When Apple (NASDAQ:AAPL) unveils the new updates to the iPhone on Sept. 9, it's widely expected to unveil a long-awaited update to the Apple TV as well. Among the rumors about the upcoming Apple TV device is that it will have an app store, a bluetooth gaming remote, Siri capabilities, and it will be priced higher at $149 or $199 (or both). What we probably won't see, however, is the anticipated video streaming service Apple is reportedly working on.
But Variety reported in late August that the tech giant is exploring opportunities with Hollywood execs to invest in original programming. The original content would presumably be part of Apple's rumored streaming service, which it's reportedly looking to sell for $40 per month. That's a premium price compared to Netflix's (NASDAQ:NFLX) $9 per month and HBO Now's $15 per month subscription price. Moreover, it's twice as expensive as Sling TV, which features about two dozen live television channels.
If Apple wants to sell a premium-priced streaming service, it needs premium content. Financing originals is one of the most efficient ways to secure that content.
Originals are cheap
Over the last three years, Netflix has decidedly shifted its focus from licensing everything available, to mostly licensing content it can acquire exclusive rights to, or otherwise has massive appeal. Most recently, that strategic shift was evident in the company's decision to let its contract with EPIX expire.
In Netflix's fourth quarter letter to shareholders, CEO Reed Hastings noted, "Original content overall was some of our most efficient content. Our originals cost us less money, relative to our viewing metrics, than most of our licensed content."
In other words, Netflix saw a higher return on investment, in terms of hours watched, on its original programming than licensed programming. And that makes sense. There's no other place to see its originals.
HBO certainly understands the power of originals. All of its television series are originals. As a result, its content budget is significantly lower than Netflix's. It spent approximately $1.6 billion on content in 2014 while retaining more robust rights for its shows than Netflix, which typically only retains the streaming rights. Netflix, comparatively, spent close to $3 billion on content, and that number is expected to rise to $5 billion next year.
Why it's worth the investment for Apple
If Apple wants to differentiate its streaming service from the growing number of SVOD competitors in the market, original content is its most efficient method. If it produced even half the amount of original content as Netflix, that would be about three new hours of programming every week.
Netflix is expected to spend $450 million on its original programming this year, so Apple could likely produce similar content for around $200 million to $250 million. For a company with over $200 billion in the bank and a 12-month trailing free cash flow of $69 billion, that's a pretty small price to pay.
Consider also that a successful streaming service would also mean Apple would likely sell more hardware. With the new Apple TV expected to be priced around $199, Apple would only have to sell a couple million additional units for it to be worth the investment. Not to mention, Apple could also sell its original content to its 800 million iTunes users around the world, even if they don't (or more likely can't) subscribe to its streaming video service, which could help reduce the piracy problem that plagues Netflix and HBO.
A hybrid streaming service
When Apple released Apple Music, it showed off its ability to offer a hybrid service, where users can listen to tracks on demand or passively listen to a live radio station. In fact, the most highly praised part of Apple Music is the Beats 1 radio station, which is something none of the other mainstream streaming services offer.
With its video streaming service, Apple may look to do something similar. It's reportedly already in negotiations with networks to stream their broadcasts live. And if it produces its own content, it could stream a live broadcast, or offer it on demand. Apple may be using its ability to finance originals as leverage to get the networks to agree to more robust rights, including time-shifting or on-demand features. This could allow Apple to produce a service that will "finally crack" the television user interface problem.
Adam Levy owns shares of Apple. 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.