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Will Apple’s premium video play be boring or savvy?


By Brad Berens, Chief strategy officer

November 10, 2017 | 8 min read

This week we learned that Apple has outbid Netflix to secure the rights for a new video series set in the world of morning TV and starring Jennifer Aniston and Reese Witherspoon. It's Aniston's first series since Friends, and Witherspoon is an Oscar winner who is also coming off a prestigious season on HBO's Big Little Lies. This is Apple's second big video purchase after a reboot of the 1980s Steven Spielberg-produced anthology series Amazing Stories.

Will Apple’s premium video play be boring or savvy?

Will Apple’s premium video play be boring or savvy? / Apple

We know that Apple is moving into the premium content business, but we don't know why or what overall strategy this serves.

I see two different strategies — one boring and one savvy — each with different implications.

In the Boring Strategy, Apple follows the Netflix model, let's call it "Appflix," creating an all-you-can-eat streaming video service with a monthly fee that will live alongside its Spotify-like streaming music service. With Appflix, we can expect to see Apple license a ton of movies and television shows from other studios to add to its own, original programming. This is a chronologically-reversed version of the playbook that HBO wrote and Netflix plagiarized: a deep library of content from other studios plus original, exclusive content that is so good it makes subscribing a no-brainer.

Instead of forging a series of relationships with studios, Apple should simply buy Hulu, which just had a successful awards season (winning best series Emmy for The Handmaid's Tale), but which isn't as successful as Netflix by orders of magnitude. Acquiring Hulu, Apple would also acquire Hulu's two-tiered subscriptions, one ad-supported and one ad-free. Apple has never understood advertising (remember iAds?), but Hulu does. This acquisition would inject some much-needed advertising know-how into Apple.

The Appflix strategy is a scale play. Subscribers would be able to use any hardware platform to subscribe to Appflix, and if this sounds familiar it's because this is the same strategy that Apple successfully used when it brought an iTunes app to Windows machines. Moreover, subscribers will still be able to buy movies and individual episodes of other shows.

This strategy is boring because it's a "me too" play, reaching out for a piece of the original content pie when slices are getting thinner and thinner as Disney, Hulu, CBS, DC, Facebook, YouTube and more crowd their way into an ecosystem already stuffed with Netflix, HBO, Showtime, Starz and more. It may be the golden age of TV with incredibly high-quality programming bursting from every conceivable direction, but nobody is dying to add yet another content subscription to her monthly credit card bill.

Nor does the strategy fit the Apple brand, which is all about premium, elegant, integrated experiences.

The Savvy Strategy tweaks the Amazon Prime model, let's call it "Apple Prime," creating an on-demand streaming video service that is free for two years whenever you buy an Apple computer or iOS device.

As in the Appflix strategy, Apple should buy Hulu in order to avoid having to cut dozens of deals with other studios, and it should continue to offer two tiers of Hulu subscriptions to current and new subscribers.

But just like Amazon Prime Video on demand, Apple Prime's primary reason for existence would be to give customers an extra reason to keep buying Apple products.

Having two reasons for the same action makes it easier to perform that action without thinking about it.

Amazon loses money on its two-day delivery promise with Prime, but it makes up for those losses because Prime members spend nearly twice as much annually as non-Prime members. The Amazon Prime Video on Demand service, which is included with the $99 annual fee for Prime, gives subscribers a powerful secondary reason to keep paying up each year, counterbalancing "maybe I don't need that light bulb in two days" against "I don't want to lose Bosch and Transparent!"

Behavioral economists like Daniel Kahneman and Richard Thaler have shown that people are twice as loss averse as they are interested in gains — so losing $5 from your pocket feels twice as bad as stumbling across a $5 bill on the street feels good. Amazon Prime exists to make the loss of all those movies and TV shows, not to mention the "free" two-day delivery, feel a lot worse than the $99 annual membership fee.

Getting back to Apple, even with paying, legacy Hulu subscribers and the rare Apple customer whose two years have expired and who chooses to pay the monthly fee, Apple Prime probably wouldn't turn a direct profit.

But that doesn't matter.

Apple Prime would make it emotionally easier for customers to buy a new iPhone, iPad or Macbook Air every couple of years because they would not only be gaining a new piece of technology, they'd be avoiding a loss of seemingly free original programming. The profit margins on increased sales for hardware would more than pay for however many billions of dollars Apple spent on programming.

An Apple Prime service would also be brand because it's a premium play. While there are more Android-powered smartphones on the planet, Apple earns vastly more money selling a smaller number of phones because of its brand premium. Apple Prime would augment that brand premium.

The savvy strategy is also a hedge against the inevitable commodification of hardware.

As I've argued elsewhere, the smartphone is not a forever technology. The simultaneous rise of voice-activated digital assistants like Siri or Alexa and heads-up display (HUD) glasses like the unfairly-maligned Google Glass or Microsoft HoloLens will push the smartphone out of the center of our everyday computing experience.

In a computing environment powered by the cloud, AIs and HUD, the most important part of the environment will be software rather than hardware. That's bad news for Apple.

We can already see a version of this happening in China, where Apple struggles because the most important part of the Chinese mobile experience is the omnipresent WeChat app rather than hardware powered by iOS or Android.

As Ben Thompson has memorably argued in his blog Stratechery (paywall):

There is nothing in any other country that is comparable: not Line, not WhatsApp, not Facebook. All of those are about communication or wasting time: WeChat is that, but it is also for reading news, for hailing taxis, for paying for lunch (try and pay with cash for lunch, and you'll look like a luddite), for accessing government resources, for business. For all intents and purposes WeChat is your phone, and to a far greater extent in China than anywhere else, your phone is everything.

In a post-smartphone world, Apple risks a service that is hardware agnostic becoming the dominant computing platform. (This is why Facebook doesn't focus on hardware.)

If the original, exclusive video content is good enough, Apple Prime will be a powerful bulwark against churn away from iPhones and Macs to Androids and Chromebooks... at least for a little while.

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