Apple enters the streaming wars in an unusual position - underdog

When he was asked recently by a Wall Street analyst to describe his feelings on looming streaming competition, Netflix chief executive Reed Hastings had a ready reply.

"Disney's going to be a great competitor," he said. Then he cleared his throat and added, "Apple's just beginning. But, you know, they'll probably have some great shows too."

As Apple, the largest publicly traded company in the world, prepares to launch its Apple TV+ streaming platform Friday, it finds itself in a rare position - underdog.

The new service will allow viewers to see original big-budget programs such as Jennifer Aniston's TV-business dramedy "The Morning Show," the alternate-history astronaut series "For All Mankind," and a reboot of the '90's children's hit "Ghostwriter." About 10 new offerings, including a nature documentary and an Oprah Winfrey-centric book series, will be available when the platform debuts, with additional programs to premiere in the months following.

But unlike with the iPhone and iPad - or even iTunes and iCloud - Apple is entering the market as a decidedly second-tier player. Its offerings lag miles behind Netflix's thousands of titles and Disney+'s well-known trove of Marvel and Pixar properties.

"It's a little weird for Apple to be in this position given how dominant they are in other places," said Raj Venkatesan, a professor of business administration at the University of Virginia's Darden School of Business. "Just look at the price - how often do you see Apple coming in as the lower price option?"

Apple TV+ can be had for $4.99 a month, less than half the price of Netflix and two dollars less than Disney.

Apple executives hope widespread brand recognition and the popularity of its devices can help make up for the lack of content. Critics are eagerly anticipating the shows, with their blue-chip talent. But some competitors, Hollywood insiders and Wall Street analysts also are raising questions about the effort - a chorus that collectively wonders whether Apple TV+'s storming of the Hollywood castle is something of a quixotic quest.

An Apple spokeswoman, Rita Cooper Lee, declined comment for this story.

Apple has been working on its original-content service since at least 2015, when it began a search for Hollywood executives to run a planned original-TV division. In June 2017 the company brought on a pair of Sony Pictures Television veterans, Jamie Erlicht and Zack Van Amburg, and gave them a mandate to find prestigious, often family-safe material.

Soon after, the pair bought and greenlighted "The Morning Show," with high-priced talent Aniston, Reese Witherspoon and Steve Carell. They gave the hour-long show a two-season order of 10 episodes each; the company will release three episodes at launch in a kind of scaled-down binge model. Other top-tier deals with the likes of Winfrey and J.J. Abrams followed.

Executives are hoping to build on Apple TV, the device and now app that, as with industry leader Roku, allows consumers to sync their streaming with their television. They believe that a proprietary subscription service with buzzy content a la Netflix could reinforce the appeal.

And that their reach could help that service succeed.

"They're in a billion pockets, y'all," Winfrey pronounced when taking the stage at the company's Apple TV+ presentation at its Cupertino, California, headquarters last spring.

But occupying pockets doesn't guarantee you can get consumers to reach into them.

Six Hollywood professionals interviewed by The Post, including agents, managers and producers, said they welcomed having a new buyer for their products, particularly one willing to spend lavishly. ("Morning Show" cost a reported $15 million per episode, a "Game of Thrones"-level number.)

But many expressed skepticism that Apple will always have a crack at the best original content. The company does not currently have its own studio to produce its shows the way, say, Disney/ABC has the production arm 20th Century Fox Television. That means it will have to rely on outside companies for its shows, raising prices and limiting supply, since many studios prefer to produce shows for in-house networks.

"If CBS is making [shows] for CBS and Universal is making for NBC, where does that leave Apple?" said one Hollywood agent who asked for anonymity so as not to jeopardize business relationships.

That's one reason, the agent said, that Apple had to overpay for its shows. "See," an apocalyptic thriller starring Jason Momoa, also will cost as much as $15 million per episode. The company's annual content budget has come in at $6 billion, about $5 billion more than early estimates, according to the Financial Times.

And library content - licensed non-original shows that have helped drive subscriptions for Netflix and other streaming services - is virtually non-existent. Apple has stayed out of that game, even as companies like Comcast and Warner Media have paid much as half a billion dollars for streaming rights to modern sitcoms such "The Office" and "The Big Bang Theory." That has kept Apple's costs down but resulted in a surprising lack of shows on the service.

"Apple doesn't do things small, and they seem to be doing this small," said Mikey Campbell, who edits the watchdog site Apple Insider. "I expected them to for more partnerships for more content. It's really odd for Apple TV+ to roll out with such a limited amount of shows." he added.

Apple's acquisition of a traditional media entity, which would offer a major injection of content, has been the subject of speculation in the merger-and-acquisition community - Sony, CBS-Viacom, and Lionsgate are frequently mentioned - but there is little evidence that such a move is in the offing. The company does have a content agreement with A24, a boutique distributor whose films include best-picture winner "Moonlight," "Ex Machina", and the television series Euphoria.

Meanwhile, challenges await on the distribution side where experts say Apple's current businesses offer little leverage to box out competitors.

Several years ago, they say, when many Americans were still figuring out how to migrate their entertainment consumption away from the traditional cable box, Apple's control of hardware and its popular app store would have provided an advantage.

But with Netflix now a fixture on home-entertainment systems, Amazon Video tossed in with Prime subscriptions and Disney fixed in consumer consciousness, Apple's device ubiquity won't offer the edge it once did.

"The installed base gives Apple a potential group to market to, which can give them an uptick," said Tuna Amobi, an analyst who covers the media and entertainment space for CFRA , an investment research firm. "But it may be a fraction of an uptick."

The tactics Apple used to launch its music service, in which rival Spotify was sometimes hard to find on Apple platforms, won't work on video services even if the company wanted to try it, Amobi and others said. Apple does not offer comparable content to those competitors and, in any event, the iPhone isn't nearly as popular for television viewing as it is for listening to music.

And of the 1.4 billion Apple devices out there, according to chief executive Tim Cook, 900 million are iPhones, undercutting Winfrey's "billion pockets" claim.

Streaming also remains a cost-intensive business, thanks largely to the escalating cost of content. Even Disney, which is expected to attract tens of millions of subscribers to its new Disney+ service that debuts Nov. 12, will struggle financially - chief executive Robert Iger has warned Disney+ won't be in the black until 2023.

Apple, with its lower price point, could face an even steeper climb. "You look at five bucks and it's hard to model profitability," Amobi said.

Krish Sankar, an analyst at the investment-banking firm Cowen who has long covered Apple, said that "there's no revenue and no one knows how these shows are going to play out. That's the bad news."

He added dryly, "The good news is the expectations are low."

Some close to Apple say profitability is beside the point.

Eddy Cue, who runs Apple's Internet Software and Services division that includes TV+, is taking a holistic approach, according to a person familiar with his thinking who requested anonymity because they were not authorized to talk publicly. The goal is simply to offer an added service that makes people likely to stay within the Apple universe and use its other services, from Apple Pay to Apple Music - similar to how Amazon creates video to retain Prime subscribers.

One streaming industry veteran who asked to remain anonymous because of Apple's sensitivity about public statements said that Apple could bundle TV+ with other services, such as Apple Music, its videogame product Arcade and iCloud, making it very difficult for Apple's billion-plus users to cancel.

Still, Sankar noted that Apple's most successful divisions are iTunes and the app store, gateways to the products of others. That's a different strategy from Apple TV+, which aims to create a closed universe of Apple-specific shows that competes for eyeballs directly with Netflix, Disney, Warner Media and others.

And there could be legal challenges if Apple restricts access too heavily. Spotify earlier this year complained to European antitrust officials that Apple's fees are used to give its own services an unfair advantage. Apple is also facing an inquiry from the U.S. Department of Justice and Congress into whether it has used its power to hurt competition and innovation.

Apple TV+ is also a way to keep people buying Apple devices. The company is holding a promotion that will give buyers of iPhones, iPads and other devices free Apple TV+ for a year. But hardware sales are slowing. And whether Apple can flourish as a company primarily on the basis of services - never mind whether Apple TV+ can stand on its own among those services - remains an open question to some experts.

"You need to keep your subscribers to all your services, and that can be very hard to do, because there are new competitors for almost all of them," said Venkatesan, the UVA professor.

Apple reports its earnings on Wednesday, two days before the AppleTV+ launch, and investors will be looking to see growth in services revenue.

Some observers believe Apple's Friday launch - two weeks ahead of Disney and some six months ahead of Warner Media's HBO Max and Comcast's Peacock - could provide an advantage because streaming customers are up for grabs.

"There are a few hard-core consumers who definitely want to buy every new service and a few people who will never subscribe to any of them," said Greg Silverman, chief executive of Concentric, an analytics company and platform in Cambridge, Mass. "But most are in the middle - they're undecided voters. That's who Apple can target."

One larger Apple goal, the person familiar with Apple's thinking said, may be to achieve the late Steve Jobs' longstanding dream of Apple as American consumers' entry point for television, whether via devices like Apple TV or must-see shows on Apple TV+.

But even that could take a while - if it happens at all. Campbell of Apple Insider noted that the biggest tell is the company's offer of a free year of AppleTV+ to buyers of hardware. Promotions for new technology releases, he said, usually run three or six months, at which point the product and its customer base should be established.

"This is not something even they think they're going to be really successful at any time soon," he said.

The Washington Post’s Reed Albergotti in San Francisco contributed to this report.