This week saw Apple finally unveil its long awaiting Netflix rival. Maria Rua-Agueta at IHS Markit, looks at the state of the current market and how Apple TV + can stand out from the crowd.
Apple is now obviously looking beyond its own devices, with the deal it recently struck with Samsung. However, the new Apple streaming service could provide further evidence that the company is opening up its walled garden to increase consumer reach, as smartphone sales continue to soften.
Netflix confirmed that the company will not be part of Apple’s streaming service, but Showtime, HBO, Starz and others could end up joining its new service. Such partnerships will be critical to bolster the value of Apple’s service on top of their $1 billion content spend; an impressive early number, but one that still pales in comparison to the current spending of other global content providers.
Some key points:
• The primary focus of Apple is on its high-margin hardware business, which comprises 86 percent of Apple revenue. However, the company is increasingly focusing on consumer services and subscriptions, which are a growing part of its business.
• Apple has 1.4 billion installed devices around the world, according to IHS Markit.
• Apple has reportedly spent up to $1 billion on original commissions and broadening the availability of its video offers—most notably with its announcement at CES 2019 that iTunes would be coming to Samsung TVs. There are approximately 9 million Samsung TV sets in North America that could run the iTunes app once updated firmware is installed, according to IHS Markit.
• Apple’s expansion outside of its ecosystem is likely to include partnerships with other content providers, which could position Apple as a content re-aggregator in an increasingly fragmented online video market.
• Apple is looking to diversify its revenue streams as smartphone sales slow. With more than 1 billion iPhones shipped, Apple ranked second in global smartphone shipments in 2017. In 2018 Apple’s ranking fell to third, behind Huawei and Samsung.
Apple video strategy options
Apple has a wide range of options, when it comes to its video strategy. These options include, but are not limited to, the following:
• Restructuring its existing media services (including the video portion of Apple Music). Using this to create differentiation from similar services, and enhancing consumer value.
• Adding a new video tier to a broader subscription suite, sitting alongside: the company’s expected news subscription offer, the recently rumoured games subscription, or even as an expansion to the Apple Upgrade program.
• Free media for hardware users – adding value and differentiation in an increasingly competitive market, incentivising iPhone sales.
• Launching a standalone video service with Apple’s own content, forging partnerships with players like HBO, and consolidating iTunes and Apple originals with content from other video players, all in one place.
Apple might adopt some combination of the options above (e.g. Apple Music subscribers get video as a value-add at no extra charge, while other consumers can sign up for a monthly fee).
Questions for consumers
A new streaming service could be a boon for consumers, in the following ways:
1. More competition, always good for consumers
2. More money – more (and more premium) content – lower costs for consumers.
3. More inventive content – greater selection of more diverse content both in terms of subject matter, genre and origin of production – German, Spanish, Korean content thriving.
With all of these new service providers and content, reluctance to subscribe to additional services could become an industry concern, as consumers begin to compare their services based on quality and price. A potential solution to this issue may come in the form of re-aggregation. As streaming services make deals with telcos and cable companies, growing numbers of subscriptions are managed through traditional deals. Amazon Channels platform and other online platforms will emerge, and they will also play a roll in re-aggregation. It’s highly likely that what today’s announcement from Apple will attempt to solve this problem.
Partnerships and the aggregator role will become critical
The aggregator role will become more important to Sky and other pay TV operators. Partnering with different SVOD providers will become increasingly important, when it comes to providing a complete bundle. The online video market in the United States is set to get even more competitive, with major launches from Disney, Apple, Warner Media and Comcast.
Platforms achieve scale, and generate revenue, using a number of different business models. The global big-tech firms competing in the video market operate in very different ways to the incumbent players. For example, platform companies’ core business is not video – they come from a variety of backgrounds, as follows:
• Alibaba: Retail
• Amazon: Retail
• Apple: Devices
• Google: Advertising
Amazon is primarily a retailer, and it’s branching out from online into physical retail, payment systems, hardware and voice assistants is particularly noteable. Outside of its retail focussed operations, an increasingly large percentage of Amazon’s revenue are generated from its AWS cloud computing division. For Google, the vast majority of revenue comes from advertising, either directly or through partners.
Aysmymetric threat
Big technology companies are a threat to traditional businesses offering standalone versions of a single element of these platforms. Additionally, if the big platforms don’t need to make a profit from a particular service, they can easily (even incidentally) undercut those pure-play companies operating on a tight margin. For platform companies, value can be created elsewhere.
This is further compounded when the value of video to a company’s wider ecosystem is considered, namely in the following ways:
• Tying the ecosystem together – device, video, commerce, etc.
• Increasing user adoption and user engagement, as it provides a better user experience
• Driving revenue and monetisation
• Reducing churn
By Maria Rua-Aguete
Executive director
IHS Markit