Life after iTunes: Apple’s big media challenge

Like all the big tech firms, Apple is spending billions to produce original video content as it builds its place in the future of media, but it faces lots of challenges in its attempt.

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Apple

Like all the big tech firms, Apple is spending billions to produce original video content as it builds its place in the future of media, but it faces lots of challenges in its attempt.

The revolution will be televised

Big players, including Google, Apple and Facebook, want a slice of the $170 billion/year U.S. TV market.

They are willing to invest deeply to grab their piece of the pie. That’s the thinking of Needham & Co analyst Laura Martin in an extensive client research note provided to me, "The Future of Media – an Epic Battle."

In doing so, they hope to exploit changing viewing habits as viewing audiences use social networks and smartphones to access increasing quantities of video — these changing viewing habits are a big opportunity for these disruptive firms.

It is interesting that 16 years ago today Apple launched iTunes. At that time, consumers wanted to own content. Today, consumers are happy to rent it, and that's part of what drives Apple to seek new ways to make its services stand out.

When it comes to regulation, tech firms have a window of opportunity. Martin points to the recent Department of Justice decision to block the AT&T/Time Warner merger as a suggestion that regulators have a blind spot to the impact of the big tech firms as competitors.

Tech firms are already spending huge amounts of cash on creating original video content designed to weaken the connection between viewing audiences and existing incumbents in the space.

This battle for the future of media means tech firms will buy the large studios, she argues. (Once again, Steve Jobs was way ahead of his time with the 1986 acquisition of Pixar, I might point out.)

The search for ‘chemistry’

I’d also argue that some tech firms will find it hard to loosen up enough to create the greatest content.

Would family-friendly Apple be institutionally capable of creating shows with the kind of challenging adult themes that drive the most successful TV and movie franchises?

Could Apple make The Wire, or Google create Zeitgeist? Is its ambition for content creation really going to be defined by Carpool Karaoke and a show about real estate?

Such institutional challenges lead me to anticipate tech firms will inevitably spin out their content creation arms as separate but wholly-owned entities. Martin agrees:

“We believe that what makes a great creative culture is very difficult to replicate and it has little to do with money,” states Martin. “Anyone in Hollywood will take your money, and they each believe they have the next Forest Gump or Pretty Woman or Wedding Crashers.

“However, 1 out of every 10 TV series or films is a hit and most of the others are written off. Netflix’s track record of making hits vs. B and C titles is worse, despite its enormous data trove advantages. Cash isn’t what makes the difference between making hits and non‐hits, nor is data. It’s much harder chemistry than that.”

The search for this chemistry is what makes the acquisition of existing content creation firms by tech firms more likely.

Apple is certainly assembling a team around this project that has the industry chops to lead this business.

Buying in and cashing out

Not only do these entities bring a little of that creative zeal, but they also provide access to the deep advantages incumbents in the space already enjoy: audience engagement, dual (subscription and advertising) revenue streams, and their establishment within existing content creation ecosystems.

Tech firms also recognize that ad revenue will inevitably return to television as increasing numbers of people choose to use ad blockers online.

Martin says tech firms will run their studios “separately,” arguing:

“Hit content is hard to create and slow to accumulate and deep TV and film libraries built over decades are increasingly valuable for the company that controls them.”

The high monthly price of skinny bundles and individual OTT channels for very limited programing and/or access also underscores the value of mega-bundles. In some frames of reference, the kings of OTT content remain Netflix, Amazon Prime and YouTube — Apple has a place at this table through iTunes, but it doesn’t yet offer similar depth of content.

[ABOVE: Steve Jobs on television.]

Apple’s challenges

While Apple has the scale, reputation and technology skills to stake a place in the space, the company suffers from its failure to build an effective ad network that finds the sweet spot compromise between user privacy and ad network data. It has also been unable to form an effective social network — essential as new TV audiences are increasingly likely to surface social media feeds in search of new content.

That means Apple faces stiff competition from the likes of Facebook, a “world-class consumer aggregation platform” with best-in-class ad-targeting capabilities.

It also faces resistance from small players, including Roku:

  • Roku’s TV streaming software is now included within 20 percent of connected televisions sold in the U.S., Martin revealed.
  • That’s because large TV manufacturers are afraid of the big tech companies, but they are not afraid of Roku.

(It will be interesting to see what happens next with TiVo, given its recent move to open up the Apple TV for cable operators.)

Apple has been rumoured to plan to create its own televisions integrating Apple TV, but these haven’t appeared yet. That's partly because the company has recognized the need to get both its software and its content provision right.

Content provision is a battle that is becoming more complex as Disney and others plan their own streaming services, prompting Apple’s move into original content creation. The software, however, has improved with the introduction of Apple’s TV app.

A developing story

However, Apple is still developing its answer as audiences embrace on-demand access models of media ownership. It must — the iTunes franchise is shrinking as consumers turn to OTT operators, including Netflix and Amazon.

There has been some speculation of a Netflix purchase, but given that big content providers are currently withdrawing content from that firm as they plan their own streaming services, I think it more likely Apple will purchase content creation companies than tech firms.

It will be interesting to see what acquisitions Apple will make to enhance its place in the space, but with approximately (rumored) $1 billion booked for investment in original content this year alone, additional investment in supporting infrastructure elements seems mandatory at this point.

What do you think Apple needs to do to stake space in this place? How would you improve Apple TV? What kind of content and technology investments do you think Apple should make? Let me know via Twitter below.

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