Most Important Story of the Week – 13 September 2019: Debunking Some Apple Myths

This is my third try writing this week’s column. Apple TV+ is clearly the “most important story” this week since it’s Apple’s entry into the streaming wars. That’s like the United States entering World War II. What did my first two takes look like?

Attempt 1: An article about “ecosystems”, since that was the explanation du jour of the week. I wrote too much for this column.

Attempt 2: Really calling folks out for not digging into Apple’s financials. But that required me to do them too, which took too long for this week’s column. That’s an analysis article.

Still, I had so many thoughts on Apple that we’ll have enough for thoughts on Apple TV+/Channels today and in the future. Don’t worry.

(Programming note: I’m traveling for a music festival—Kaaboo 2019, the film festival for the middle-aged. Seriously, that’s how the bill it—so if I make any mistakes, I was rushed. And I’ll have my newsletter next week! Sign up now!)

Most Important Story of the Week – Debunking Some Apple TV+ Myths

Reading the coverage of Apple TV+’s pricing announcement, the media ecosystem swung from “$10 is way too expensive” to “$5 wins the content wars” immediately. That sort of surprised me. Bit of an overreaction, wouldn’t you say? Along the way, too, I noticed a lot of observers leveraging a lot of the same explanations and even numbers to explain the news. 

Let’s debunk a couple of those. Plus, I’ll add in the strategic risks for Apple implied by these mistakes. First, though, a new product that actually does make sense.

Apple Arcade Solves a Customer Problem: No in-app purchases

I play a few more iPad games then I probably want to admit. I loath pay-to-play, though. Just not how I was brought up to play games and the best games don’t feature this mechanic, in my opinion. Apple Arcade, their subscription video game service, solves this problem. Potentially. Right now, they probably don’t have enough games to warrant a subscription, but like all new businesses it will grow. And I hate subscription biz models anyways (for customers). So we’ll see. 

However, compared to Apple TV+, at least Arcade solves a customer need. Now how many customers are like me–which is market sizing–is a future question. But at least it solves a problem; it isn’t clear that folks were clamoring for more TV to subscribe to.

Debunking One: Apple TV+ is free. 

This is kind of true, in that yes, if you buy an Apple device, the service is free. But I saw tons of folks saying this free first year meant that Apple made it essentially free. That’s too far.

After a year, customers will need to start paying. I assume some others assumed that if customers buy multiple devices, they can keep stacking on year long free trials, but that doesn’t sound like any free trial I’ve ever seen. Most likely, after a year, the device that logged the free 12 months will have to start paying. And that, my friends, is where the true test of a business starts.

Strategic Risk for Apple: The Promotional Carousel Is Hard to Get Off.

Ask DirecTV or Hulu how offering ridiculously low prices worked for customer churn. Even if Apple doesn’t report subscriber numbers—they probably won’t—we’ll be able to tell by the discounts Apple does or doesn’t offer whether or not churn is happening.

Debunking Two: Apple will have 250 million potential customers.

This number is in fact true. It’s roughly how many iOS devices Apple sells per year. Roughly. The implications are not.

But is number of devices really the potential market? Consider two things. First, many families are on Apple’ plans. Which means even if the family owns four devices, or bought four, they’re still only subscribing once. More critically, look at this chart from Business Insider on iPhone sales.

58d04a02112f701f008b57db-750-563

Huh. So the US portion is really 70 million phones per year, with another chunk of iPad and laptops, which I didn’t see reported anywhere. Everyone breathlessly went with the 250 million. Sure, Apple TV+ is launching in 100 countries, does that include China? It’s notoriously hard to launch content in China, and Netflix and Amazon aren’t there. So I’m skeptical. Overall, if you’re discussing Apple’s plans, be very careful about mixing up US-focused strategies and global numbers.

(Bonus chart. During research, I found this amazing chart at Asymco. It should look familiar.)

Screen Shot 2019-09-12 at 10.36.10 AM

Source: Asymco.

Strategic Risk for Apple: Clarifying the United States vs China vs the Rest of the World.

Will any of Apple TV+’s first three shows play well in China? Or Japan, which is another big chunk of sales? It doesn’t seem like it, does it? They are pretty American-focused TV series. When you’re doing your analysis of Apple, if you’re making “American-centric” observations, don’t subtly slip in global numbers. Same for discussing the demand in Europe or Latin America. Some content will play globally; some may not.

Debunking Three: Apple has hundreds of millions of subscribers already.

This is true, but sort of mixing up different content buckets. Right now, Apple includes AppleCare–insurance–and cloud storage in their subscription business. Which is fine from an accounting perspective, -but not what people mean when they think subscriptions. They’re thinking of music and video. Which will be what Apple wants, especially if AppleCare is really the revenue driver. (In fairness, Apple Music has a bunch of subscribers too. Supposedly 60 million.)

Strategic Risk for Apple: Becoming an insurance company.

For the most part, customers don’t love insurance companies. They’re fine, until you need them, and then they can be a real pain. Or in medical insurance, just always be a pain. (For European readers, you folks won’t understand this analogy, but trust me.) The worry is that Apple is going to hear the siren song of subscriptions, when it turns out customers really hate subscriptions. At least the type that actually make money.

Conclusion: Even at $5, Apple TV+ price doesn’t make sense.

Not just because of the price, but because of the limited content load. And really, you can’t separate the two. When you discuss marketing, you need to talk product, price, promotion and placement together.

Listen, the best explanation is that Apple TV+ is a money loser so that Apple Channels can make money long term. But if that’s the case, given that you don’t have any library content AND don’t have to have Apple TV+ in the first place, why not make Apple TV+ free? Not just to people who buy a device, but to everyone? I like the channels business in general–it makes sense since they’re a device company–but then is TV+ really going to help if you only have seven shows?

The counter is that customers value a discount, so a stated price gives it a stated value. Maybe. But the content offering is so sparse—and could be such a dud at launch—that a discount of nothing is still nothing. If you really have no plans to add a library to make this a business that can stand on its own, and it truly is a loss-leading business, just make all the losses explicit and don’t charge for it.

Other Contenders for Most Important Story

Amazon Leaving Theaters?

The big news is that Amazon is relooking at its theatrical distribution plan after a string of “sub-optimal” launches. The best line is that Prime Video has “different metrics” of success than box office gross. How can we tell if this is true–they have different metrics–or if this is spin? Wait until next January. If Amazon spends the same amount at independent film festivals, then they told the truth. (They spent $59 million this year.) If say their spending drops to $10 million, well those different metrics are just worth a lot less.

Miramax Eyed By Viacom

Miramax has a fairly prestigious library, so why isn’t Apple buying it? Let’s wait to see what happens, but adding a bucket of movies like this makes sense for several of SuperCBS’s potential strategies.

Data of the Week – Netflix Slips in Bandwidth Rankings

What I love about this data point is that unlike surveys about customer opinion, this is customer behavior. It isn’t perfect, though. As a follower pointed out on Twitter, Netflix has improved their compression over the years (though I couldn’t find a link) which could explain the drop. I’d add other streamers are joining the fray and adding new users, so even as Netflix’ share drops, they could be as popular as they were, just declining relatively.

However, I really like looking at usage metrics in the absence of Netflix just reporting them. (I’d prefer MAU data.) Andrew Freedman at Hedgeye has done brilliant work on this looking at metrics like app installs as proxy for subscriber counts to predict Netflix subscribers. So again, in the absence of a lot of good data from Netflix, pay attention to actual quantitative performance data when we can find it..

M&A Update – Disney is Selling Fox Video Game Unit

Long term, this isn’t the biggest sale in the history of M&A. But every time a new business unit is spun off by Disney or AT&T after their huge acquisitions, it’s another red flag for those deal’s top line prices. Not deal breakers, but if you have too many–and we had that kerfuffle with Disney and Fox films already–it brings you one step closer to calling the deals overpays. Speaking of, AT&T was in the news, but I had to cut them for space. (I hope to talk about that activist investor next week.)

Context Update – Unicorn Watch

WeWork may cancel their IPO because it is over subscribed. Pay attention to that story for potential reverberations in the land of tech, like say Netflix. I’m worried that if one unicorn dies off, it may become a contagion that spreads to the herd.

Entertainment Strategy Guy Updates

Disney+ Anecdota Continue to Grow

After D23, I made the point that we’re pretty prone to taking individual data points and drawing narratives from them. No duh, right?

The last couple of weeks has seen a few more datecdotes on Disney+ and it’s potential. Take this CNET piece about how Disney+ saw it’s website crash during its discount. Which is a really funny story, because the bigger culprit, in my opinion, is poor website demand and load management, as opposed to an actual indicator of demand. (If they had a properly resourced website, does that make us bearish? No.) Also, UBS has a report out based on one survey saying Disney+ will be oversubscribed. Digital TV Research says Disney+ may reach 82 million subscribers. Take them with huge grains of salt since it is survey data.

Meanwhile, be cautious for overreactions to the results of Netherlands being the first test market for Disney+. I could see news reports going either way. (As for reading tea leaves for the content library, here’s a video walkthrough of Disney+ from D23, hat tip to Kirby Grines. Also, I was wondering if Disney+ would have all the afternoon shows of my childhood, and they will. Via Tweet.)

Binge-Ing!

In the middle of last week, the story became “binge-ing” or whether Netflix was going to change its all-at-once release strategy. They weren’t/aren’t, but that didn’t stop one article from setting off a cascade. The upside was that because of the brouhaha, via Kirby Grines of The Streaming Wars newsletter, I was pointed to another long read on “binge vs weekly”. Then I found two more. Here they are. Also, if you ever write on Twitter, “this isn’t a debate”, that usually means it is definitely a debate!

– Sarah Witten at CNBC “Netflix should take a cue from ‘Game of Thrones’ and ditch binge-watching for new shows” 

– Mike Raab at OneZero “Tech vs. Media: Which TV Streaming Strategy Is Better?”

– MidiaResearch “Netflix’s Binge-Watching Problem”

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