AT&T (T)'s acquisition of Time Warner (TWX, Financial) set off a frenzy of corporate merger and acquisition activity, as many of the older, traditional Hollywood movie and TV studios are in danger of being left behind in a new Netflix (NFLX, Financial)-dominated on-demand video delivery service world.
Apple (AAPL, Financial), is looking to increase its footprint in this lucrative and rapidly growing digital streaming market. The company recently formed a partnership with Oprah Winfrey to create programs for its planned subscription video service.
In a statement, Apple said Ms. Winfrey would “create original programs that embrace her incomparable ability to connect with audiences around the world.”
Amazon (AMZN, Financial) had spoken with Winfrey last year about producing content for its Amazon Prime service.
Although Apple is a formidable rival by any standard, its commitment to spend $1 billion for content creation doesn’t come close to the $8 billion that Netflix is expected to spend this year.
Apple hasn’t disclosed how it plans to distribute this content; it is expected to offer its programs through a subscription offering that bundles access to the programs along with storage on its iCloud platform.
Apple’s foray into the video subscription business is part of its strategic plans to branch out into service areas that it hopes will replace some of the lost revenue, as sales of iPhones have slowed down. For many years, the iPhone has been Apple’s golden cow, accounting for two-thirds of the company’s total revenue.
That dependence reveals a dangerous lack of business unit diversification, as consumers have lately balked at the price of the new iPhones, leading the company to modify new iPhone production by replacing the phone screens with cheaper LCDs.
Diversifying into the content delivery business makes eminent sense due to the potential huge market for digital streaming that could help the company supplement its revenue to help offset the decline from iPhones sales.
In order to get its content delivery business up and running, Apple, like Netflix, has poached Hollywood talent recently, signing two producers from Sony Corp. to help launch the video effort. These producers have a number of TV productions to their credit, including the enormously successful “Breaking Bad” and “The Crown.” The arrival of these two veteran producers signals Apple is serious about delivering quality content to consumers.Amazon and Netflix have entered into agreements with content creators as well.
Although revenue from iPhone sales has declined, Apple clearly has the resources to enter the original content production competition. Apple like many other tech companies repatriated a staggering amount of cash from foreign operations when the tax law changes lowered the rate to 15% from 35%. The five largest tech companies by market value have a staggering amount of cash —more than half a trillion dollars — and they have no reticence in spending it.
Apple is following the lead of Netflix and eschewing the acquisition of Hollywood studios or other media companies. It is the build-over-buy approach. If it wanted to purchase a media company, Apple clearly has the cash to do so, but it is outsourcing the production to experienced Hollywood and TV producers and directors. AT&T adopted a different approach hoping to achieve synergy with its purchase of Time Warner.
Apple doesn’t have a specific launch date of this direct-to-consumer video service, but those familiar with the company’s business plans have said it is expected to roll it out next year.
Netflix has created a do or die reality for the older or traditional communication and media companies, setting off a frenzy of merger activity for fear of being left behind. Given the number and resources of the corporate heavyweights involved in what surely will be a fiercely competitive environment for viewers, the new digital content delivery market is going to resemble a Hobbesian state of nature: Each media conglomerate or tech company fighting for subscribers in a war of each against all.
Disclosure: I have no position in any of the securities referenced in this article.
