Apple and original TV: a strategy teardown

Last week, the New York Times published, “Apple Goes to Hollywood. Will Its Story Have a Happy Ending?,” a useful but incomplete article by John Koblin.

The article is useful because it describes how Apple has already exceeded its billion dollar budget dedicated to creating new television shows, has inked deals with big-name talent like Jennifer Aniston, Steven Spielberg, and Reese Witherspoon, is building a huge headquarters for its new entertainment division in Culver City, and has hired away two top-flight TV executives from Sony Pictures Television to run it.

The article is incomplete because it doesn’t explore why Apple is doing this.

What’s the strategy that Apple thinks original video will help them achieve? The article mentions that web firms Yahoo!, Microsoft and Google’s YouTube have dabbled in original video content, while new-style entertainment platforms Netflix, Amazon and Hulu have gone all in with multi-billion dollar development slates. However, it doesn’t dig deeper than, “Apple’s strong brand name and its willingness to write big checks have quickly made it a top draw for show creators and stars.”

We can call this a “brand halo strategy,” where talent (tautologically) wants to work with Apple because it’s Apple, but that still doesn’t get us any closer to what outcome Apple wants to achieve by handing large amounts of money to big stars.

Another possible strategy, a hedge strategy, would explore the inevitable future decline of the smartphone as people’s primary computing interface in favor of a Personal Area Network (or PAN) that distributed the different functions of a smartphone across smaller devices we’d wear. This would be bad for Apple since it earns most of its money from the various iPhone models. In this case, Apple’s foray into expensive, original TV shows is an attempt to create new revenue streams from services as hardware revenue declines.

You don’t have to agree with me about PANs in order to see that the iPhone has a limited future. That future has already arrived in China, where WeChat (a combination of Facebook, Google, Amazon, and a credit card) is so dominant — with an app that is pretty much the same across different mobile operating systems — that, as Ben Thompson has observed in Stratechery:

For all intents and purposes WeChat is your phone, and to a far greater extent in China than anywhere else, your phone is everything. Naturally, WeChat works the same on iOS as it does on Android. That, by extension, means that for the day-to-day lives of Chinese there is no penalty to switching away from an iPhone.

As apps absorb more and more smartphone functionality, the specific brand of smartphone you have becomes less and less important. Rather than a line of entertainment properties, Apple’s best defense against this sort of commodification is its hard-won status as a luxury brand. (Scott Galloway nicely describes this in his recent book, The Four.)

The two-strategy strategy

Part of the challenge in figuring out Apple’s goals with original entertainment is that it’s hard to figure out the right benchmark, which is probably why the Times article mentions six different companies. Unlike Google and Yahoo, Apple isn’t an ad-supported internet company. Unlike Microsoft, it isn’t a software company that has a sideline in game systems and tablets. Unlike Netflix and Hulu, Apple isn’t a pure-play entertainment company.

That leaves Amazon, which is a kinda-sorta analog to Apple in how entertainment supports its other strategic goals.

Like Apple, Amazon sells physical objects, some of which it manufactures itself. Like Apple, Amazon is dominant in its industry (ecommerce), but it also has hungry challengers eager to take its business. As Samsung is to Apple, so is Walmart to Amazon.

Amazon’s response to the competition has been to create Prime, a service that gives its members unlimited two-day delivery as well as streaming music, free books and (most crucially for this column) an immense streaming library of movies and TV in Amazon Prime Video on Demand, which includes award-winning and exclusive original content.

Prime Video exists solely to make starting or renewing a $99 annual Prime subscription a no-brainer. Giving somebody two reasons to do something — what I call the “two-strategy strategy” (and what Freud called “overdetermination”) — makes it hard not to do it. “I don’t really use Amazon enough to pay a hundred bucks for two-day delivery, but I don’t want to lose access to Bosch and Transparent, not to mention all those movies!”

Prime Video is important to Amazon because on average Prime members spend nearly twice what non-members spend each year.

In Amazon’s two-strategy strategy we start to see Apple’s real motivation for diving into original TV, and where it has a strategic advantage over Amazon.

A virtuous cycle

What talent like Aniston, Spielberg and Witherspoon bring to the table is obvious: shows. What Apple brings to the table is less obvious but more important: attention.

Apple’s strategic advantage over Amazon Prime Video is a cluster of attention reservoirs: the app stores for both iOS and Mac OS, the desktop and notifications for Mac OS, and — most importantly — the notifications functionality built into every iOS device.

When Apple is ready to launch a new TV series, it can let hundreds of millions of people know simply by triggering an iPhone notification that — as a benefit of being an Apple customer — you have free access to a new show.

That’s an audience that advertisers would love to get in front of, but I don’t think that Apple has advertising revenue in mind as its primary reason for creating original content.

Instead, in a variation on the two-strategy strategy, Apple is creating original content to give its users another reason to stick around in the Apple ecosystem. It’s a virtuous cycle: the notifications drive audience for the entertainment properties, and the entertainment properties drive retention for Apple customers.

The best way for Apple to benefit from this virtuous cycle would be to have sell-by dates for free access to every episode of every show: “Tune in tonight for free, or subscribe tomorrow.” A short free window would drive urgency, and in Hollywood the size of an initial audience often determines how long enthusiasm for a show will last. Plus, since we humans are more interested in avoiding loss than pursuing gain, having always-about-to-expire access to original shows would raise the value of those shows for viewers.

Rather than a hedge against declining hardware revenue, Apple’s original TV strategy creates stability and increases loyalty for its hardware.

Coda: Instead of creating its own content, Apple has another option– buy a controlling stake in Disney. As The New York Times article observes, Apple has $258 billion in its cash reserves. The market capitalization of the Walt Disney Company is $148 billion. Since Laurene Powell Jobs (Apple co-founder Steve Jobs’ widow) already owns four percent of Disney (and is presumably still friendly with Apple), Apple could acquire an additional 47 percent of Disney for $70 billion– a bargain!

Disney is already creating its own Netflix-like streaming services (as well as a sports-focused one with ESPN). For Apple, bundling free or subsidized access to Disney characters, Marvel characters, Star Wars characters, ABC television shows and more with its hardware would be history’s best fringe benefit.

It would also be a really good reason to make your next smartphone an iPhone.

[Originally posted on the Center site.]

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Futurist, strategist, researcher, startup advisor, writer, speaker, events veteran & family man.

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bradberens

Futurist, strategist, researcher, startup advisor, writer, speaker, events veteran & family man.

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