Apple: Strategy vs. Original programming

Dr. Dre hasn’t released an album in 15 years, and Apple knows it. Coinciding with the launch of Apple Music last month, the hip hop veteran (whose ‘Beats’ electronics and music service were bought by Apple last year for $3Bn) released his new album ‘Compton’ exclusively on the new music service. Add this to the ‘Beats 1’ radio channel and ‘curated’ playlists (which are actually very good, if you are a music buff) and you have the start of something that looks like original or exclusive programming. This week in Variety there were reports of a larger foray into content. Apple has been rumoured to be doing the rounds of Hollywood studios and even put a bid in for the Top Gear team who eventually went to Amazon for $250M (could have been a nice content synergy for the Apple car release?…).

Although these may just be rumours,  they represent more substantial content ventures for Apple. This begs an interesting question – how does Apple producing original content work with Apple’s strategy of designing and selling hardware with integrated software?

In the aftermath of Apple’s developer conference (WWDC), where the Apple Music service was launched, I wrote a post describing the challenge of aligning a music streaming service (largely undifferentiated) with Apple’s strategy. Apple’s strategy and business model is designing and selling ‘ever more personal’ devices with integrated software. In that post I explored the idea that Apple’s problem space is shrinking (i.e. how many more devices can you make ever more personal?) so moving into platforms, cloud and possibly content are new ways for Apple to grow its bottom line. Like music streaming however, original content development has its own strategic challenges and here are 2 ways to view this:

1. Apple wants to create original content to increase Apple device sales

It is possible that Apple is exploring content creation in very much the same way companies like Amazon or Facebook have been exploring ‘proprietary’ hardware sales (e.g. Amazon Fire and Facebook Phone) to support their underlying business model. Original content could be a way to drive their underlying business model of selling devices at a high premium. Apple’s products already command a significant mark up through integrated software, customer/user experience and hardware design but content would add another element of differentiation – high quality video. If the Top Gear rumour is true, it fits well within this context. A show with the popularity of Top Gear in a very defined demographic (Male: 18-50) could contribute significant sales to IDevices and AppleTV.

This is an optimistic view. If the Amazon and Facebook analogies are anything to go by, then there is a bad precedent. That said, if anyone can give it a shot (Apple has the funds to do so) Apple probably can.

2. Apple wants to take on Netflix et al in their own patch

This scenario looks very similar to Apple Music. In a scenario where Apple creates their own content (Movies, TV) and serves it up through an Apple Music (type) platform they are getting into the realm of taking on Netflix on their own turf.  Apple Music walked right into a crowded and established music streaming market (e.g. Spotify, Rdio, Pandora, Soundcloud, Tidal etc.) with a relatively undifferentiated service (bar Radio 1 and curated playlists).  This strategy would do little to further Apples business model and may leave them with a low margin undifferentiated SVOD platform.

Looking at these views side-by-side, 1. Apple creating original content to sell devices or 2. Apple creating content to take on the Netflix platform, it is hard to like either option strategically. The first may help to differentiate devices but content will be subsidized by the hardware it is differentiating. For this to work Apple will need to beat HBO and Netflix etc. in attracting the best talent to create their original programming which is likely to be difficult for a device and software maker (Amazon has the same problem with Hardware Engineers).  The second just feels like Apple would be doing it because they can. This unfortunately may mean they won’t be magically better than their competitors in an already crowded (and sticky) market for SVOD.

An original programming strategy is interesting for Apple but it is challenging when compared to its current strategy and business model. In many ways this is the strategic challenge for all Technology, Media and Telecommunications incumbents as convergence continues to push the boundaries of their traditional core competencies and competitive advantage. Apple may be better placed to capitalise on the fact that they are already a platform of sorts (a device and software one not a Netflix/Spotify one). By taking an approach that allows HBO, Netflix, Spotify, Rdio and other players in the streaming services market to offer the best service they can on Apple devices creates differentiation and utilises Apples core competencies.

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