With its $800 iPhones and $1,400 Hermès smart watches, Apple’s not exactly in the business of bargain-bin pricing. But the surprisingly low-priced debut of Apple TV Plus, at $4.99 per month for a family subscription, is a signal that the streaming video market of tomorrow — soon to be awash with services from Disney, WarnerMedia and others — will be one with pressured margins and claws-out competition for viewers’ wallets.
“We seem to be marching toward a very low-margin-structure business in general for content aggregation, and there may not be a great way out of that, considering some of the players don’t really have a mandate to make money,” says Wall Street analyst Doug Creutz, who covers the traditional media sector for Cowen. “Some of the players don’t seem to care about the possibility of what they’re doing, because they’re doing it to serve other things in their business that are more important to them.”
Disney Plus’ $6.99 monthly offering, unveiled in April, set the bar for the new wave of subscription video-on-demand services that are approaching the market. Despite being the first to announce its plans this year, it will not be the first to market, nor the cheapest. Apple, having already undercut Disney on price, will debut 11 days earlier, on Nov. 1, and is trumpeting a free year’s subscription to anyone who buys a new iPhone, iPad, Apple TV, Mac or iPod Touch device.
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“Apple’s not really charging people,” says Richard Greenfield, media analyst at research firm LightShed Partners. “You’re getting tens of millions of people buying Apple products who will have access to Apple TV Plus for free.”
Free makes customers happy but Wall Street suspicious. Goldman Sachs cast doubt on Apple’s streaming strategy, slashing its stock price target from $187 to $165 a share and projecting that the yearlong freebie would weigh on earnings, gross profits and average selling prices (but not cash flow). The note forced the Cupertino, Calif., tech darling to publicly defend its promotional offer just days after its unveiling.
There’s a school of thought, notably, that believes Apple isn’t serious about its entertainment efforts, and that Apple TV Plus is primarily a hardware play, a way to incentivize current customers to upgrade their gadgets and entice new consumers to join the Apple ecosystem.
Greenfield hesitates to call Apple’s original entertainment push a “loss leader,” though. “It’s more like ‘Membership has its privileges,’” he says. The strategy is similar to Amazon’s with Prime Video: an add-on perk designed to get customers to buy more products through the company’s free-shipping program.
Compared with Netflix or Disney, “the Apple bet is different,” adds Dave Shull, president and CEO of TiVo. “It’s ‘Can we spend a couple billion dollars to keep people in our hardware ecosystem?’”
TiVo, which sells set-top hardware and software to cable operators worldwide, sees the rise of internet-delivered video services as a boon to its business. That’s because the TiVo platform can add value by letting people find and watch content across multiple sources. Says Shull, former CEO of the Weather Channel who spent about a decade at Dish Network: “For the first time in my career, I’m happy about all this OTT chaos in the market.”
It’s undoubtedly a competitive field. There are only so many monthly subscriptions consumers’ budgets will bear. The U.S. market already has about 60 million Netflix customers and 151 million worldwide, while Amazon skipped past the 100 million mark in global Prime subscriptions last year. Hulu, now fully under Disney’s operational control, will be seeking to expand its 28 million-subscriber footprint as its new parent company bundles the service with Disney Plus and ESPN Plus for $12.99 a month.
Apple TV Plus’ small price tag notably comes with a small content offering: fewer than 10 new series. That’s far from the hefty package of shows, movies and library archives that Disney Plus will have at launch, and even further from the content juggernaut that Netflix , with its endless appetite, has become.
Likening the current streaming market to cable networks in the early 1980s, Barclays analyst Kannan Venkateshwar believes a great deal of experimentation is ahead, with distribution differences potentially impacting how each service scales up. But he doesn’t think that Apple’s limited content offering will be hugely prohibitive.
“We believe content, while important, doesn’t necessarily have a linear relationship with adoption,” wrote Venkateshwar in a Sept. 12 note to clients. “In fact, too much content can overwhelm and create a content discovery problem, which we believe is something Netflix may have to deal with more directly given the extent of its content base.”
AT&T-owned WarnerMedia, meanwhile, is in a unique situation. HBO has an estimated 38 million U.S. subscribers, per Greenfield. That’s different from starting an SVOD service from scratch, he says, predicting a significant number of current HBO subs will be willing to pay a few bucks more to get “a whole lot more content.”
Its forthcoming streamer, HBO Max — which will encompass the core HBO service as well as a vast catalog of content from other Warner properties — will likely have to price the super-premium streaming service at more than the $15 it charges for HBO alone, unless it wants to start undercutting itself.
“The legacy guys are trying to preserve the economics that they have, whereas the new guys are less concerned with that,” says Creutz, surmising that HBO Max, which launches in the spring of 2020, could be an attempt at reducing churn of stand-alone HBO subscriptions. But he believes the greater concern isn’t that traditional cable customers will cut off their add-on HBO subscriptions; it’s that they’ll scrap their linear cable bundle altogether.
HBO Max’s logistics will be fleshed out more fully on AT&T’s investor day on Oct. 29, where the service’s price point is an anticipated detail. A Wall Street Journal report from earlier in the year suggested it would be $16-$17 a month, and a source familiar with the matter indicates to Variety that that approximate price range still stands.
Creutz believes the more important question isn’t what prices look like now, but what prices will be in the future — that is, how much wiggle room each SVOD will have to increase rates without pushback. Netflix already raised its prices this year, bumping up its cheapest tier to $8.99 a month and its most expensive to $15.99 a month, and simultaneously experienced its first domestic subscriber loss in eight years. Amazon upped its price for an annual Prime membership just last year.
Wielding the ability to increase its prices over time without angering its subscriber base may be Apple’s greatest advantage, both because the company is not dependent on streaming-platform revenue for its survival and because some industry insiders have the sense that to the company, Apple TV Plus is just a line item that can be written off should the venture not meet expectations. Netflix, by contrast, is hugely dependent on subscription revenue.
Either way, the streaming wars promise to peel consumers away from traditional pay TV, Greenfield says. And it’s worth considering that while most viewers subscribe to only one cable bundle, at these prices they’ll have room for several streaming services, meaning that it isn’t a zero-sum game.
“If the content is really good,” he says, “it’s less about one versus the other.”
