Exclusivity = differentiation. This is a key point to understand. Apple has always remained differentiated in the market on the back of what they offer that no one else can. Apple’s management likes to call this out in presentations and earnings calls by using the phrase “only Apple.” What they are referring to is something they alone are uniquely positioned to offer. While it is true many parts of their differentiation has to do with procedures and philosophies related to hardware design, the real differentiation is combining that with the genuine nugget of exclusivity which is iOS and macOS. I can confidently say both Apple’s margins and volume sales of iPhone would be half or less of what it is today if they shipped the same Android software as everyone else. While software remains a key differentiator and the biggest factor as over time as hardware differentiation diminishes, understanding elements of content exclusivity is the next piece of Apple maintaining broader ecosystem “stickiness”.
Apps aren’t always the Answer
One of the more interesting things we have learned is the limits of the app ecosystem on Apple products beyond iPhone. While it is true Apple has the most robust developer ecosystem out there, the most fruit yielded from this seems to benefit iPhone more and other products not so much. When we looked at the upside for iPad, Apple TV, and Apple Watch, the default answer on why be bullish with these products against the competition was always the apps. However, this has not played out as a major factor for iPad, Apple TV, or Apple Watch the way we or others have thought. Of the three I mentioned, perhaps the strongest argument where this has worked is with iPad, but I’ll save some concerns on this related for a separate post on why I think Apple’s iPad strategy is at risk. That being said, what if the future of Apple TV and Apple Watch, or any other new category Apple creates, is not apps? What if the value of Apple’s large and robust developer ecosystem only yields the most fruit for iPhone and, to a degree, iPad but nothing else? While I don’t want to discount a long view that this can change, we can certainly make the case that, up to this point, apps have not moved the needle for either platform. This is where my mind turns to the need for exclusive content and services.
While it is right to be skeptical about Apple’s entry into producing original video (a la “Planet of the Apps”), largely because it is not a core competency of the company, exclusive content, both in music and video, is the only thing that will make the services themselves more valuable. I strongly believe that, without exclusive video content, Apple will have a very hard time growing the Apple TV business. As much as Apple believes they can solve the search and discovery problems of TV, there will remain very little to differentiate their Apple TV box from a much lower priced Fire TV, Roku Box, or any number of third-party hardware which play all the same apps (HBO Go, Hulu, Netflix, Amazon Prime Video (which isn’t on Apple TV)) as well as all the network apps that let me access the content I pay for. Besides a few exercise apps I use on Apple TV (admittedly not a mainstream use case), there is very little differentiating the Apple TV experience for me as opposed to other devices I use. This will remain the Apple challenge until they build consumer pull-in exclusive content. Note this stat, for example, from a series of Morgan Stanley reports I’ve read. They found that 37% of new Amazon Prime subscribers said Amazon’s original content in Prime Video was the single biggest factor in their decision to subscribe. As of Q4 2016, over 50% of new Netflix subscribers said Netflix originals where the primary reason for them to subscribe. Not surprisingly, that number goes above 70% for HBO Now. It should come as no shock that exclusive original content drives subscriptions to entertainment.
This is why I think Apple is going down the road of creating exclusive content is an important one. I agree with the assessment that Apple does not need to try and compete with Netflix or Amazon on volume. However, they must compete with them on quality or none of this will work. The analogy I’ve been giving the investor community on this was all Apple needs is one Game of Thrones. That alone could drive the differentiated value. This is the crucial step for Apple’s TV ambitions. It is chicken and egg. Reports are likely correct Apple is having trouble getting content deals done, which is no surprise because they have nowhere near the leverage they once did in the iPod era. They won’t have that leverage until they have a large enough base of customers on Apple TV, which they won’t get until they have more exclusive content. A real strategic web to navigate.
Definitely look forward to your post on why you think iPad strategy is at risk. A shame considering that it’s a great device & platform.
The root of the problem: Apple thought “toaster+fridge” when it was “oven+grill”. And they’re too arrogant to backtrack.
Good point & good analogy
In some ways, I liken iOS much like ’90s AOL, but with a very critical difference…
AOL (and others) provided a safe, easy way to access a curated portion of the internet. All well and good. On the same hardware (this is critically important) you could enter, and exit, AOL or any of it’s competitors, or the “raw” internet at will. It was not tying a service to the hardware. You got to choose your experience, at any given time, on your own hardware.
This parallels content exclusivity on a hardware platform. For the consumer, this is a very bad deal. It’s not a matter of if, but when it will be abused by the device, now also content, provider.
For one, how would you regulate it?
Legalities aside, should a consumer be happier buying one device, a TV, that can play all content, or should they obediently be happy with content that requires them to buy a device tied to that content exclusively?
Should watching “Breaking Bad” require a Samsung TV?
This is coercion, but judging from past responses “most people won’t care, and therefore that represents the best case”. I call BS.
More and more, though, the device needed to play _all_ content is the computer. there are a number of things I can’t see on TV. Even before that there are things I need to buy specific devices to see (cable decoders). And then there are things I have to pay yet again to see even with those extra devices. Until iTunes I could not have seen certain cable shows unless, at best, I waited until the season (or worse, the series) was finished and then buy the DVDs.
Exclusive content is not anything new in the entertainment industry. The entertainment industry as a whole is effectively built on coercion, whether you are a content creator, content distributor, or content provider.
Joe
I chose TV as the simplest possible example where my objection would hold.
When I buy a cable decoder I do so to watch content of a local, and regulated, monopoly. The restriction is geographic and on choice of distribution, not on device. Still, why should we like that, as you describe.
Until iTunes…
iTunes is a pretty hardware independent (except mostly for Linux and Android). Either way it doesn’t (yet) require the exclusive use of an Apple hardware product. (And I’m sure you fully realize that you never needed iTunes, even before there was an iTunes, no do what iTunes did. Yes, legally.)
I understand that exclusive deals are nothing new, content tied exclusively to device is new to me. It the bundling specifically, and exclusively, to device that matters. This is a very dangerous situation. It’s also a major reason why anti-trust laws exist.
But you don’t need to go that far. Let’s say that each hardware company had exclusive deals with content. Let’s even restrict it to computer content, is it okay to have to own x kinds of computers to be able to watch everything? Not type of device, but type of deal. Is that not antithetical to what computers are for?
Speaking for myself, I really don’t care about commercial content enough to let it bother me. If, say, HBO or A&E don’t want me as a viewer because I am just not going to subscribe to either their app or cable (never mind if they tied it to a device, which I think some have done when they went iOS first) that’s fine with me. If they want me as a viewer they will offer me something on my terms. If they don’t that’s their loss, not mine.
There is enough other content (and other things in general) that are just as, if not more, interesting for me to see and do. Same if someone tied something to a device. Their content is just not that important. And that is coming from someone who can legitimately write it all off on my taxes as a business expense.
As such, most exclusivity deals are only short term anyway, and are only interesting to a niche market.
Joe
You are basing your very credible point on a few assumptions.
a) It’s only media. It can easily extend to books, newspapers, etc. All tied to specific devices. No more Nook, Kindle or NY Times application. You actually would need (hypothetically) a hardware Nook, Kindle, or NY Times device.
b) That it would remain short term and niche.
c) Even if legal, we don’t have to like it on behalf of ourselves and others.
No, I only used media in my example. The principles are the same regardless of content. That’s the checks and balances for the content creator and creative industry, though. Always has been. How much of a barrier do they want between their potential audience and their content?
Besides, how different is a NYT device from when you had to have the printed paper to read anyway? But just as NYT wanted to broaden their reader base and figured out a way to have their printed version nationally distributed in a timely manner (through local printers receiving the copy transmitted) they have demonstrated a desire to have their content as accessible to as many people as possible. For many of the content creators and distributers, ultimately that is important.
And even with NYT. If they can only provide content in a way that I don’t want to pay for, I’ll find my news somewhere else. As a matter of fact, that is exactly what I do.
Joe
“Besides, how different is a NYT device from when you had to have the printed paper to read anyway?”
One reason to have a computer is to not need to have each and every newspaper. But still, it’s not one device, but one for each exclusive camp.
It makes sense what you say about distance between the publisher and consumer, but that distance too often depends on artificial, sometimes anti-competitive, factors.
Exactly my point. For NYT (and most content creators/distributors) to go to a dedicated device as you pose and fear is a step backwards. I think that alone will keep any exclusivity tied to a device (as exclusivity agreements have largely always been) temporary (either in agreement or even content, as in content that is only relevant for a short period of time) and/or niche.
ANY barrier between the creative content and the viewer has ALWAYS been artificial, including third party publishers.
Joe
Thank you for great content. I look forward to the continuation.
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