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There's an Easy Solution to Apple's Digital Video Woes

In music, when faced with declining sales of downloads due to the rapid shift toward streaming, Apple (NASDAQ: AAPL) had a solution: launch its Apple Music streaming service. Apple Music now has 27 million paid subscribers, and the service has turned the tide, bringing the company's music business back to growth. Here's CFO Luca Maestri on the last earnings call (emphasis added): "On the music front, we are the market leader in digital music and obviously now by having the combination of the download business with the streaming service, which we didn't have until recently, we've been able to bring our music business back to growth, we've grown over the last three quarters, and we feel very good about that."

The Mac maker's download and rental video business is now suffering a similar fate, according to a recent report from The Wall Street Journal. The solution is obvious: Apple should do in video what it just did in music.

Falling market share

Apple's market share has fallen from over 50% to somewhere in the neighborhood of 20% to 35%, according to the report. A company spokeswoman told the Journal that Apple is focusing on providing third-party video streaming services to its users, while noting that video purchases and rentals are at the highest level in over 10 years.

Image source: Apple.

While iTunes video sales aren't declining in the same way that music sales were, the market share losses are still disconcerting. The overall market for digital video content is growing, which is in part helping offset those market share losses. Amazon.com and Comcast are reportedly making gains and taking a bite out of Apple's slice, garnering roughly 20% and 15% market share, respectively.

If Apple really wants to compete with Netflix, then it should actually compete with Netflix

Of course, the seemingly obvious solution is for Apple to launch a video streaming service that would compete with Netflix (NASDAQ: NFLX). (Yes, Apple could buy Netflix -- those pesky acquisition rumors appear to be immortal, despite my best efforts to kill them.) Also, bear in mind that service chief Eddy Cue has explicitly stated, "But we're not trying to compete with Netflix or compete with Comcast."

It doesn't seem like a stretch for Apple to ink licensing deals with Hollywood studios if it really wanted to create such a service. It's already wading into original video content, albeit in a misguided fashion. Apple's actions here somewhat betray Cue's comment, though. Even if Apple is bundling the content with Apple Music, it's still competing with Netflix as a prominent buyer in Hollywood.

I often criticize the company's decision to bundle original video content with a music-streaming service, since it positions that content in a gray area. No one signs up for a music service in order to access niche video content; they sign up for the music.

Bringing it all together

Apple's original content strategy is truly bizarre right now, but it has all of the pieces for a video streaming service if it wanted to build one. And as far as that Netflix acquisition idea goes, Apple could build a competing service for a lot less than spending over $70 billion acquiring Netflix. That's not to say that competing with Netflix would be easy; the dominant online video streamer has carved out an incredibly strong brand with global recognition and strong pricing power, with a growing stable of high-quality original content. But remember, video services aren't mutually exclusive, and in some cases, they can be highly complementary. 

Apple has made its services ambitions quite clear, hoping to bring in $50 billion in revenue in 2020. Instead of selling third-party subscriptions -- of which there are now 165 million in total across all categories -- and collecting its 15% cut, it could quite easily create its own "Apple Video" service that includes both licensed and original content. Apple just needs to make up its mind.

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Evan Niu, CFA owns shares of Apple and Netflix. The Motley Fool owns shares of and recommends AMZN, Apple, and Netflix. The Motley Fool has a disclosure policy.