Apple Tip-Toes Into Original Video

The Wall Street Journal reported this week that Apple has begun talks with producers in Hollywood about buy rights to original TV series and movies. If true it would represent at least the third attempt by the iPhone maker to crack the TV code, so far without notable success, although its strategy this time appears to be different from its previous efforts.

I say “appears” because, according to the Journal, Apple itself  “is still working out details of its business strategy built around original content.”

The new shows, which could begin appearing by the end of this year, will reportedly be made available to subscribers of Apple Music, suggesting this isn’t an attempt (yet) to build a direct competitor to Netflix and Amazon Prime. The fact that Apple is targeting individual movies and TV series rather than networks suggests this is also not some sort of skinny bundle play to compete with Sling TV and the new Hulu service.

Instead, it appears to be an effort by Apple to differentiate Apple Music from Spotify, Tidal and other music streaming services. If so, that in itself would represent a significant shift in strategy by Apple.

Up to now, Apple’s services have always been in the service of hardware sales: iTunes drove sales of iPods; the App Store drove sales of iPhones and iPads.

But Apple Music hasn’t really worked out that way. As the Journal report notes, Apple missed its internal revenue targets last year for the first time in at least seven years, as the iPhone 6s failed to meet expectations and sales of iPhone overall slowed. Clearly, Apple Music (or for that matter Siri) is not driving Apple hardware sales to the same degree as have Apple services in the past.

Unlike Apple’s hardware business it’s services business has actually been growing fairly robustly of late, reaching $6.3 billion in its last reported fiscal quarter ended September 24, up 24 percent over the same period the prior year. But Apple has never reckoned its service business the same way as its hardware sales. Though not strictly a loss-leader, Apple’s margin expectations and investment posture toward its services business have historically been far more modest than for its hardware businesses.

Clearly, though, those expectations are growing as Apple’s hardware sales level off, and if the Journal’s report is correct its investment posture toward those services is getting more aggressive.

That suggests two critical questions regarding Apple’s budding video ambitions: What rights is it actually looking to buy and in which window?; and how much non-music related video are consumers really looking for in a music service?

Apple would obviously seem to be after some flavor of on-demand streaming rights, but which one is not clear. If it is looking for worldwide, first-window subscription-VOD rights (i.e. no prior broadcast or other type of exploitation), it will inevitably end up competing with the likes of Netflix and Amazon at least on the acquisition side. And that’s a competition Apple can’t possibly win at this point without blowing up its entire services business model. Buying a few series here and there is not going to give Apple the sort of leverage with producers that Netflix wields.

According to the Journal, Apple has been dangling access to viewership data — something Netflix has historically denied its producing “partners” — as an inducement. But it’s unclear how valuable that data would really be to producers.

Rights owners would love to see viewership data for their content on Netflix because they imagine it would give some amount of leverage in negotiating license fees with the streaming service. That’s a debatable point, in that Netflix relies largely on an algorithm to determine what it will pay for a piece of content that, for all anyone outside of Netflix knows, may not even be based on raw viewership numbers. But in any case, Apple isn’t going to be a big enough buyer to much in the way of leverage with producers. So, while viewership numbers might be nice for rights owners to know, they’re unlikely to influence the negotiation one way or the other.

Those data would be far more valuable to producers if Apple were contemplating some sort of advertising-supported model, but then Apple Music would likely have to get in line behind the broadcast and cable windows, which would preclude deriving any value from exclusivity.

The most likely scenario is that Apple will try to tip-toe into the exclusive original series business between the 800-lbs gorillas. But that will mean being very careful and strategic about where it puts its feet.

Perhaps the biggest question, though, is whether all that effort will ultimately be worth it. Though consumers have shown themselves increasingly willing to pay for music and video delivered over the internet, it’s not clear whether they see any value in getting them as part of the same service.

People consumer music and video in very different ways, and at different times and settings. Like Spotify, Apple has experimented with offering music-related video content as part of Apple Music, including  acquiring rights to a series of half-hour episodes of James Corden’s popular “Carpool Karaoke” segments from the Late Late Show.

But scripted series and movies are very different animals, and much more expensive to create or acquire.

The value proposition of any subscription streaming series, whether offering music or scripted video series, generally lies in the breadth and comprehensiveness of its selection, leavened with a measure of exclusive content. Consumers may be happy to subscribe to both types of service but it’s not clear how much value they would see in sprinkling a little bit of one into the other.

The table stakes in both the music and video streaming games have grown high while Apple has been trying to figure out its strategy for both. Unless you’re willing to stake them you might be better holding onto your money.