I’ve been quite critical about the tech echo chamber portraying Apple’s upcoming video streaming business as a response to plateauing iPhone sales. I see them as completely separate things. Apple’s push into services is a natural progression for a company which is in the business of creating devices that transport data as opposed to old-world companies that are in the business of transporting durable goods or people. The services push would have happened at about this time regardless of where iPhone unit sales stood.
I’ve been critical of the idea that a new video streaming business could replace falling iPhone sales for the following reasons:
But my criticism above is assuming that Apple wants to play the same game as Netflix, that is, sell you another video service for $9.99 per month. If Apple wants to play that game, they have a long road ahead of them despite their stable of top actors and directors. Even if they are ultimately successful, it won’t be for a very long time.
In order to quickly be successful, Apple has to do one of two things: either undercut Netflix’s prices or offer much more for the dollar. And since it has never been in Apple’s DNA to simply compete on the basis of having the lowest price, I would expect them to offer much more value. For instance, they tiptoed into the intelligent-assistance base station market not by undercutting Amazon’s Echo but by offering vastly superior sound.
I was trying to think of a scenario where Apple could effectively attack the services business by offering more versus charging less, and this is how I would handle it.
Tier One: Make today’s Apple Music FREE for iOS
Having access to thousands upon thousands of songs commercial free and being able to use Siri to play them is great. Throw in streaming on the Apple Watch or a HomePod, and it’s really hard to beat. Can you imagine if Apple made Apple Music free to anyone who uses Apple hardware? IOS becomes much more sticky and even lowly products like the HomePod or Apple TV would get a shot in the arm.
If Apple made Apple Music free on iOS, it would increase iOS market share. And people forget, you can drive up market share two ways, stealing customers or reducing losses. A certain percentage of people come and go. If you can simply increase the stickiness of your ecosystem, you’re going to gain more than you lose and thereby increase market share. This will drive up future iPhone unit sales.
Making today’s Apple Music free would also serve as a giant commercial for the paid tier. Apple Music users would constantly see the shows that they can’t watch whenever they browse the app. Getting people to download your app is half the battle. But if the app is already on your phone and you’re already opening it, that’s 80% of the battle.
Tier Two: Keep Apple Music pricing the same and ADD tons of content
Apple could effectively undercut Netflix by offering the service at $9.99 per month but adding much more that Netflix doesn’t offer. Netflix doesn’t offer music, magazines, news or games. If Apple added all of these items to their subscription service, who in their right mind wouldn’t compare the two services and think that Apple offers the better value?
I’d announce to all current subscribers of Apple Music that without doing anything, they now have access to all of Apple’s exclusive video content, PLUS news services, PLUS magazines and maybe even games. People across the country would give Tim Cook a standing ovation in their living rooms. Overnight, Apple would become the service to beat. Except for Amazon Prime, the other services are all one-trick ponies.
Apple offering more content than Netflix is marching in a direction that Netflix can’t follow. If Apple were to undercut Netflix on price, Netflix could simply match their price. But Netflix has no content outside of video to offer. They can be effectively outgunned by Apple on this front.
Another reason I would recommend a plan like above is because almost nothing changes. All of Apple’s current subscribers are automatically signed up for the new service. You aren’t asking anyone to think about upgrading. You want the onus to be on people having to take the initiative to cancel. Not to be on people to take the time to explore new options and sign up.
The Profitability Question
But the all-important question is whether or not the above system would be profitable for Apple. Every 500 heads in personnel needed to manage the increased services will cost Apple about $70 million in expenses. Then there’s the billion-plus that they will shell out for new original content every year.
Only Apple could make this work because only Apple can subsidize this system via annual hardware sales. Even if iPhone unit sales plateau, the financial analysts would model that Apple could prevent further erosion of unit sales. I used to work for the Herman Miller corporation. If we came out with a popular new desk or chair, there was a corresponding uplift in sales of our cubicles and file cabinets. We sold an office environment, not just components. More and more, Apple is evolving into a digital lifestyle as opposed to just a seller of handsets or laptops.
I may be out of step with most other Apple Watchers in that I still see services as subservient to hardware at Apple. However, it is precisely that school of thought that would allow Apple to become the value leader.
- Netflix has a huge head start– It takes years to get to this level of business
- Apple is spending a fraction of what Netflix does– They are unlikely to reach the same scale as Netflix
- The entire Netflix business is smaller than the iPad business– Many analysts consider the iPad business the red-headed stepchild, and yet any new video streaming business likely to be much smaller.
But my criticism above is assuming that Apple wants to play the same game as Netflix, that is, sell you another video service for $9.99 per month. If Apple wants to play that game, they have a long road ahead of them despite their stable of top actors and directors. Even if they are ultimately successful, it won’t be for a very long time.
In order to quickly be successful, Apple has to do one of two things: either undercut Netflix’s prices or offer much more for the dollar. And since it has never been in Apple’s DNA to simply compete on the basis of having the lowest price, I would expect them to offer much more value. For instance, they tiptoed into the intelligent-assistance base station market not by undercutting Amazon’s Echo but by offering vastly superior sound.
I was trying to think of a scenario where Apple could effectively attack the services business by offering more versus charging less, and this is how I would handle it.
Tier One: Make today’s Apple Music FREE for iOS
Having access to thousands upon thousands of songs commercial free and being able to use Siri to play them is great. Throw in streaming on the Apple Watch or a HomePod, and it’s really hard to beat. Can you imagine if Apple made Apple Music free to anyone who uses Apple hardware? IOS becomes much more sticky and even lowly products like the HomePod or Apple TV would get a shot in the arm.
If Apple made Apple Music free on iOS, it would increase iOS market share. And people forget, you can drive up market share two ways, stealing customers or reducing losses. A certain percentage of people come and go. If you can simply increase the stickiness of your ecosystem, you’re going to gain more than you lose and thereby increase market share. This will drive up future iPhone unit sales.
Making today’s Apple Music free would also serve as a giant commercial for the paid tier. Apple Music users would constantly see the shows that they can’t watch whenever they browse the app. Getting people to download your app is half the battle. But if the app is already on your phone and you’re already opening it, that’s 80% of the battle.
Tier Two: Keep Apple Music pricing the same and ADD tons of content
Apple could effectively undercut Netflix by offering the service at $9.99 per month but adding much more that Netflix doesn’t offer. Netflix doesn’t offer music, magazines, news or games. If Apple added all of these items to their subscription service, who in their right mind wouldn’t compare the two services and think that Apple offers the better value?
I’d announce to all current subscribers of Apple Music that without doing anything, they now have access to all of Apple’s exclusive video content, PLUS news services, PLUS magazines and maybe even games. People across the country would give Tim Cook a standing ovation in their living rooms. Overnight, Apple would become the service to beat. Except for Amazon Prime, the other services are all one-trick ponies.
Apple offering more content than Netflix is marching in a direction that Netflix can’t follow. If Apple were to undercut Netflix on price, Netflix could simply match their price. But Netflix has no content outside of video to offer. They can be effectively outgunned by Apple on this front.
Another reason I would recommend a plan like above is because almost nothing changes. All of Apple’s current subscribers are automatically signed up for the new service. You aren’t asking anyone to think about upgrading. You want the onus to be on people having to take the initiative to cancel. Not to be on people to take the time to explore new options and sign up.
The Profitability Question
But the all-important question is whether or not the above system would be profitable for Apple. Every 500 heads in personnel needed to manage the increased services will cost Apple about $70 million in expenses. Then there’s the billion-plus that they will shell out for new original content every year.
Only Apple could make this work because only Apple can subsidize this system via annual hardware sales. Even if iPhone unit sales plateau, the financial analysts would model that Apple could prevent further erosion of unit sales. I used to work for the Herman Miller corporation. If we came out with a popular new desk or chair, there was a corresponding uplift in sales of our cubicles and file cabinets. We sold an office environment, not just components. More and more, Apple is evolving into a digital lifestyle as opposed to just a seller of handsets or laptops.
I may be out of step with most other Apple Watchers in that I still see services as subservient to hardware at Apple. However, it is precisely that school of thought that would allow Apple to become the value leader.
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