September 10, 2019 / 9:03 PM / 9 days ago

Breakingviews - Apple TV could be pilot for more dramatic things

CEO Tim Cook speaks at an Apple event at their headquarters in Cupertino, California, U.S. September 10, 2019. REUTERS/Stephen Lam

NEW YORK/SAN FRANCISCO (Reuters Breakingviews) - Apple is known for the cleanness of its smartphone designs, yet its TV plans have until now been full of static. On Tuesday, the $970 billion company made things a tad clearer, by announcing that its new Apple TV+ package will be cheaper than rivals. That doesn’t guarantee it will be a smash hit, but it’s enough to get a bunch of people trying it out, which will help Chief Executive Tim Cook with a longer-term goal.

At $5 a month, Apple’s offering costs less than half the $13 charged by Netflix for its most popular plan, and the hitherto competitive $7 charged by Walt Disney for its own over-the-top product announced earlier this year. That adds a price war to the content war already underway. Netflix, Amazon and Disney have spent billions on programming. Apple has $102 billion of net cash to dip into. It has committed $6 billion for original shows and movies, the Financial Times reported in August. That puts it in line with Amazon’s spending budget on programming.

Regardless, Apple TV is likely part of a larger strategy shift from hardware to subscription revenue. One tell is that the company is giving away a free year of service with the purchase of an iPhone, iPad or Mac. That’s a decent way of getting customers on the hook to pay Apple recurring fees. Apple also unveiled a subscription gaming service for $5 a month for a family. While the content is limited that may not matter. Video customers are accustomed to playing a favorite game for months at a time. The fact they are family-friendly is a much-needed bonus: no ads, no in-game purchases and no data collection.

For the nine-months ending June 29, Apple’s service revenue represented 20% of its $196 billion in sales. It’s growing at a fast clip, some 16% over the period compared to the same period a year ago. That compares with Apple’s flagship stream of hardware revenue, which declined. Keeping the trajectory of services going is growing more critical. It’s not hard to see how Apple will start small, then bundle a series of services to keep customers regularly shelling out – not unlike Amazon’s Prime membership. Apple TV, in other words, makes most sense as a pilot for more dramatic things.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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