The Problem With Apple's TV Ambitions

By Jeremy Bowman Markets Fool.com

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Apple(NASDAQ: AAPL) has toyed with the idea of entering the television industry for what seems like ages now. Since it unveiled the original Apple TV in 2007, the company has considered manufacturing its own television set, putting together a "skinny bundle," and even, according to pundits, making an offer for a company likeNetflix(NASDAQ: NFLX).

Apple has long had a foothold in music ever since it launched iTunes, and television could bring the same complementary benefits to its ecosystem. Apple already sells many of the devices used to consume streaming video, and technology has tipped the entertainment scales toward tech companies rather than traditional media players. After Netflix, e-commerce giantAmazon.com(NASDAQ: AMZN) has made the biggest splash in streaming.

Now Apple wants to join the herd, producing its own original shows. According to TheWall Street Journal, the company has been in talks with producers to make its own programming, which would be available to subscribers of its $10/month music-streaming service. The company hopes to launch such programming by the end of 2017.

However, while it seems natural for Apple to have ambitions in TV, diving straight into original programming could present a number of challenges for the company.

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1. Profits are thin

After years of breakneck international expansion, Netflix is finally set to deliver its first year of "material profits" since 2011, when it split its streaming service from its DVD-by-mail business after years of operating at breakeven. Amazon, meanwhile, doesn't break out figures for its streaming service, and essentially gives it away to its Prime members, using its content as a carrot to entice more people to shop on its website.

The point is that video streaming is no one's idea of a cash cow at this point. The services are so cheap, at about $10/month, that a company needs to generate a substantial base before hoping to make a profit. Netflix, for example, is set to top 100 million subscribers this year, but it took the company years to get to that point. Apple could operate the service at a loss, but that seems contrary to the company's high-margin business model. With more than $45 billion in net income in its last fiscal year, it's going to take more than a small video streaming service to move the needle.

2. Where's the expertise?

Apple is a device-maker. Its brand and its profits come from making hardware like the iPhone, iPad, and the Mac. Developing and shopping for TV shows is outside of its core competencies, and because iTunes has languished over the years, it lacks the detailed data that competitors like Netflix have on customer preferences.

Analysts dismissed Netflix's initial ambitions in original programming, but the company's vast database guided it when it chose to remake the British seriesHouse of Cards, as it recognized that its subscribers had a penchant for political dramas and actor Kevin Spacey. That show would be the first of several hit series for Netflix.

Amazon may have had to start more from scratch, though it had its own a la carte streaming service before getting into originals. That company's culture also prizes innovation, risk-taking, and failure, and it launched its original programming in 2013, giving it a significant head start over Apple. Thanks to its Prime subscriber base, the company quickly found an audience for its shows. In comparison, Apple under Tim Cook seems more content to leverage its current assets and products into new revenue streams rather than build fresh ones.

If Apple wishes to give away original programming to its Apple Music subscribers, it may be able to build viewership like Amazon did. But Apple doesn't have the same interest in adding perks to Apple Music the way Amazon does with Prime. Ultimately, the company needs to find a way to grow profits, and original TV seems unlikely to do that either directly or indirectly as its impact on hardware sales would probably be limited.

Apple's track record in television so far also bodes poorly for its ambitions, as the company seems unclear of its ultimate goal and is unable to successfully negotiate with media partners. With its hardware sales stalling, Apple has increasingly turned to services like Apple Music or Apple Pay, but the relationship between its devices and TV seems tenuous at best. Rather than entering the increasingly competitive media environment, the company would be better off leading with its strength, directly investing in research and development that would advance hardware sales or develop its next blockbuster product..

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Jeremy Bowman owns shares of Apple and Netflix. The Motley Fool owns shares of and recommends Amazon.com, Apple, and Netflix. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.