Here's How Apple Can Win in Streaming Video

Apple (NASDAQ: AAPL) seemingly needs its next big thing. The company's core product — the iPhone — may not continue to be the powerhouse revenue driver it has been since the handset first revolutionized the smartphone business in 2007.

It's not that people don't want iPhones. Roughly 900 million remain in use. It's just that it has become harder for the company to make its annual update a major event.

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Why upgrade to a phone that looks almost exactly like its predecessor when the new features aren't overtly visible? That could lead consumers to hold onto their iPhones longer, impacting Apple's bottom line and driving its need for new revenue sources.

That's where the company's planned video service comes in — only not in the way you've probably considered it. Apple doesn't necessarily need to use a streaming service to create revenue. It needs one to make upgrading your iPhone more attractive.

What is Apple doing?

Apple hasn't revealed many details of its upcoming Apple TV+ streaming video service. At the launch event for it on March 25, the company trotted out some celebrity contributors — Oprah Winfrey, J.J. Abrams, Jennifer Aniston, Steven Spielberg, M. Night Shyamalan, and Reese Witherspoon, among others — but offered limited details as to what they might be doing.

"Apple TV+ will be home to some of the highest quality original storytelling that TV and movie lovers have seen yet," said Apple Senior Vice President Eddy Cue in a press release.

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That sounds nice, but it's mostly just noise. A new series from Spielberg and a couple of documentaries from Winfrey might be enticing, but it's hard to attract attention in a very crowded marketplace. Apple will be taking on Netflix, HBO, Walt Disney, and Amazon — companies that already have huge libraries and established intellectual property.

How would this work?

People upgrade their iPhone roughly every four years, according to recent data from CNBC. That's an increase from a 2018 cycle of every three years, and it's a troubling trend for the company. The problem — as we already discussed — is that since adding Siri, fingerprint scanning, and Apple Pay, the latest iPhone improvements have been more incremental.

It's easy for a consumer to hold onto his or her iPhone longer when doing so does not require much sacrifice. When having an older model meant not having Siri or being unable to use Apple Pay, that drove consumers to upgrade.

The video service could create that upgrade desire. Apple could make its streaming offering free for users on the latest version of iOS. If that version only works well (or at all) on newer phones, then getting access to top-tier free content might help push consumers to upgrade sooner.

If the 900 million iPhones in use get replaced on a four-year cycle, then Apple sells 225 million handsets in a year. Change that to a three-year cycle, and the company sells 300 million a year (or an extra 225 million over a three-year period). Add in some added iPad and Mac sales, and it seems likely that a free video service drives more revenue than a paid service ever could.

There's no reason to pay Apple even $4.99 a month for a video service that would be behind Netflix, HBO, Disney+, Amazon Prime, and Hulu in terms of its content offering for a long time. In fact, Apple could really only hope to surpass Prime and Hulu, making its best-case scenario being the fourth most desirable paid streaming service.

As a free offer that's only for people with the latest iPhone, iPads, and Macs, Apple+ becomes another reason for people to upgrade their hardware and another way to show others that they have. That could be a massive driver for the company in a way that supports its existing business model rather than creating a new one.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline owns shares of Apple. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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