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Apple (NASDAQ: AAPL) has been developing its own original since the beginning of last year. It has some 24 original series in the works and two films, according to reports. That could be the start of a subscription, or SVOD, service.
But Apple might be planning to sell subscriptions for its own SVOD service. It may not even be possible to buy a product, but the growing popularity of ad-supported video on demand. Instead, it could simply give to its originals to anyone with an iPhone or iPad, according to a report from CNBC.
Source image: Apple.
A $ 1 billion loss leader
Apple is not just giving Apple fans two dozen original shows and a couple of movies out of the kindness of its heart. While Apple appreciates all the people using the 1.3 billion active devices around the world, it appreciates their potential to buy new services even more.
Services is an increasingly important part of Apple's business, accounting for 18% of revenue in the company's most recent fiscal third quarter. And considering the higher-margin profile of its services, it accounts for a larger share of profits.
CNBC's report suggests Hulu, HBO Now, Showtime, and lesser-known premium services like Boomerang Gold Shudder.
Apple will use the originals to attract its users to the TV app on iOS, and to download. In that sense, Apple wants to be more like Amazon (NASDAQ: AMZN) Prime Video Channels instead of Amazon Prime Instant Video.
Amazon has had a lot of success with Channels, driving over 1 million subscribers to each of HBO, Showtime, and Starz. It is one of the largest sources for SVOD subscriptions in the world. One estimate even says Prime Video Channels accounts for 55% of all direct-to-consumer video subscriptions.
It's easy to see why Apple would want in that action. Driving tens of millions of monthly subscriptions would be a very high-margin revenue source. If the cost of entry is just $ 1 trillion of PG-rated content, Apple will gladly pony up that cash for a crack at the massive and growing market. And like Amazon, it has a built-in customer base in the form of iOS users. Only the iOS user base may be around 10 times the size of Amazon's Prime members.
Making it even easier to sign up
Apple's TV app is asking customers for each individual SVOD service on their phone and sign up for a subscription. But Apple could remove a lot from the TV app, no additional apps necessary. Bloomberg reported Apple was working on such a mechanism earlier this year.
Some SVOD services would likely welcome any opportunity to increase their subscriber numbers. But larger services would be recommended to Apple's customers. Apple has already seen significant pushback from Netflix with their TV app and its revenue share of subscriptions.
So, Apple needs to make the TV app so popular that SVOD services are able to maximize their revenue. That will not be easy, but the idea of keeping the TV app is smart. It's worked for Amazon to attract millions of customers SVOD services, and it could work for Apple, too. If not, the $ 1 trillion will sting a bit, but rest assured Apple will not have much trouble making that back.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool 's Board of Directors. Adam Levy owns shares of Amazon and Apple. The Motley Fool own shares of Amazon, Apple, and NFLX. The Motley Fool has the following options: long January 2020 $ 150 calls on Apple and short January 2020 $ 155 calls on Apple. The Motley Fool has a disclosure policy.
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