Did Netflix, Inc. Score a Discounted Deal With Apple, Inc.?

Netflix now offers subscriptions directly in its iPhone app. Image source: iOS App Store.

At long last, Netflix is finally offering users the ability to sign up for its popular service directly within its iOS app in the form of an in-app purchase. This comes five years after Netflix first launched its mobile app for Apple's platform. Historically, new users would have to sign up via Netflix's regular desktop site, and then they could use the streaming app to access the service.

The reason for this long-standing aversion if obvious: Apple's typical 30% cut of in-app purchases (including subscriptions) is a lot to ask, and adds up very quickly over the long run. Netflix's most popular plan is its $9-per-month standard tier, and considering how heavily Netflix is investing in original content, $2.70 per month per subscriber acquired through iOS is probably too much to ask.

Why now? There are two possible explanations that could explain Netflix's recent change of heart. In all likelihood, the real reason could be a combination of both.

Mobile is necessary for international growthThe first is that Netflix is very likely approaching a point of subscriber saturation in the U.S. To be clear, the company is still adding domestic subscribers, but at a slower pace. Netflix had just over 41 million paid memberships in the U.S. at the end of June. There are still opportunities stateside, but Netflix has already picked most of the low-hanging fruit, and now it needs to be more aggressive with courting new users via different channels.

On the international front, Netflix is quite aware that in many emerging markets, mobile is the primary way that users access the Internet. That means that in order to win over those users, it needs to allow them to subscribe directly within a mobile app.

In other words, paying a fee to the platform operator is critical to expand into international markets, while the incremental cost in the mature domestic market should be modest.

Maybe it got cheaper tooThe second reason that I'm suggesting is a little bit more speculative, but hear me out.

Remember when Netflix archrival HBO launched its new over-the-top HBO Now streaming service on Apple TV earlier this year with a three-month exclusivity window? At the time, Re/code reported that Apple was reducing its cut to 15% of subscriptions that were sold directly through Apple TV. That lower rater was reportedly available to many of the most popular video services, including both Time Warner's HBO Now and Netflix. Intuitively, it does seem silly to double the rate based entirely on which platform a subscriber signs up on for the same underlying service.

Then over the summer, a couple other interesting reports surfaced. The Financial Times reported in June that Apple was seriously thinking about restructuring the long-standing 30/70 split, particularly in the context of media subscriptions. The difference would be negligible for Apple, but huge for the content partners that keep Apple's platforms vibrant. A month later, Reuters said that antitrust regulators were unofficially scrutinizing the 30% cut as it relates to rival music streaming services.

Perhaps we haven't heard any widespread changes because Apple is negotiating deals on a case-by-case basis with the bigger players. While the FT report suggested that any changes would not apply to the App Store, the Reuters report said that regulators were very specifically looking at the App Store. It's not a stretch to think that the prominent companies potentially have more leverage to ink one-off deals.

All of this suggests that Apple has very compelling reasons to make deals with content services. It makes iOS that much more attractive as a platform partner while potentially relieving pressure on the regulatory front. The timing is just too perfect also. After years of abstaining, Netflix suddenly introduces in-app subscriptions just a couple of months after all of these reports of Apple reducing its fee? Come on.

The article Did Netflix, Inc. Score a Discounted Deal With Apple, Inc.? originally appeared on Fool.com.

Evan Niu, CFA owns shares of Apple and Netflix. The Motley Fool owns and recommends Apple and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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