Rumors barreled through the streaming video-on-demand industry over the past week that Apple Inc. (NASDAQ:AAPL) was getting ready to plant its flag in the fast-growing market.
According to Variety, the King of Cupertino has been in preliminary talks with Hollywood execs on creating original content for the iPhone maker. It's unclear exactly how much content Apple might be looking to produce, but sources indicate the company is seeking to put out long-form content that would compete with the likes of Netflix (NASDAQ:NFLX). Unsurprisingly, the news shook up shares of the leading streamer, which fell 8% the day it broke.
Hollywood has long suspected Apple would make such a move as it has offered video content on iTunes for years, making a tangential competitor in TV, and it had already announced plans for a subscription TV service next year. While its strength in devices gives it an asset in delivering TV content, there are a number of drawbacks to Apple's aspirations in original TV.
Room for one more?
Despite its youth, the streaming field is already becoming a crowded and fragmented one. Netflix still dominates with more than 40 million domestic households paying $8 or more per month for its content, but others like Hulu and Amazon.com are quickly making strides to catch up, improving their content arsenal and making their service more appealing in other ways. Just last week, Amazon announced that it would enable its content to be downloaded on iOS or Android devices and Hulu said it would launch an ad-free platform for $12 per month. Meanwhile, HBO and Showtime have both unveiled their own streaming-only services, and cable and satellite providers have been working to offer their own "skinny bundles," such as DISH's Sling.
Play to your strengths, not your weaknesses
Apple is the most valuable company in the world and one of the most powerful brands because of the popularity of its devices. From the Apple I to the Apple Watch, the company's strength has been in technological products, and that brand carries huge benefits when applied to other such gadgets, but not much outside of that wheelhouse. If the company were to launch, say, a soft drink, slapping the name Apple on it would do nothing to drive sales. Similarly, original programming is not going to be any more appealing because it carries the Apple logo.
iTunes has been the one exception to its product ecosystem, but the former had to be created in order to sell the iPod. With Apple's purported original programming, there is no new product it is intending to sell.
Original programming isn't actually such a great business
Apple's profit margins above 20% are tremendous evidence of its brand strength and demand for its products. Studio and TV production, on the other hand, are among the riskier businesses out there. Studios can spend hundred of millions of dollars without any assurance that the movie or show will be hit.
For all the hubbub about Netflix's slate of original shows, only two are widely regarded as hits -- House of Cards and Orange is the New Black. The company is still without a significant profit as it sees itself making investments for the future. Amazon, which is pouring money into originals, is well-known for playing the long game as well. In other words, if Apple wants to jump into this field, it's likely to be just an average player rather than the star it's accustomed to being.
What is all that cash for?
Apple has over $200 billion in cash and marketable securities on its balance sheet. If it wants to make a splash in TV, the best and easiest way to do so would be a big acquisition like it did in music when it bought Beats Electronics to facilitate Apple Music.
Rumors once swirled that Netflix would be a worthy target of Apple, especially when it was worth less than $5 billion in 2012. HBO, the most successful and profitable subscription service, pulls in close to $2 billion in profits a year. Apple could reasonably make a bid for HBO at $40 billion or $50 billion. That's a lot of money to spend, but acquiring a company like HBO or another major studio would make Apple a huge force in TV overnight.
While a subscription TV service may make sense for Apple, I'd prefer to see the tech giant put its effort into developing breakthrough devices rather than ancillary products like Apple Music, Apple Pay, and the forthcoming TV service. These may seem like smart ways to make money, but Apple's success relies most on the appeal of devices, not tangential services. A TV service could complement Apple TV and enhance the ecosystem of its products, but diving into original programming seems too risky and unnecessary and fraught with potentially damaging consequences for the brand.
Jeremy Bowman owns shares of Apple and Netflix. The Motley Fool owns and recommends Amazon.com, 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.