16 Comments

Summary:

According to NPD, Netflix now dominates digital video downloads in the U.S. Apple has only a measly 4 percent of the overall market, placing it about on par with cable and satellite providers. What does this mean for the future of Apple’s video business?

npd_video_0211

According to NPD, the iTunes Store accounted for just 4 percent of video downloaded or streamed through February of this year in the U.S., making it just one of many also-rans trailing Netflix, which dominates with 61 percent. Twisting the knife, at least part of Netflix’s success is a direct result of Apple. More than a hundred million iOS devices can stream Netflix content, and in January Netflix announced that the Apple TV “in just four months has passed the also-growing iPad in Netflix viewing hours.” How did a company as savvy as Apple end up opening the back door to such strong competition in the digital video space?

It is the success of the company’s music strategy  (the iTunes Store accounts for about 66 percent of retail music in the U.S.) that has arguably done the most to hurt Apple’s video efforts. Fairly or not, music industry executives, not to mention aging rock start Jon Bon Jovi, see Apple’s success as at least partially “responsible for killing the music business.” Movie studio and television network executives are no doubt wary of being victims of a similar success.

Last fall with the introduction of television rentals for the iTunes Store, Jeff Zucker, then CEO of NBC, asserted NBC did “not think 99 cents is the right price point for our content.” Since then, ABC and FOX remain the only networks renting television. The situation appears even worse for Apple’s long-rumored video streaming service. Going back to 2009, a plan for offering network content for around $30 per month has repeatedly failed to materialize, despite the fact that this very similar to what the dominant Netflix offers. And that could be how Apple turns the situation around.

By appealing to the concerns of network and television studios, Apple could position itself as an alternative to the dominance of Netflix, a strategy similar to the one it used against Amazon’s Kindle with the iBookstore. Unfortunately, that would likely mean more favorable deals for content providers than Apple seems inclined to offer, but that difference could be partially made up by applying subscription fees of 30 percent to Netflix accounts originating on iOS devices. If Netflix then pulled its app from the App Store instead of complying with new subscription rules, consumers would have the iTunes Store offering equivalent streaming content (if, of course, it can convince studios to come on board). Apple risks alienating users by forcing Neflix to make a choice between leaving and complying with its subscription fee structure, but it can always backtrack if it starts hemorrhaging a significant number of users.

If that sounds like a huge risk, it is, but the stakes are high. At least some Android devices will soon be getting Netflix, and it’s already available on a wide variety of different platforms, including all major home gaming consoles. Netflix is also a much better value than iTunes rentals or purchases, with $8 granting users unlimited access. If Apple can’t come up with a better, cheaper way to sell its own video wares, it may be better off concentrating its efforts on making sure partners like Netflix continue to feel welcome in the App Store ecosystem, lest they abandon the platform and take a considerable number of users along with them.

  1. What Are Apple’s Options in the Video War With Netflix?

    Buy them. Although it may not pass government scrutiny.

    But i’d absolutely love to see Apple outright buy Netflix as long as they maintain their model of putting Netflix on all sorts of devices which is brilliant. Just polish the UI on all those devices and watch the subscriber numbers continue to grow.

    Share
    1. Netflix has a market cap north of 11 billion. Given the premium that it would take above that to get the deal approved Apple would never pay that price. Not that Netflix shareholders would approve it.

      Apple would kill Netflix because they would pull Netflix streaming from all non Apple devices. That would be the Apple way.

      Never happens.

      Share
      1. Andrew Macdonald Wednesday, March 16, 2011

        Not only that, but if I remember correctly, if another company buys Netflix (or any other type of company which has deals in place with studios, labels etc), a lot of the deals they have with the will become invalid.

        I might be wrong though, but Im sure I read that somewhere when people were banging on about Apple buying Pandora

        Share
      2. Yeah, just like they pulled iTunes from Windows.

        Share
      3. @Gary – Yes, iTunes and Safari are both available for Windows. Not the topic at hand. You name for me one mobile phone, tablet or streaming device where any Apple application or service is available. Go ahead and look, I’ll wait.

        Share
    2. Aside from other complications, in my opinion, buying Netflix would do no good because the content providers could simply refuse to license their content to an Apple owned Netflix.

      Share
  2. I only bought the AppleTV because it has Netflix streaming built in. Never bought the original as I had favored Roku before that. If Apple bans Netflix apps because Netflix refuses to pay the Apple extortion fees then I will ban AppleTV from my home.

    Netflix didn’t get to where they are because of iOS and being banned from iOS won’t kill Netflix.

    Share
    1. Since the Apple TV does yet access the App Store, the Netflix App could be removed from the App Store but reman on the Apple TV.

      Share
      1. I can’t see Apple pulling Netflix from the app store and not removing it from AppleTV. Then again, I can’t see Apple being stupid enough to pull Netflix. Customer backlash would be one thing, an antitrust investigation would be another.

        Everyone needs to keep in mind that Apple can only do what the Feds are willing to overlook.

        Share
  3. Two points to make:

    1. Netflix may have a huge majority of downloads but what is it’s share of revenue? Assume the average Netflix user streams 15 movies per month for $8. If apple has 4% and Netflix 60% then that means Apple sells one movie for the Neflix 15. But they sell it for $3-5 not the $0.50 that Netflix gets for the movie studios. So REVENUE share could be very different from number of movie share. Based on $8 versus $4 per month, maybe Netflix has 20% and Apple and the others 10% each.

    2. It is common knowledge that the movie studios are goi to jack up their prices dramatically when Netflix renews it’s contracts in the next couple of years. How much market share will Netflix have if it’s streaming plan is $40 per month?

    Finally, I take issue with he comment above that Netflix shareholders would somehow protect the company from a hostile bid. Money talks. If apple felt Netflix was a useful edition and it’s contracts could be transferred they would bid as much as they need. $11B is nothing to apple. They have about $50B in cash that the market values at nothing. If they bid a 100% premium I’m sure most institutional shareholders of Netflix would sell.

    Share
    1. 1. Revenue share matters to investors. I don’t recommend Netflix based on revenue.
      2. When their content costs rise so will prices. Along with that, selection will go down. Netflix will no longer offer every single thing that they can sign. $40 a month? No, because Netflix knows that will kill their business.

      You can take issue with anything that you want, but I never said that Netflix shareholders would “protect” the company, I implied that there would be doubt about acceptance. You can suppose that Apple would offer 22 billion for the company but that wouldn’t be likely. Apple has never shown an appetite for high value acquisitions and I don’t see Netflix being any different. And regardless of your opinion, $22,000,000,000 is a lot more than nothing to Apple.

      Aside from that, Netflix has a strategy and if the shareholders saw greater value in that strategy than a 22 billion offer they would reject it.

      Share
  4. Why would apple want to get into this business? They sell hardware products that provide access to Netflix, and they sell pay-per-view. Netflix isn’t exactly a cash cow, my family averages 12 cents a title with Netflix and according to feedflicks 27% of Netflix subscribers pay even less than I do per title. Both buying Netflix and competing with Netflix looks extremely unattractive, continue integration in the apple ecosystem is the way to go. Anything not available on Netflix should be easy to pay-per-view through Itunes store.

    Share
  5. I don’t get the constant comparisons between Netflix streaming and Apple’s streaming services.

    NEITHER are comprehensive catalogs, but Apple’s library is so much more current than Netflix’s it’s almost beyond compare.

    Netflix does indeed offer unlimited streaming for $8/mo, but have you looked at what they offer? Titles are NOT current. Apple’s are.

    If you don’t care about how current your entertainment sources are, then of course Netflix is a great value. But if you want to watch CURRENT shows and CURRENT movie releases, Apple’s offers are the best choice, of the two. (To a lesser extent, Hulu Plus has something to offer, but since that’s not usually available from hardware devices as opposed to true computers, it’s in a different category)

    Share
    1. Kman Apple streaming doesn’t do well in my house (and many others) because I have 400 hours worth of HD DVR space. For current television shows I’m covered. For movies, if I were in such a hurry to see a movie that I couldn’t wait the 28 days for it to show at Netflix I’d have already seen it on the big screen. I use Netflix for the huge back catalog of shows and movies on disc and streaming, and it’s priced accordingly.

      On Hulu not being available on devices, I beg to differ. Hulu is available on both of my Sony Blu-Ray players and both of my Roku boxes. The only TV in my house that can’t stream Hulu+ is the one that has the Vizio Blu-Ray and AppleTV hooked up. Hulu+ is integrated in to quite a lot of network capable devices and the number grows all the time.

      Most people don’t have an AppleTV 2 and most people stream to more than just an iPad, iPhone or computer. It will be a monumental and measurable mistake for Apple to clear these apps from iOS devices.

      Share
      1. Randy- I, too, have loads of HD DVR capabilities at home. I mostly use ATV streaming for new release rentals (when I’m feeling exceptionally lazy). But I have a number of friends who have cut the cord, and do not have traditional TV. For them, a season pass to current from ATV is just the ticket.

        I hadn’t realized Hulu Plus had expanded to so many hardware devices. Good for them… although a lot more people would be happy if the main, free, Hulu itself were available.

        I’m not aware that there has been any announcement from Apple that they are going to drop the built-in Netflix support from the ATV2. This seems to be mostly speculation from random people… that’s not even a topic of the article we’re posting to.

        I hope they don’t, because the Netflix user interface on the ATV2 is MUCH better than the Netflix interface in my Sony BR player.

        Share
  6. Apple is primarily a hardware company, and makes barely more on rentals than the cost of maintaining the service, so Netflix helps Apple a lot more than it hurts them, because availability of Netflix is another selling point for Apple hardware. This is particularly so for AppleTV, for which Netflix is the primary selling point for most owners, but it is also a factor for iPads, and to a lesser extent for the iPod Touch and iPhone.

    Providing a 30% cut of revenues in perpetuity for customers who sign up for Netflix via Netflix’s app seems a very steep price for Netflix, who is doing quite well attracting customers without help from Apple. Netflix probably won’t go along with this, and Apple’s best strategy is to clarify their policy such that it does not apply to Netflix.

    Buying Netflix is not a solution for Apple. At this point, it would be expensive, and Netflix actually owns very little that Apple needs. Apple certainly does not want to be in the disks-by-mail business, so Netflix’s expertise there is not an asset to Apple. Apple has its own streaming technology. And Netflix’s media licenses are time-limited, and there is no guarantee that they would be renewed if Netflix were to become a part of Apple. Netflix’s biggest asset is similar to Apple’s–the quality and vision of its management–but very little of that would likely carry over if Apple were to purchase the company.

    Share

Comments have been disabled for this post