Apple Is Willing to Sacrifice Apple TV for Apple TV+

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Apple (NASDAQ: AAPL) is really taking this services thing to heart. When the company took the wraps off its paid subscription Apple TV+ service, it also unveiled a host of platforms customers will be able to stream the service from. Most notably, TV+ will be available on Roku (NASDAQ: ROKU) and Amazon (NASDAQ: AMZN) Fire TV devices.

That's not really a big surprise after Apple said at CES earlier this year that it would make iTunes available on Samsung smart TVs. After that announcement, I wrote, "Apple will charge customers for access to its content and work to make it available on as many popular platforms as possible. That could mean a partnership with Roku and Amazon as well."

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While Apple has 1.4 billion active devices in use, only a small handful of those are Apple TVs. Roku and Fire TV are, by far, the most popular way to watch streaming video on TV screens, and their lead is growing.

People stream television on their televisions

Apple controls a significant market share of smartphones and an even bigger share of tablets. It also has a sizable installed base of Mac computers.

But Apple's share of TV-connected streaming devices is relatively small. Just 15% of streamers used an Apple TV device, according to a Parks Associates survey from last year. By comparison, Roku and Amazon held 37% and 28% shares, respectively.

A similar survey from William Blair analysts last summer found 27% and 29% of consumers stream video on a Roku or Fire TV, respectively, compared to just 16% that use Apple TV. It also found 30% of consumers stream video via the built-in operating system on their smart TV.

By partnering with Roku and Amazon, as well as a handful of smart TV manufacturers, Apple will more than quintuple its reach on televisions.

That's important because the television is still where most people watch television. Netflix says 70% of its subscribers' viewing hours are on connected televisions. If Apple couldn't reach its potential audience where they want to stream video, Apple TV+ would be DOA.

Is it worth it?

Apple is spending hundreds of millions of dollars on content for TV+. While its content budget isn't nearly the size of Netflix's $12 billion cash outlay on content in 2018, it still requires a level of scale for the investment to pay off. It might not need Netflix-like scale, but it needs more scale than the built-in Apple TV user base could offer.

Ultimately, however, Apple is sacrificing the opportunity to use TV+ as a selling tool for its hardware -- a strategy that was practically presumed until the recent announcement.

But the sacrifice might not be that big. Apple didn't mention any support for Android devices, so if users want to stream on mobile they might need to buy into the iOS ecosystem. And Apple generates much more revenue from iPhone and iPad sales than it does Apple TV. That revenue is very likely more profitable as well.

It's impossible to tell whether this strategy will result in a more profitable company. But considering the massive television audience outside of Apple's hardware reach and the relatively small size of Apple TV in the company's business, the risk is certainly worth it.

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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 Apple and Amazon. The Motley Fool owns shares of and recommends Amazon, Apple, and Netflix. The Motley Fool has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple. The Motley Fool recommends Roku. The Motley Fool has a disclosure policy.