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Is Apple TV+ a Failure?

By Adam Levy - Jan 28, 2021 at 7:20AM

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Nobody really wants to pay for a subscription.

Quibi might not be the only streaming service out of the recent batch of launches to fall flat with consumers. Apple's (AAPL 4.01%) Apple TV+, which was introduced in November 2019, hasn't managed to win over a whole lot of folks.

Sixty-two percent of its subscribers are still on a free trial, according to a survey from analysts at MoffettNathanson. What's more, 29% of those on a trial have no intention of paying when their trial ends. But Apple doesn't want to lose them. It extended the free trial for all existing members to July 2021 earlier this year.

With considerably less traction than other recently launched streaming services like Disney's (DIS 3.33%) Disney+ and AT&T's HBO Max, investors may be wondering if Apple just wasted billions on content for the service.

The Apple TV+ home screen displayed on a television set.

Image source: Apple.

How Apple TV+ stacks up

Apple launched Apple TV+ with a generous yearlong free trial for anyone buying a new Apple device. Disney+ debuted around the same time with a similar yearlong trial for Verizon customers.

But Disney+ has proven much more appealing, reaching well beyond the Verizon customers that received a free year of service. Just 16% of subscribers said they were on the free trial through the wireless carrier. 

Not only are fewer Disney+ subscribers on a trial membership, but a lot more people plan to pay for the service once their trial ends. MoffettNathanson's survey found 19% of trial viewers have no intention of paying for a subscription. During Verizon's fourth-quarter earnings call, management said more than two-thirds have kept their subscription after the yearlong trial expired.

The big challenge for Apple is its limited content library. While it's had a few breakout hits with its original series and films, it doesn't have the deep library and consistent release schedule of Disney+ and HBO Max that could convince subscribers to pay month after month. Apple may be hoping another six months, and some second seasons of its originals, will convince existing trial members to stay put and start paying $5 per month.

MoffettNathanson's survey data and Apple's continued extension of the free trial suggests Apple TV+'s paid membership is insignificant at this point. And if the free trial offer were to end, it could result in a massive net subscriber loss.

Did Apple make another Quibi?

Quibi was forced to close up shop and sell off assets after it failed to garner a consistent audience for its mobile-first streaming video service. But Apple has the benefit of a $274 billion business outside of its video service, so it can keep investing in content and marketing and continue absorbing losses. That said, management would've cut off the service a long time ago if it didn't believe Apple TV+ was benefiting the company long-term.

Throwing in Apple TV+ as a freebie for new device purchasers may encourage more hardware sales. It could get existing Apple device owners to upgrade their phones and tablets sooner, or it could be the deciding factor for someone choosing between an iPhone and another device. Apple's hardware business still accounts for two-thirds of its gross profit, so juicing its sales can have a big impact on its bottom line.

Meanwhile, Apple's services business is one of its biggest growth drivers. While Apple TV+ may not be contributing to that segment's revenue directly, it fits nicely into the company's Apple One services bundle. Getting users to bundle their subscriptions makes them more likely to stay subscribed and continue using Apple hardware as well. By making it part of the bundle, Apple TV+ can support Apple's services business and its overall strategy even without direct subscribers.

While investors may be disappointed in the direct sign-ups for Apple TV+, especially compared to Disney+, it's important to remember Apple isn't a media company. It doesn't make most of its profits from distributing TV and films like Disney does. It makes its profits from device sales and the associated services it can sell for those device owners. If Apple TV+ benefits those businesses, it's not a failure.

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