he logo for Netflix Inc. sits on an Apple Inc. iPhone smartphone in this arranged photograph in London, U.K. (Photographer: Jason Alden/Bloomberg)

Apple Doesn’t Need to Be Netflix to Succeed at Video

(Bloomberg Opinion) -- In Apple Inc.’s effort to become more than the iPhone company, it has become savvier about pitching people apps, started a digital music subscription, and created an app for reading news

Apple is still the iPhone company despite those tactics. But consumers don’t have to wait long to see the next steps in Apple’s attempted transformation. 

Among the company’s coming internet add-ons is an online video service, with entertainment programs that Apple has been funding, and movies and TV series from other companies as well. Unusually for the secretive Apple, it has all but acknowledged its video service is coming. (Bloomberg News reported on Wednesday that Apple plans to announce its video offering next month.) Apple has also discussed a single fee for a combination of its internet-related offerings such as news, video and the iCloud digital storage service. 

I’ve been skeptical about Apple’s apparent strategy for its coming video service. It wants family-friendly programs that can be televised on a conventional television network, but an Apple entertainment app isn’t likely to have the same big and broad audience as the Super Bowl. Apple also will be fighting for consumers’ wallets with what seems like a billion other online video options

And Apple’s track record in this category is far from stellar. The company has tried repeatedly to reinvent home entertainment but has been mostly on the sidelines during the radical reshaping of the last decade. 

I’ve had a change of heart. Apple may not need a coherent strategy, a wow product or Netflix-like subscriber numbers to declare victory — albeit a minor one — for its video service. What if the bar for Apple’s video service isn’t an entertainment-changing juggernaut like Netflix Inc., but something else? What if it’s HBO, and Apple is effectively its own cable television company selling it? 

Apple Doesn’t Need to Be Netflix to Succeed at Video

HBO is a good business. In 2018, the operation now owned by AT&T Inc. had about $6.5 billion in revenue, more than 140 million subscribers and ended the year with operating profit margins of 37 percent, according to AT&T disclosures. Nice, right? For comparison, Apple’s operating margin is 26 percent and Netflix’s is 10 percent. From what is known about Apple’s video service, it sounds more like HBO than Netflix. People will get access to some buzz-worthy TV series and films, which is one of the big draws of HBO.

If Apple’s video service is essentially HBO, then Apple itself will play the role of the cable television companies that often sell HBO as an add-on to TV service. Like those cable TV companies, Apple has a large built-in audience — 900 million iPhones are in use around the world — to push people to buy more entertainment options.

We’ve seen that distribution power in Apple News, the app that is built into iPhones, iPads and Mac computers, which some news publications say attracts a large volume of readers. Apple also says it has more than 50 million paying customers for Apple Music, and it helps that Apple can make its own music service front-and-center and offer free subscription trials to iPhone owners. The power of distribution is strong.  

The difficulty I have with an Apple video service in the mold of HBO is that it seems safe, which is an odd thing to write about Apple.

An Apple HBO is not a Steve Jobs-like vision of reinventing an entire industry. It’s far less ambitious than several of Apple’s failed attempts in television. To be fair, we haven’t seen what Apple is cooking up, and it may have genuinely clever ideas in store. But in principle, charging a monthly fee for access to movies and TV series in an Apple-like design does not seem like a big idea.

Apple Doesn’t Need to Be Netflix to Succeed at Video

Underwhelming might be fine. Apple Music was relatively safe, and it did help get more people comfortable with streaming music for a fee. Apple is often not the first company to come up with an idea, but it has made some technologies easy to use, cool and ubiquitous. This power is not absolute, however, and Apple shouldn’t get overly confident in its ability to change people’s behavior in video.

One problem with safe is that it doesn’t change the financial path of a company the size of Apple. Let’s say it signs up as many subscribers as Apple Music has now, at $10 a month and with HBO’s profit margins. That’s a business of $6 billion a year and $2 billion of operating profits, or about 2 to 3 percent of Apple’s annual sales and operating income. That shows how no single internet service will on its own compensate for declining iPhone sales. 

Where Apple might be innovative is in the packaging and combination of various internet options such as news, photo storage, video and more with a single subscription price. This is not, however, the Apple of people’s imagination. If the conversation about Apple’s video service or news subscription product focuses on the inventiveness of how it’s packaged together, it will show how little imagination there is in Apple’s vision of video entertainment and the technology behind it. 

This is roughly the same number of subscribers as Netflix. HBO has been around a lot longer than Netflix, and many of its customers aren't paying for HBO directly but through whatever company sells them television service. With about the same number of subscribers, Netflix had two and a half times HBO's revenue in 2018.

Two important differences between music and video: Music is more tied to smartphones, where Apple has a powerful distribution platform, than streaming video, which is often watched on TVs. And unlike subscription music services at the time Apple Music was released in 2015, subscription video is mainstream already in many countries.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

©2019 Bloomberg L.P.