enter a highly competitive market relatively late in the game. Apple is looking for valued differentiation, not category dominance.

Most interesting, Apple’s transition to a subscription model including a video offering would mean that the company, like Disney and AT&T, would come to look a lot more like Amazon Prime than its present-day self.

 

You can reach Matthew Ball at mb.ball@gmail.com or @ballmatthew