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Why the $4.99 Price Tag for Apple TV+ is a Stroke of Genius

By Mike Strain – Sep 20, 2019 at 12:17PM

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The company's new service needs to attract customers, and starting with a low price and free subscriptions will help do that.

Apple (AAPL -1.07%) needed to do something to make its new video streaming service stand out. It just did.

Apple TV+ will cost only $4.99 per month, and it's free for a year when someone buys an iPhone, iPad, Mac, or Apple TV. The company made the announcement Sept. 10 during its annual event that's often highlighted with new iPhone announcements. (There was that, too.)

Apple joins the streaming wars Nov. 1, and the monthly price is lower than its fellow ad-free competition, which includes blue chip companies like Netflix (NFLX -0.69%), Disney+ (DIS -0.98%), Amazon Prime Video (AMZN 0.59%) and Hulu (also Disney).

Tim Cook stands on a dark stage with a large image of actor Jason Momoa and the word See on a screen behind Cook.

Apple CEO Tim Cook prepares to show the trailer for the Apple original See. IMAGE SOURCE: APPLE

Apple's decision was a good one for a few key reasons: The company doesn't have a content library that matches the competition; its low price and free subscription offer could help sell hardware; and the price is low enough that Apple may not have to beat the competition -- subscribers may simply see it as an inexpensive add-on to their video streaming services.

Big names but a small content library

Apple is banking on name recognition to attract customers.

Steve Carell, Jennifer Aniston, and Reese Witherspoon will all be on Apple TV+ -- and that's just one program, The Morning Show. Oprah Winfrey will have a show, and Steven Spielberg brings his anthology Amazing Stories. Jason Momoa, of Aquaman and Game of Thrones fame, stars in See.

The starting lineup looks strong, but Apple has no content bench, which helps explain the low price. Apple is expected to launch with just nine shows, which doesn't compare to the massive content libraries from its top rivals.

Apple will be rolling out new shows in the ensuing months, but to charge a monthly price similar to Netflix ($12.99 standard plan), Disney+ (launching Nov. 12 at $6.99), Amazon Prime ($12.99, with the dual value of free delivery), or Hulu ($11.99) wouldn't have made sense -- especially considering more content-rich competition is on the way. Comcast's (CMCSA -1.15%) NBCUniversal is launching Peacock in April and AT&T's (T -0.46%) WarnerMedia is expected to launch HBO Max in the spring. 

TV shows could help sell hardware

Apple CEO Tim Cook emphasized the price of the company's new streaming service. "This is crazy," he said, as the audience in the Steve Jobs Theater cheered.

It's not crazy. While Apple TV+ falls in line with the company's long-term strategy of increasing services revenue, it also could spur additional iPhone sales. As the holiday season approaches, a free year of Apple TV+ may be the little incentive that convinces some customers to upgrade their iPhone, or buy one for the first time. That's important, because iPhone sales, Apple's biggest source of revenue, have continued to decline -- down 12% year over year in the most recent quarter.

Even if the streaming service doesn't boost iPhone sales, Apple still will sell tens of millions of devices in the holiday season, and those customers will get a free year of Apple TV+. That could help quickly build a customer base that will be up for automatic subscription renewals in 12 months. The subscriptions could become a source of recurring revenue. If Apple's content proves popular, the company eventually could raise prices.

Giving away subscriptions wasn't met favorably by everyone on Wall Street. A Goldman Sachs analyst believes they will negatively affect earnings, and lowered his price target for the stock as a result. Apple disputed the assessment, issuing a statement saying that the service wouldn't materially impact earnings.

In either case, it's a short-term issue with little bearing on Apple's long-term strategy. The company wants to attract customers to its services ecosystem, where they could find Apple Arcade ($4.99 per month) or Apple Music ($9.99 per month for an individual plan) as appealing options, too.

It's cheap

With so many streaming options and not enough time to watch them all, how will someone choose? Apple made its service so cheap that customers may not face an either-or decision when it comes to Apple or a competitor. It's possible they will choose both -- and probably a third one, according to the 13th edition of Deloitte's digital media trends survey.

The survey found that consumers subscribe to an average of three paid video streaming services, and 57% of respondents said they subscribed for content they couldn't get anywhere else. That number grew to 71% among millennials. That's one reason why Apple reportedly committed $6 billion for original content, still only half of what Netflix spent ($12.04 billion) in 2018 alone.

Apple can afford the investment. It had nearly $211 billion in cash and marketable securities on its balance sheet in the most recent quarter. That cash gives the company flexibility to spend, and to absorb short-term losses as it tries to build a subscriber base among its more than 1.4 billion active iOS devices to challenge Netflix's 151 million worldwide subscribers. 

Apple's cash hoard also could give it a long-term competitive advantage. Content prices already are rising among streaming companies; and who wants to get into a bidding war with a company that has $200 billion in cash? 

Looking ahead

Apple enters the streaming wars at a competitive disadvantage. It doesn't have Netflix's audience or the proven, valuable content that Disney has been producing for generations.

To attract viewers, Apple had to do something. Charging $5 a month and giving away year-long subscriptions was a smart strategy that seems almost certain to give Apple TV+ viewers. Then, it will be up to the content to keep them.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Mike Strain owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

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