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John Kinsellagh
John Kinsellagh
Articles (135) 

Apple Cautiously Enters the Original Content Market

Entry into digital streaming services is key for the company’s future growth, but its current posture is inexplicably guarded

November 19, 2018 | About:

In order to implement its plans to diversify into the original content media market, Apple (NASDAQ:AAPL) Inc. has entered into a multiyear partnership with the award-winning, New York-based studio A24. The studio will produce several films for Apple, as it follows the lead of digital streaming giant Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) in producing original full-length motion pictures, which will compete with traditional Hollywood media companies such as Disney (NYSE:DIS).

Apple’s foray into the online media content business is part of its strategic plan to expand its existing subscription service channels that it hopes will replace some of the lost revenue from declining iPhone sales. For many years, the iPhone has been Apple’s golden cash cow, accounting for two-thirds of the company’s total revenue.

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While shareholders should applaud Apple’s attempt to diversify and strengthen its service and subscription offerings, there are several aspects concerning the company’s current plans to enter the streaming market that appear somewhat mystifying.

First, Apple’s choice of A24 as a bona fide studio partner seems somewhat odd. In 2017, A24’s production of “Moonlight” received the Oscar for best picture. Despite the honor, however, the movie was one of the lowest grossing films ever to win the award.

A24 has released several other movies recently, and its largest production to date, horror film "Hereditary,” grossed only $44 million in the U.S. and Canada.

How a partnership with a studio whose productions have generated exceptionally low grossing films will enhance Apple’s revenue from its planned media and streaming operations has not yet been explained. Additionally, Apple has earmarked only $1 billion for original content production; Netflix is spending over $8 billion this year alone.

Apple, like Amazon, has no experience whatsoever in the original content business. Even though it’s sourcing out its original content productions to established film companies, how the original content piece produced by these studios fits into Apple’s overall digital streaming services plan is somewhat unclear. The difficulty for Apple is that if its iPhone sales decline at an accelerated clip, the company may not have the luxury of time in terms of finding its footing in a new line of business wholly unrelated to its traditional business operations.

For the past three years, Amazon has been making original movies and TV series offered through its Prime membership. Its efforts in producing movies has been criticized as erratic, poorly managed and the quality of its original offerings has been inconsistent. Given Amazon’s difficulties in adding media operations to its wholly unrelated primary business of online retail, there is no guarantee that Apple’s foray into the original content market will be smooth and problem-free.

Given the recent bad news from its iPhone suppliers and its own reduced revenue guidance related to declining iPhone sales, Apple’s posture toward entering the original content area seems inexplicably guarded. Apple CEO Tim Cook has adopted a conservative approach. Back in June, Cook indicated he didn’t want any movies that contained gratuitous violence, raw language politics or risqué story lines that might risk the company’s pristine brand image. The story lines Cook wants to avoid are precisely those that have been embraced by Apple’s eventual competitors — cable TV, Netflix and Amazon. The existing players in the direct-to-consumer streaming market don’t share Apple’s restrictive content compunctions.

Furthermore, this concern for producing only “wholesome” original movies is seemingly at odds with Apple’s hiring of two veteran Hollywood producers who have “Breaking Bad” as well as other titles under their belt. If Cook wants Apple’s original content to be free from violence, how will hiring the producer of “Breaking Bad” be an asset to the company or fit within Cook’s concern for impairing Apple’s brand?

Apple’s digital streaming strategy is to deliver its media offerings, including original content, through existing distribution channels, such as its icloud monthly service or through its Apple TV offerings.

Should iPhone and other hardware sales continue to slow, Apple may not have the luxury of entering the movie business by dipping its toe in the water. Netflix already has a commanding lead in the digital streaming media market, so if Apple wants a piece of the pie, it is going to need to broaden its horizon in terms of offerings and go beyond its odd idea of producing only original content offerings consistent with its “brand.”

Cook’s expectations or perceptions notwithstanding, Apple’s brand is not connected with the production of entertainment or movies; it is associated with manufacturing groundbreaking, innovative devices that have upended entire industries.

Disclosure: I have no position in any of the securities referenced in this article.

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About the author:

John Kinsellagh
John Kinsellagh is a freelance writer, former financial adviser and attorney specializing in civil litigation and securities law. He completed the Boston Security Analysts Society course on investment analysis and portfolio management.

He has served as an arbitrator for FINRA for over 25 years resolving disputes within the financial services industry. He writes primarily on financial markets, legal and regulatory issues that impact the investment community, and personal finance.

He is the author of "The Mainstream Media Democratic Party Complex" and "Election 2016," both available on Amazon. Follow him on Twitter @jkinsellagh.

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