Why Apple Is Getting Into Original Content

In what has become something of a trend, Apple uses an opening film to kick off its product unveilings. The video shown at the start of Apple’s Services event two weeks ago at Steve Jobs Theater stood out to me.

Apple relied on a retro opening credits film theme to give a pretty clear hint of what was to come: a Hollywood-heavy event with nearly a third of the stage time given to celebrities talking about Apple’s upcoming video streaming service, Apple TV+.

The video served a few other functions as well. The “A Think Different Production” was telling the world that Apple was about to enter original video content in a very big way. The video was also meant to show how Apple now has a growing number of cast members (hardware, software, and services) that come together to create the film (user experience).

Event Surprises

Apple’s Services event contained a number of surprises when it came to its revamped content distribution arm:

  1. Apple is directly funding iOS game development for Apple Arcade. While third-party game developers will retain ownership of the games that will begin as Apple Arcade exclusives, Apple isn’t too far from playing in the realm of producing its own iOS gaming content.

  2. With Apple News and News+, Apple may be as close as it gets to doing original written content. Apple continues to move down the path of having its team of editors curate news and investigate reporting. The only way for Apple to move further into original written content would be to hire a team of reporters and journalists for actually reporting and breaking news. This isn’t likely to occur for a number of reasons.

  3. Apple TV+ represents Apple’s first comprehensive move into original video content. There were plenty of questions as to how Apple would position its original video content within its broader TV strategy. We know Apple TV+ will be an ad-free subscription service, the implication being that it will be some kind of paid service that lives within the Apple TV app. This app will then be available in more than 100 countries via iPhones, iPads, Macs, Apple TVs, most of the leading smart television set platforms, and Roku and Amazon Fire TV.

My full Apple Services event review is available for Above Avalon members here (major themes) and here (full notes). 

History

One of the more crucial questions found with Apple’s event involves why the company is moving into original content in the first place. The answer speaks volumes as to how the content consumption landscape has changed in just a few short years.

In order to answer the “why” behind an initiative like Apple TV+ and Apple’s move into original video content, one has to go back to the late 1990s. Apple has long held a desire to distribute content through its devices. Part of this desire is rooted in Apple’s content creation ambitions via Mac software such as iMovie. Apple introduced iMovie in 1999. As told in ‘Becoming Steve Jobs’ by Brent Schlender and Rick Tetzeli, Steve Jobs handed out Sony digital camcorders to six Apple executives for shooting and editing four-minute home movies. The clips were then shown at Macworld 2000.

Jump ahead a few years, and Apple’s iTunes empire played a major role in expanding the Apple user base and eventually setting the stage for iOS and the App Store. In 2018, Apple earned an estimated $20B of revenue from selling digital goods.

As Apple grew its content distribution arm, the thought of Apple producing its own content remained a pipe dream. While there has been a continuous stream of suggestions from analysts and pundits that Apple buy video content companies such as Disney or Time Warner (HBO), the rationale behind such acquisitions never made much sense from Apple’s perspective. The content libraries that would be purchased in a deal were already available to Apple users (and likely weren’t going away), each target company contained too much corporate baggage regarding other business segments, and there would surely be significant culture clashes.

The first signs of Apple genuinely starting to open up to the idea of original content appeared after the Beats acquisition in 2014 and Apple’s subsequent entry into music streaming with Apple Music in 2015. Jimmy Iovine looked at original video as a way to have an Apple music streaming service stand out from Spotify. In addition to various music-related video projects, including documentaries, Apple’s Beats 1 put the company firmly into original audio content territory.

Shows like ‘Carpool Karaoke’ and ‘Planet of the Apps’ served as an original video test run for Apple. The biggest takeaway was that management needed to hire outside talent and place a much larger bet on original content if it wanted to develop a coherent video strategy and stand out from the competition.

In terms of the broader video landscape, Apple’s video distribution strategy is entering a third phase:

  1. Offer video creation tools to users

  2. Offer video creation tools to users + distribute paid third-party content

  3. Offer video creation tools to users + distribute paid third-party content + distribute original video content

Too Much Content

Many people correctly predicted the slow death, or unbundling, of the large cable bundle. However, very few people projected the flood of new content from entirely new players including Netflix and Amazon. These new players are now forcing the old guard to double down on even more original content. Both Disney and WarnerMedia (formerly Time Warner) are placing big bets on ramping up original content budgets to support their respective new direct-to-consumer streaming services. Add YouTube into the mix, and it’s easy to see why Netflix says sleep is its biggest competitor. There has never been as much video content to consume than there is today. With a finite amount of time each day, there is only so much content that we can consume.

This dynamic drove recent comments from Warren Buffett, one of Apple’s largest shareholders, about how the digital entertainment space isn’t something he would be interested in competing in, although he is indirectly doing so with his $50 billion Apple stake. Here’s Buffett:

“You’ve got some very very very big players that are going to fight over those eyeballs…You have very smart people with lots of resources trying to figure out how to grab another half hour of your time. I would not want to play in that game myself.”

Buffett wasn’t alone in his stance. Many analysts and pundits looked at Apple’s event two weeks ago with bewilderment. On the surface, it seemed like Apple had simply announced new revenue-generating services to deliver even more content to its user base.

  • Not reading enough magazines or news? Subscribe to Apple News+ and get $650 worth of magazines per month for just $10 per month.

  • Not playing enough iOS games? Pay for Apple Arcade and play 100 games with no content stuck behind in-app purchases.

  • Not watching enough video content? Use the Apple TV app and watch video from your favorite sources as well as an entirely new slate of video content with Apple TV+.

Some were stumped as to how Apple could possibly compete with Netflix by just announcing a handful of original shows. Such a question demonstrated a complete misread of what Apple had actually announced on stage.

Curation for Casual

Instead of just announcing services for consuming more content, Apple unveiled a strategy for curating content for its user base of a billion people. This curation involves everything from picking out which news stories and iOS games Apple users may enjoy to taking an active role in protecting users’ content consumption habits in terms of privacy and security.

One way of describing this revised strategy is curation for the casual.

  • Apple Arcade appeals to the casual gamer who may be interested in playing a few minutes of an iOS game here or there. Such a user values Apple’s curation in terms of selecting what will be an always fresh lineup of approximately 100 titles.

  • Apple News+ is for the casual magazine reader who may not be interested in subscribing to any one particular magazine but enjoys reading an article here or there. Such a user values Apples’ curation in terms of picking out stories from hundreds of magazines.

This leaves the question: Why is Apple getting into original video content? Apple could have curated video content from third parties to those looking for a handful of interesting shows and movies.

TV+ Strategy

Heading into Apple’s event last week, my thinking was that Apple would position original video content as a way of getting people to spend time within the Apple TV app. More time spent in the Apple TV app would also likely mean more third-party video bundles being subscribed to from directly within the app. However, Apple’s very deliberate original content lineup, including the partnerships with Steven Spielberg and Oprah, told me that Apple’s original content video strategy boils down to something more.

 

Tim Cook, Oprah Winfrey, and Steven Spielberg at Apple Park.

 

Apple is using its own slate of original video content to develop a differentiated curation experience that won’t be found anywhere other than in the Apple TV app. Apple isn’t just developing shows and movies that will then be curated to its viewers. Instead, the shows themselves have already been curated. This explains Apple’s decision to bet on brands (Oprah, Spielberg, Sesame Workshop, J.J. Abrams, etc.) and star power.

Apple’s original video strategy is nothing like that held by Netflix or Hulu (quantity over quality). The strategy also ends up being quite different from Amazon’s play for third-party bundles and some original content (which has been quite bumpy). Apple appears to be taking a different path from HBO too (quality over quantity).

The Apple TV+ equation doesn’t boil down to Apple betting on either video quality or quantity. Instead, the TV+ equation is about selling video curation on a global scale. Apple’s form of curation extends to ensuring privacy and security when it comes to content consumption behavior, something that has received little to no attention up to now in the world of direct-to-consumer paid video streaming.

Turning back to the idea of users having a finite amount of time to consume video content, why is something like TV+ needed in the marketplace? The bet Apple is placing is that curation will gain value as the amount of video content available across various bundles and streaming services continues to increase. Apple’s video strategy isn’t based on grabbing as much time as possible from users. Such a battle will be a brutal one to fight. Instead, Apple is interested in offering its users a truly curated (and private) viewing experience on all their devices. No other company offers such a service.

A Core Technology

Content distribution has become commoditized. Most companies are merely interested in checking off the video streaming box on the list of platform requisites. The same can be said for music streaming, gaming, etc. Apple thinks the resulting flood of content is now opening the door for content distribution to once again turn into a competitive advantage.

It's possible that Apple’s content distribution arm, and the company’s underlying curation for casual strategy, will eventually be considered a core technology powering Apple devices. Notice how Apple News+, Apple Arcade, and Apple TV+ are not going to be available on Android smartphones.

As Apple has been working to control other core technologies powering its devices, all signs point to Apple slowly wanting to reduce its dependency on others when it comes to its content distribution arm. Apple’s move into original video content lays the groundwork for Apple to eventually move into original content in other genres as well.

Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories per day, 10-12 stories per week). Available to Above Avalon members. To sign up and for more information on membership, visit the membership page.

Above Avalon Podcast Episode 144: Checking Up on iPad

In recent years, the iPad line has undergone transformational changes. In episode 144, we look at Apple’s broader iPad strategy to add context to the newest updates involving the iPad mini and iPad Air. The episode kicks off with my thoughts on the new devices. The discussion then turns to the three sales phases that have come to define the iPad business over the years. Additional topics include Peak iPad mini, how Apple is following an iPhone / Mac hybrid approach when it comes to iPad updates, whether the iPad line is too complex or complicated, and observations on the current iPad line.

To listen to episode 144, go here

The complete Above Avalon podcast episode archive is available here

Thoughts on Apple's Revised iPad Line

In what has become something of a trend, Apple once again unveiled a few iPad strategy adjustments in March. This year’s changes include an update to the 7.9-inch iPad mini and altering the 10.5-inch iPad Pro to arrive at a lower-priced and rebranded 10.5-inch iPad Air. The best way to analyze these updates is to look at Apple’s broader iPad strategy and the significant amount of change that the product category has undergone in just the past two years.

Changes

iPad mini. The most noteworthy change to the iPad mini was that it received an update in the first place. The last time the iPad mini received an update was in September 2015. Over the subsequent three years, iPad mini sales have steadily declined and now represent a small fraction of overall iPad sales. As smartphone screen sizes increased, the market for a tablet with a 7.9-inch screen shrunk. Sales for the iPad mini won’t surpass record level put in years ago, a claim referred to as Peak iPad mini. However, there was likely still enough demand for a 7.9-inch iPad to warrant an update.

The most noticeable update to the iPad mini will be found on the performance front related to the A12 Bionic chip. The iPad mini 4 had an A8 chip. The new iPad mini also has an improved display and Apple Pencil support (1st generation). Apple maintained the $399 price for iPad mini while cutting entry-level storage in half to 64GB. In addition, Apple removed the number nomenclature, instead opting for the much simpler and cleaner “iPad mini.”

iPad Air. Apple positioned the new 10.5-inch iPad Air as the successor to the 9.7-inch iPad Air 2 that was discontinued back in early 2017. In reality, the new iPad Air is more of a 10.5-inch iPad Pro successor that had components removed in order to have a lower price. The new iPad Air retails for $499 while the 10.5-inch iPad Pro went for $649.

  • Primary addition (from the 10.5-inch iPad Pro): A12 Bionic chip

  • Primary subtractions (from the 10.5-inch iPad Pro): 12MP camera, quad speakers, ProMotion, less RAM, 4K video recording.

Another minor change includes Apple removing the 512GB capacity option.

Three Sales Phases

When looking at the broader iPad category, there have been three distinct sales phases over the years:

  1. Rocket launch

  2. Implosion

  3. Stabilization

Exhibit 1: iPad’s Three Sales Phases

Rocket launch. The iPad was Apple’s best-selling product out of the gate with 22M units sold in the first twelve months. It is going to be difficult for another Apple product to come close to achieving iPad’s early sales success. While there were likely a number of factors that came together to produce a perfect storm for iPad’s record launch, fascination with iOS on a large screen (the iPhone had a 3.5-inch screen when the iPad launched) and a thriving iOS app ecosystem provided plenty of fuel for the iPad rocket.

Implosion. iPad sales peaked at the end of 2013 at 74M unit sales on a trailing twelve months (TTM) basis. Three years later, the iPad sales runrate stood at 41M units. Three factors are behind the dramatic decline in sales: less demand for iPad mini, a longer upgrade cycle, and the broader iPad category being cannibalized by more capable iPhones.

Stabilization. The iPad business has been trending at a 44M annual unit sales run rate for the past two years. The combination of sales to new users and sales to existing users is roughly flat year-over-year. Apple’s decision to bifurcate the iPad line with more capable and powerful models at the high end and increasingly lower-priced models at the low end has played a major role in stabilizing sales. It also hasn’t hurt that the sales headwind associated with declining iPad mini demand has ended.

Current Line

The iPad line currently consists of five models and a few dozen SKUs when considering storage options and case colors.

  • iPad Pro (11-inch and 12.9-inch)

  • iPad Air (10.5-inch)

  • iPad (9.7-inch)

  • iPad mini (7.9-inch)

It may be easy to look at the five preceding models and conclude that Apple is aiming to copy the Mac line with a few “Pro” models at the top end and lower-priced models branded as “Air” and “mini” at the other end. Some may even think Apple is trying to recreate the 2x2 matrix Mac quadrant from the late 1990s in which Apple sold four Macs, two portables, and two desktops, targeting the consumer and professional markets.

However, there is one critical error in the preceding assumption.

Touch-based computing has blurred the line between consumer and professional devices. Each iPad model is used by a wide range of users. In addition to being a content consumption device, the iPad mini is utilized in various enterprise settings. Meanwhile, the 12.9-inch iPad Pro, combined with the Apple Pencil, can be either used for a wide range of content creation tasks or simply web browsing and content consumption. There isn’t one device that ultimately targets just consumer segments or enterprise use cases.

Instead, Apple’s iPad strategy seems to be following more of a hybrid approach, taking elements of both the Mac and iPhone lines.

In terms of nomenclature, there is no question that Apple is borrowing from the Mac. The MacBook Air is the best-selling and most popular Mac. The popularity is one reason why Apple decided to stick with the Air branding following last year’s update. Similarly, Apple is likely positioning the iPad Air at $499 to be one of the better-selling iPad models. Similar to the Mac mini, the iPad mini will then likely represent a smaller percentage of overall sales while handling a variety of enterprise use cases.

The strategy found with taking the 10.5-inch iPad Pro form factor and removing components and technology to lower the price and arrive at the 10.5-inch iPad Air is reminiscent of the iPhone SE strategy. The move to unveil the latest industrial design with the Pro models at the top is also something seen with the iPhone.

Borrowing from both the Mac and iPhone playbooks make sense when considering the iPad has a user base that measures in between that of Mac and iPhone. At end of the 2018, the iPhone, iPad, and Mac user bases were as follows:

Consumer Choice

One of the largest complaints facing the iPad line over the years has been the complexity and confusion in terms of the number of models available for purchase. Apple has done a few things to add clarity. Instead of keeping older models in the lineup at lower prices, management has moved to having a few new iPad models at prices ranging from $329 to $999. In addition, Apple has worked on reducing price gaps between models. The $250 price gap that had existed between the 10.5-inch iPad Pro and iPad mini 4 has been reduced to $100 with the new iPad Air and iPad mini.

  • iPad Pro (12.9-inch): $999

  • iPad Pro (11-inch): $799

  • iPad Air (10.5-inch): $499

  • iPad mini (7.9-inch): $399

  • iPad (9.7-inch): $329

There is no question that some customers use price to select the best iPad. Accordingly, the $329 iPad and $499 iPad Air will likely be strong sellers. In order for Apple to reach these lower prices, the company had to make some difficult product marketing decisions in terms of components, industrial design, and subsequently, Apple Pencil support. The non-Pro models work with Apple Pencil V1 while the Pro models are designed to work with Apple Pencil V2.

Another variable that may guide a customer’s buying decision is screen size. As with price, Apple has done a good job of covering the screen range from 7.9 inches to 12.9 inches.

  • iPad Pro 12.9-inch

  • iPad Pro 11-inch

  • iPad Air 10.5-inch

  • iPad 9.7-inch

  • iPad mini 7.9-inch

Apple continues to position the larger 9.7-inch iPad, instead of the new, smaller iPad mini, as the entry-level option. This is done because larger iPads have become vastly more popular than the iPad mini. Apple did not want to sacrifice that popularity just to have screen size correlate directly to price. In addition, the larger 9.7-inch iPad is marketed to educational institutions (special pricing brings the 9.7-inch iPad to $299).

Ready for WWDC

In recent years, the iPad line has undergone transformational changes. Apple management has not only bet on higher-priced, larger iPads with the Pro segment, but also doubled down on lower-priced iPads in an attempt to compete against Chromebooks and even hand-me-down iPhones.

From a unit sales perspective, the iPad mini’s best days are clearly behind it, and a $999 iPad Pro will likely end up representing a small fraction of overall iPad sales. However, from a hardware perspective, it’s hard to argue we aren’t looking at the strongest iPad line to date. Apple has spent the past three years expanding the iPad line in order to appeal to hundreds of millions of people.

This takes us to software - the missing link. All of the signs point to Apple getting the iPad line ready for new software features unveiled at this year’s WWDC. This week’s hardware updates cap off the first half of Apple’s two-part iPad show.

Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories per day, 10-12 stories per week). Available to Above Avalon members. To sign up and for more information on membership, visit the membership page.

Above Avalon Podcast Episode 143: Look at the Capex

For the first time in 16 years, Apple expects its capital expenditures (capex) to decline during the current fiscal year. Episode 143 is dedicated to discussing capex and how the financial metric provides a different look at how Apple is unique in comparison to its largest peers. Additional topics include defining capex, the theories behind Apple’s declining capex, the dramatic capex shift occurring among the Wall Street giants, and how capex shines light on a company’s cash-generating machine.

To listen to episode 143, go here

The complete Above Avalon podcast episode archive is available here