People may still think of Apple (NASDAQ:AAPL) as a device company, but it's worth remembering that before it reinvented itself with the market-dominating phenomenon called the iPod, it had to build up its iTunes ecosystem. In other words, software and content lay underneath hardware successes. So as Apple gets ready to launch its new video streaming service this spring, it would be foolish to write this strategy off.
In this segment of the Market Foolery podcast, host Chris Hill and senior analyst Jim Mueller discuss the merits of the offering, how Apple will profit directly -- and how much -- whether it will move the needle on device sales, how its potential streaming partners are responding, and why the history of Apple may repeat itself.
A full transcript follows the video.
This video was recorded on Feb. 14, 2019.
Chris Hill: Let's move on to Apple, which is getting ready to launch a new video streaming service. This is expected in late April, early May. It's going to have free original content for people who own Apple devices. Apparently, they're going to have a subscription platform for existing digital services that are not named Netflix or HBO.
Jim Mueller: [laughs] Right. Hulu's still out of it, too. This is Apple's way of trying to become a bundled cable provider without being a cable provider. They want to be a one-stop app for subscribing to your news, to your entertainment --
Mueller: Music, whether they add that on or not. And they're sweetening the deal with some original content you get just for having an iOS device. The writing's on the wall, as far as cable bundles go. Those are slowly disappearing. So Apple and Amazon, too, through their Prime Video channels, are offering these different apps. The incentive for the over-the-top streamer like Hulu -- or Netflix or whoever, CBS, Viacom, and Lionsgate's Starz have reportedly signed on with Apple -- is that Apple gets a cut of the revenue. They seem to be holding out for 30%, which is pretty hefty.
Hill: That's what they have in the App Store, right?
Mueller: For the apps, I think that's right. But, for instance, I subscribe to HBO NOW through my Apple TV. HBO NOW only has to pay Apple 15%. Apple is trying to get even more out of this deal. Their news service that they're supposed to launch, the report is that they're having a 50/50 revenue share. Plus, they get the data of the viewing habits of these people. So, rather than having to exit your Netflix app to open up a Hulu app or a CBS News app or a CBS app or whatever it is, they just want to have you be able to click through channels like you did on your old cable box.
This is part of Apple's move toward getting more services revenue. It was about 13% services revenue in the first quarter, which was just reported recently. That's up from 10% the year before. Their product sales, the number of iPhones they're selling, is slowly going down. It's good enough, right? This is where they seem to be heading. We'll just have to see how it works out.
Hill: Part of me wants to just skip ahead to the fall. Because typically, Apple has an event in the fall where they unveil the latest version of their devices, that sort of thing. If this launch goes well, presumably at that point, that becomes part of the selling proposition, doesn't it? They're looking to get more people in the devices, they're looking to get people to upgrade more. They've done an admirable job of getting people into Apple Music, there's somewhere between 55 million and 60 million subscribers. So, if they can pull this off, then presumably, it moves the needle to some degree on the devices.
Hill: But, boy, I think if they could go back in time, they would rethink the battery replacement program. I continue to wait for -- maybe this will never come, but I really want to know the behind-the-scenes story of how that all played out. The estimates that "we'll only need to replace 1 million batteries," and it ends up being 11 million batteries, and the massive ripple effect in sales.
Mueller: Yeah. That had a big issue. It certainly affected sales of the iPhone X. But if you go back in history, Apple's modern growth started off with the iPod, the little thing, the music player. They'd launched their Music Store to get people to buy the iPod. You could very well be right, this could be another way to get people to buy the devices.
Hill: If you're Netflix, you're not worried about this right now, are you? You're keeping an eye on it, but you're not worried about this.
Mueller: Apple has some original content. Keep an eye on that. Reports say they spent about a billion dollars last year on that, and they've signed up Oprah Winfrey, among others, to help produce that content. It might be interesting to watch and just add it as another subscription. But if I'm Netflix, yeah, I'm probably not too worried about it.
Hill: I mentioned at the top that HBO is not involved in this. I should have added the word "yet." It will be interesting to see, come late April, early May, when they announce this, if, in fact, they have struck a deal with HBO.
Mueller: HBO has the deal already through the ITV of 15%. They might be dragging their feet about doubling that and losing another 15% of the revenue.
Hill: If you're HBO, you're like, "No. We'll stick with the deal we have. We'll go with 15%."
Mueller: Showtime is supposed to be on this new thing, too. That might push them forward.