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Apple, Inc.'s Strange Fascination With Original Content Is Misplaced and Noncommittal

Apple isn't giving up on TV yet. Image source: Apple.

It's been about nine months since we first heard about Vital Signs, Apple's (NASDAQ: AAPL) rumored foray into original TV content that would be based on hip-hop-artist-turned-Apple-executive Dr. Dre. We haven't heard much about the project since, but there have been various other headlines and rumors that form a mosaic around Apple's interest in original content.

There's no doubt that Apple has some interest here, but it's being incredibly noncommittal. Apple acquired the rights to an unscripted TV series based on Carpool Karaoke, months before CEO and Alabama-native Tim Cook serenaded attendees at Apple's September iPhone event with Sweet Home Alabama. That performance came just a couple months after services chief Eddy Cue told The Hollywood Reporter:

We're not in the business of trying to create TV shows. If we see it being complementary to the things we're doing at Apple Music or if we see it being something that's innovative on our platform, we may help them and guide them and make suggestions. But we're not trying to compete with Netflix (NASDAQ: NFLX) or compete with Comcast.

Cue's comments don't exactly line up with what Cook said last month on the earnings call:

I would confirm that television has intense interest with me and many other people here. In terms of owning content and creating content, we have started with focusing on some original content, as you point out. We've got a few things going there that we've talked about. And I think it's a great opportunity for us both from a creation point of view and an ownership point of view. and so it's is an area that we're focused on.

Now The Information is reporting that Apple had expressed interest in a video deal with Chris Rock, which didn't progress much. Netflix ended up scooping up the comedian for a $40 million deal. What in the world is even going on?

Make up your mind, Apple

If there's a lack of consistency between reported headlines and executive comments, that's probably because Apple doesn't even know how it wants to proceed here. TV has always been a hard nut to crack, and Apple has no easy solutions with modernizing the industry given how entrenched the value chain is.

Apple's TV ambitions stem from its long-standing strategy of using exclusive services as a differentiating factor to sell its hardware, and its track record doing so is mixed, with both successes and failures. There have been many reports of Apple trying to put together a slimmed-down TV bundle with just 25 channels, but Apple has never made meaningful progress negotiating with networks and cable operators, since it is essentially asking them all to disrupt themselves by embracing cord-cutting.

Apple's new TV app will be released later this year. Image source: Apple.

The Mac maker recently announced a new TV app that hopes to unify the viewing experience across all devices, aggregating content from a wide range of providers. The new TV app is just as notable for what it has as for what it lacks -- namely, Netflix and Amazon (NASDAQ: AMZN). Omitting Amazon is expected, given the two companies' long-standing rivalry within services and utter unwillingness to collaborating on each other's platforms. But Netflix's exclusion is more peculiar, since it has always had a good relationship with Apple. Of course, Netflix has its own apps for Apple platforms, so it won't really be missing out.

If we wanted to really speculate, Apple's new TV app could be seen as a precursor for some type of TV service if and when Apple inks the necessary partnerships. But the secret sauce would always be original content as a differentiator. This is where it gets tricky.

Don't do it, Tim

Apple absolutely wants to continue growing its services business, which is now a nearly $25 billion business that's primarily built on non-recurring content purchases from iTunes and the App Store, as well as AppleCare and Apple Pay. Apple Music now has about 17 million subscribers, which annualizes into about $2 billion in revenue. As Apple continues to highlight recurring-revenue sources, a TV subscription service fits right in.

But original content is expensive -- Netflix just raised $1 billion in debt to fund its aggressive original content plans for 2017-- especially if you do it right. TV is an inherently fickle and unpredictable industry. No one knows what will be a hit and what will be a flop. At least 15 studios passed on Stranger Things, which proved to be a sleeper hit for Netflix that drove subscriber growth last quarter. Experimenting is a requisite, and that's why Netflix takes a broad approach. It's also why it costs so much. To build a compelling library of original content, you need to buy shows across a wide range of genres as well as localized content for certain geographies, and each risks being a flop. Netflix's subscriber numbers show that the video streamer is executing quite well, but video streaming is Netflix's core business.

It makes far less sense for Apple to put any meaningful amount of money toward building a library of original content with the hopes of building a TV service as a side business. Most importantly, can you imagine a customer buying an iPhone so they can subscribe to a hypothetical Apple TV service just so they can see exclusive original content? Me neither.

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Evan Niu, CFA owns shares of Apple and Netflix. The Motley Fool owns shares of and recommends Amazon.com, Apple, and Netflix. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.