With the iPhone Sputtering, Apple Bets Its Future on TV and News
With the iPhone Sputtering, Apple Bets Its Future on TV and News
Updated March 25, 2019 5:52 a.m. ET
The iPhone is running out of juice. To go beyond the device that made Apple AAPL a global colossus, Tim Cook is betting on a suite of services—marking the company’s biggest shift in more than a decade.
The chief executive’s strategy, years in the making, takes Apple out of its comfort zone into areas where it has failed in the past, and that today are replete with risks and competition. Apple will take a giant leap toward its goal on Monday, when it plans to announce video- and news-subscription services that it hopes will generate billions of dollars in new annual revenue and deepen ties between iPhone users and the company.
In some ways, Apple helped create its own predicament when it launched the app industry a decade ago. The goal was to make the iPhone more powerful.
Over time, though, apps and services, from Spotify to Netflix to China’s WeChat have often become more important to users than the devices that run them. That allows consumers to hold on to phones longer or switch to less expensive versions. In January, Apple reported its first decline in revenue and profit for a holiday quarter in over a decade.
By contrast, revenue from the services business grew 33% last year, to nearly $40 billion—accounting for about 15% of the company’s total of $265.6 billion.
The company’s ambition in video is to become an alternative to cable, combining original series with shows from other networks to create a new entertainment service that can reach more than 100 markets world-wide. It is the tech giant’s latest attempt to reinvent television, something it has tried to do for about a decade with limited success.
On Monday, the tech giant plans to unveil the first
footage from some of its new original TV shows, according to people familiar with the event. Apple has used a $1 billion budget to buy dozens of original TV shows in hopes it can land a breakout hit. It has cut deals with Hollywood stars including actor Reese Witherspoon and director J.J. Abrams, who have been invited to attend Monday’s event on Apple’s campus, according to those people.
Apple declined to comment for this article.
Apple hasn’t said what it will charge for the programming. People working on the projects said the company plans to charge a fee, after previously saying it would be free to Apple device owners.
The original series will be delivered in a new TV app that staff have been calling a Netflix killer. It will make it easier for people to subscribe with a single click to channels such as Starz, Showtime and HBO, with which Apple has been negotiating to offer their shows to users for $9.99 a month each, people familiar with the talks said.
Apple has been negotiating to bring its new TV app to multiple platforms, including Roku and smart TVs, according to people familiar with the talks—an unusual move for a company that has long preferred to limit its software and services to its own devices. Some of those distribution agreements are expected to be announced Monday.
At the same event, Apple plans to showcase a revamped News app that includes a premium tier with access to more than 200 magazines—including Bon Appétit, People and Glamour—as well as newspapers, including The Wall Street Journal. It plans to charge $9.99 for the service and believes the premium news content can lift engagement on its devices, people familiar with the plans said. The New York Times earlier reported on the Journal’s participation.
As part of the arrangement, much of the Journal’s content will be available through the service, although certain types of stories—particularly general news, politics and lifestyles news—will be showcased, while business and finance news won’t be displayed as prominently, according to people familiar with the situation. The deal will result in the Journal hiring more reporters focused on general news to help feed Apple’s product, one of the people said. The Journal sells its own subscriptions for $39 a month.
The news subscription offering follows Apple’s 2018 acquisition of a Netflix-for-news app called Texture. The deal gave Apple rights to most major North American magazines for at least five years and up to two decades in an agreement that splits revenue 50-50 between the tech giant and publishers such as Hearst Magazines and Condé Nast, according to people familiar with the deal.
The terms rankled some newspapers Apple courted, including the New York Times and the Washington Post, which sell monthly subscriptions for $15 and $10, respectively. The Washington Post and New York Times aren’t participating in the new app, according to people familiar with the situation.
When Apple last found itself on the ropes in the early 2000s, co-founder Steve Jobs reinvented the company by pushing it into mobile devices. The iPod and its accompanying iTunes service revived a company that was largely dependent on Mac computer sales. The subsequent iPhone helped Apple become the first company to surpass $1 trillion in market value last year.
Mr. Cook, who succeeded Mr. Jobs, is attempting a similar feat in the approaching twilight of the smartphone era. He began pushing the services strategy hard in late 2017, after Apple launched its 10th-anniversary smartphone, the iPhone X. While a big price increase to nearly $1,000 was helping boost revenue, the iPhone X wasn’t selling more phones, and higher prices made sophisticated, lower-cost rival devices more appealing.
Mr. Cook, who had vowed earlier that year to double Apple’s services revenue by 2020, began meeting regularly with the services division.
At the monthly sessions, the 58-year-old CEO has peppered the team with detailed questions. He wanted services team members to tell him which apps were selling well, how many Apple Music subscribers stuck with the service, and how many people were signing up for iCloud storage, a costly service that required spending billions of dollars to build data centers around the U.S., according to people familiar with the meetings.
“You couldn’t say, ‘I don’t have that information. I’ll get that tonight,’ ” said one person involved. “You had to have a dictionary of backup.”
Apple’s biggest source of services revenue comes from distributing other companies’ software through its App Store. The company is now battling Spotify and Netflix, two of the most popular apps, over its practice of taking 30% of sales or subscription revenue from apps.
Apple’s music-streaming service, its biggest attempt so far to build its own subscription business, has about 50 million global subscribers—far behind Spotify’s 96 million.
Apple’s base of 1.4 billion iPhones, iPads and Macs in use globally gives it a distribution platform. Yet the businesses of selling gadgets and services can conflict. To reach the biggest possible market for video service, Apple would have to offer it on non-Apple devices—something it has been loath to do in years past.
Previous successes with services such as iTunes, which redefined the music industry, have been offset by troubles with Maps and Siri.
“They built an organization to make beautiful gadgets and compete with Samsung and other gray-box manufacturers,” said Mike Levin, co-founder of Consumer Intelligence Research Partners, a technology analysis firm. “Now, they have to really think about the services and software that have been so uneven and compete with a lot of very different competitors.”
Mr. Cook has said Apple retains its edge. “Apple innovates like no other company on Earth, and we are not taking our foot off the gas,” he told investors in January, when Apple reported earnings.
Apple’s stock, while up since early January, remains 20% below its peak in October. It is currently valued at $900.85 billion.
Co-founder Mr. Jobs foreshadowed Apple’s services future when he started iTunes in 2001, offering categories from competing major labels to make the first successful digital-music store, with songs available for 99 cents.
When Apple created the iPhone in 2007, Mr. Jobs opposed letting other companies sell apps for it, fearing they could undercut performance or introduce viruses.
Apple’s software team, recognizing that more apps could make the phone more dynamic, pushed back and prevailed. The resulting App Store has generated more than $120 billion in total sales for developers since it opened in 2008.
It also brought competition from rivals such as Spotify, which began selling subscriptions in the U.S. in 2011.
The competition led to Apple’s biggest deal, its $3 billion acquisition of Beats Electronics LLC in 2014, so Apple could launch a competing music-streaming service.
By then, concerns had already been rising inside Apple about the iPhone’s future. The number of devices Apple sold was growing more than 20% annually as Mr. Cook pushed it into new retailers and markets, but sales executives told colleagues in 2014 they were running out of avenues for easy growth, former employees said. “They were freaked out,” one person said.
During a presentation before the launch, the music-streaming team told Mr. Cook they expected to generate more than 10 million subscribers in the first year.
“Double that,” said Mr. Cook, according to a person familiar with the meeting. The executives ended up easily clearing the goal, which encouraged them about Mr. Cook’s vision for the opportunity in services, the person said.
Mr. Cook and Eddy Cue, his lieutenant in charge of services, started looking for other subscription opportunities. Video was an immediate priority. Apple’s share of movie sales and rentals was more than 50% in 2012. By 2017 it had fallen to between 20% and 35%.
Apple wanted a service that could beat Netflix, a person familiar with the company’s plan said. After a 2015 effort to persuade Walt Disney and others to join a streaming-TV service faltered, Apple’s executives debated alternatives, including acquiring Walt Disney Co. or Netflix, and building its own studio, people familiar with the discussions said.
In 2017, it hired two prominent executives from Sony Pictures Television and empowered them to cut deals for more than two dozen original programs. They scooped up a reboot of Steven Spielberg’s Amblin Television’s “Amazing Stories,” scored a series about a morning talk show starring Ms. Witherspoon, and struck a partnership with Oprah Winfrey.
Apple faces steep competition from big spenders while it plays catch-up to experienced rivals. Netflix has 139 million subscribers and is expected to spend $15 billion on content this year. It also offers a far deeper content library than Apple plans to make available. Disney, which has decades of experience making hit shows and movies, plans to launch its own streaming service later this year.
Morgan Stanley estimates that a combined media package from Apple that includes video and music could generate more than $22 billion in sales by 2025.
Previously, Apple used software and services to sell more of its own devices. In January, Apple announced it would put a TV app on sets made by rival Samsung Electronics Co., making it available to people who don’t necessarily own any Apple hardware.
Apple executives made clear during talks with TV makers that it needed as broad a reach as possible to compete with Netflix and others. Last year, Apple announced a similar agreement with rival Amazon.com to bring Apple Music to Echo smart speakers.
“We made a mistake with Apple Music, thinking we could go it alone, and it took a long time to catch up. We still aren’t there yet,” the head of marketing Apple services, Jon Giselman, said during a meeting with one of the company’s partners, according to a person in attendance.
The push into news subscriptions could help Apple battle Facebook whose News Feed has helped it become the No. 1 app world-wide in monthly active smartphone users. It is also the anchor of a business that Facebook is looking to expand by emphasizing private messaging, a step many interpret as the first in an effort to become a super-app like China’s WeChat, which allows users to shop, order food, buy movie tickets and make reservations on any mobile operating system.
For Mr. Cook’s monthly services meetings, the company has intensified monitoring of apps that benefit and threaten Apple. The team has created a release radar for the CEO to track apps that are expected to sell well and other metrics for the apps that have challenged Apple’s business, including iTunes sales decreases compared with Apple Music subscription growth, said the person involved with the meetings.
Other successful subscription apps have given away much more content at lower prices than Apple is expected to offer initially. Amazon Prime members, who pay $119 annually, get free video content and discounted music subscriptions. Some inside Apple’s services group wanted similar benefits for iPhone buyers. Mr. Cook and his leadership team have made it clear that its forthcoming services will carry a price tag.
“There’s this conflict between wanting to become a services business and acting like one,” said the person. “They haven’t solved that.”
—Lukas Alpert, Joe Flint and Benjamin Mullin contributed to this article.