According to NPD, the iTunes Store (s aapl) 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(s nflx), 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 (s amzn) 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 (s goog) 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.