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Apple Is Making a Multibillion-Dollar Mistake

By Daniel B. Kline - Updated Dec 11, 2018 at 2:13PM

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The company is entering a crowded space where it has limited chances for success.

The world has become clogged with quality content. Netflix (NFLX -6.24%) makes so much of it that it's hard to keep up, and Amazon (AMZN -6.10%) throws in a bunch of highly regarded shows as a perk for people who pay for free two-day shipping. Add in HBO, the slew of top-tier programs offered on basic cable, and even the occasional quality program offered by the broadcast networks, and there's simply too much for most people to watch. And that's before a new streaming service from Walt Disney launches, which will have shows from the Marvel and Star Wars universes, as well as other big-budget efforts based on the company's intellectual property

That makes it very hard for any new show to garner much traction. It also makes the difference between a hit and a failure awfully hard to tell. Basically, creating top-tier TV has become a bit like bringing pie to an all-you-can-eat buffet. Sure, a few people may want a slice -- but many won't, and most won't even notice that you're there.

Apple (AAPL -4.53%), however, has chosen to ignore the crowded marketplace. It wants to plunge into the original video market, with plans to spend $4.2 billion by 2022 according to Variety.

People watch TV on a tablet.

Apple is making a mistake in creating original content. Image source: Getty Images.

What is Apple doing?

The company has not made it entirely clear what it's going to do with billions of dollars worth of original content. There are rumors that the company will start a streaming service to take on Netflix, Amazon, Disney+, HBO, and the rest, but that actually seems not all that likely.

Instead, it's much more plausible that Apple intends to make video part of its streaming music service. The shows would be a sort of bonus for members, and a way to differentiate Apple Music from its near-identical rivals.

Both ideas are sort of terrible. Apple -- even with its huge customer base -- lacks the intellectual property to build its own streaming service. It could certainly create a few good shows, but that would not be enough to get customers to sign up when so many rivals offer so much more.

Video as a bonus for Apple Music subscribers also seems like a waste. It's very hard to get attention for a new show on a fledgling platform. Amazon has proven that: It gives its service away as a throw-in for its free shipping deal, and even so its award-winning prestigious shows barely have any audience.

Transparent, an Emmy winner, was watched by 1.49 million people between Sept 21. and May 2 according to data cited by Variety. Even Man in the High Castle -- Amazon Prime Video's highest-rated show at the time (the 2016 TV season) -- only lured in 3.44 million viewers during the entire TV season.

Those numbers would make High Castle a hit by cable standards, and canceled if it aired on a network. Transparent wouldn't have made a second week on a network, and it would be an iffy proposition on any major channel.

It's about more than ratings

Apple is spending billions to reach a few million people, if it can even reach that many -- its paying audience for its music service sat at around 36 million subscribers over the summer. Amazon, meanwhile, is estimated to have had over 95 million Prime members as of June in the U.S. alone.

It's easy to see why Apple wants this: Hit shows bring a level of prestige that's hard to attain otherwise. The gap between that prestige and any business metrics, however, is too big a gulf to bridge. Premium content is expensive, and most of it will get a niche audience at best.

Consumers aren't going to broadly add or keep a service because it has a couple of hit shows. And while about $1 billion a year is a relatively minor amount of money for a company that forecasts between $89 and $93 billion in first-quarter revenue, wasting money is still wasting money.

The potential rewards make creating premium video a bad bet for Apple. This is a vanity project that will deliver negligible benefits at best and pour money into an expensive drain at worst. Apple would be better off creating unique music experiences -- maybe more exclusive concerts for Apple Music subscribers, or early windows on hot new releases -- and that certainly could be done for less than $1 billion a year.

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