Apple’s upcoming content push and Tim Cook’s desire to grow Service revenue drive company to make a rare deal with its rival
It’s an unlikely partnership, Apple and Samsung.
But the rivals have, at least on one front, come together, with the two tech behemoths announcing on Sunday that iTunes will be available on all Samsung Smart TVs this spring.
The partnership will allow Samsung users to buy and rent TV shows and movies through Apple, which, in a rare move, has linked with a major competitor. The Cupertino, California-based company typically prefers to keep everything within its own ecosystem, compelling customers to keep buying Apple products through its seamless integration across devices. But its partnership with Samsung — a company it’s spent time battling in court for the better part of a decade — could signal a softened stance, at least when a major opportunity presents itself.
Let’s look at three reasons why this deal makes sense for Apple right now.
Services, Apple’s catch-all division that includes Apple Music, iCloud storage, Apple Pay, and iTunes and App Store purchases, is a key factor here. Analysts and investors’ eyes dart to Services each time Apple releases its quarterly earnings, looking for healthy growth from a sector that looks to have plenty of room to run. Apple reported $10 billion in Service revenue during Q4 2018 — a 26 percent increase year-over-year.
Apple chief Tim Cook has stressed the sector’s growth, saying in early 2017 the company’s goal was to double its Services revenue by 2020. That’s a target of about $14 billion per quarter. By partnering with Samsung, which carries 18.5 percent of the global premium TV market, according to Reuters, Apple has opened another avenue to increase its Service revenue. Samsung customers paying for shows or music through Apple will only push the company towards reaching Cook’s 2020 goal.
2) Apple’s Upcoming Content Push
Apple has pegged 2019 as the year it makes a full-blown content push. Apple’s plans were set in motion 18 months ago, after content chief Eddy Cue brought over Sony Pictures Television presidents Jamie Erlicht and Zack Van Amburg to run its video business, tipping its hand that it would be getting into scripted content. Since then, Apple has landed deals with Oprah, Steven Spielberg and J.J. Abrams, among other heavy hitters. The company has roughly 20 shows in its pipeline.
To get that content to the masses, Apple plans on launching its own TV subscription service during the first half of 2019, The Information reported last October. Apple has also planned on offering its shows for free on Apple devices, as CNBC reported. Apple already enjoys a built-in advantage, with the company estimating there are 1.3 billion active Apple devices, giving the company a massive audience from the start.
But the Samsung partnership now gives Apple another option: charging non-Apple customers to watch Apple content. That could be a worthwhile hedge, especially if Apple is able to land a “must-see” show in its slate. Considering Apple TV still lags behind Roku and Amazon Fire TV when it comes to streaming device market share, this deal could give viewers another way to catch its new shows. That would come as a tradeoff for having Apple shows exclusively on Apple devices, but would give its content a bigger audience and again help drive Service revenue.
3) Lagging iPhone Sales
The timing of the partnership was notable, if only because it came days after Apple slashed its Q1 revenue guidance by up to $9 billion. Cook pointed to underwhelming iPhone sales, particularly in China, as the driving force behind the sales drought. New data from Counterpoint Research suggests iPhone sales are down 20 percent year-over-year.
In this case, Apple could be a victim of its own success. Customers have less incentive to upgrade their iPhones now than they did a decade ago when the improvements between models were starker. This reflects an overall trend in the market: Americans held on to their phones for 32 months on average in 2018, compared to 25 months just a year earlier, according to data from NPD tracking service.
Apple, of course, is still selling a ton of phones. The company sold 46.9 million iPhones during the fourth quarter. But if the iPhone is struggling to expand its reach, especially in China, it gives Apple good reason to look to grow revenue from other sectors. It also gives the company reason to strike deals similar to its Samsung partnership in the future, if it’ll help expose its new content to a wider audience.