Why Apple is altering its OTT strategy

January 09, 2019 14:51
A Samsung executive shows off a new television during the 2019 CES industry event in Las Vegas on Jan 7. The Korean firm will offer direct access to Apple’s iTunes content via smart TVs. Photo: Reuters

Apple may not be participating in the Consumer Electronics Show that is underway in Las Vegas, but the company has still found itself grabbing the news headlines, thanks to a key announcement.

The US tech giant revealed this week that it has partnered with Samsung and Sony to help bring the iTunes app into smart TVs made by the two electronics giants.

The initiative will enable consumers to access the iTunes movie and other media content directly on their smart TVs, rather than having to go through an Apple TV set-top-box.

For Apple, the move represents a significant shift in its content offerings strategy, given its well-known penchant for restricting the access for its services to the firm's own devices.

Over the past two days, Samsung and Sony both made their own announcements in relation to the partnership with Apple. Following the collaboration, the two consumer electronics titans will be able to add Apple’s iTunes app to their smart televisions, allowing users to browse and play the iTunes movies and TV shows they had purchased or rented.

TVs will see the addition of Apple’s AirPlay 2 software that will allow iPhone owners to stream content from their device to the televisions.

Using a smart TV to watch online content isn't a new thing. YouTube has been doing so for many years, allowing people to enjoy videos on the big screen with other family members. Netflix also provides similar access to smart TV users, enabling subscribers to watch their favorite content at their convenience.

The convenience is what makes the so-called over-the-top (OTT) services so appealing -- digital music and video subscription services running on top of the internet without dedicated network support, unlike the traditional cable television services.

Apple is a key player in the OTT market, but its closed-ecosystem, where content was available only on its devices within the iOS platform, has proved an obstacle in growing the business.

With iPhone sales slowing and the prospects for other hardware devices such as iPads also uncertain, Apple has realized that it needs to open up its platform if it is boost its service business.

Senior executives, including CEO Tim Cook, appear to have grasped the importance of an open platform to reach more users to boost the size of the service business, which has become crucial for Apple's growth.

As of the end of September, Apple had 330 million paid subscribers, up 50 percent from the previous year. That translated to US$37.2 billion in service sales, or 14 percent of overall revenue for the firm's fiscal 2018, which ended in September.

The paid subscribers came from its App Store and music service Apple Music. Apple Music reportedly had around 50 million paying subscribers as of May last year. 

Apple aims to double the revenue of its service revenue from 2016 to 2020. But the company faces an uphill battle in fighting the existing market leaders in both video streaming and digital music subscription.

In the video streaming arena, Netflix had more than 137 million users worldwide by the end of September. The streaming services giant added nearly 7 million new subscribers in the quarter, about 2 million more than what the firm itself expected.

Netflix said it expected to add 9.4 million new users in the fourth quarter. Such strong momentum comes to due to premium and exclusive content lineup. Black Bird, a movie starring Sandra Bullock, for instance is said to have been viewed by 45 million members worldwide within the first seven days of its December 21 release on the streaming platform.

The phenomenal brand power is the reason why Netflix no longer provides in-App purchase for its subscribers to pay for their service through Apple's App Store. As Apple takes 30 percent of each subscription, Netflix feels it's time to get its fees directly in full from its subscribers through Netflix's own online platform, rather than contribute revenue to a potential competitor.

With Netflix putting an end to iOS users' ability to sign up for the streaming service via iTunes, Apple could lose hundreds of millions of dollars in commission fee income.

This is one factor that may have led Apple to rethink its ecosystem, and integrate the iTunes app with smart TV makers.  

Apple, as a matter of fact, has been changing its OTT strategy slowly, seeking to strike the right balance between upholding its brand premium and growing the subscriber numbers.

Apple Music service has provided an Android app to reach out to Android smartphone users since 2015. The app has recorded more than 10 million downloads on the Google Play platform. And now, Apple Music has also been launched on the Amazon platform last month.

As it seeks to enhance the content and services income and reduce the reliance on hardware sales, Apple definitely appears to be on the right track. But the question remains: how far would the firm be willing to go in throwing open the ecosystem and let go of its traditional practices? 

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EJ Insight writer