In case you haven't heard, Apple (NASDAQ:AAPL) opened its 2017 WWDC yesterday. And if somehow you didn't, no worries, there's probably a couple of hundred articles about it on the web to get you caught up.
Many of my fellow Contributors are already examining the implications of Apple's reveal on its overarching strategy. I will leave it to them to assess the bigger announcements Apple made, which included a new set of iMacs and MacBooks, the eleventh generation of iOS, and a sneak peek at a new home speaker system, called HomePod.
I did, however, want to write about one particular announcement by Apple that, at least in the early reactions, isn't getting nearly the emphasis I would have expected. In fact, many people seem to be barely talking about it at all.
Don't Forget About TV
Apple's WWDC 2017 Keynote was broken down into six announcements. That was how many CEO Tim Cook said there would be, and when CNBC went to summarize the day when it was over they also listed six main announcements.
However, the two lists did not perfectly overlap. Cook called out tvOS, macOS, iOS, and watchOS as well as iPad and the new HomePod. CNBC thought that Apple's Macintosh overhaul was so pivotal - and indeed the company did make a lot of Mac-related announcements - that it gave two slots to Macintosh, hardware and software, and didn't even mention tvOS.
Probably because tvOS took up precisely one minute twenty seconds in Cook's two hour and eighteen-minute presentation. That was the shortest by far, and in fact, Cook didn't even bother inviting anyone else up to the stage like he usually does. He simply told the audience about one new channel being added to the fifty-plus channels already on the OS, and then told them "you'll be hearing a lot more about tvOS later this year." And that was it, on to the next.
So, understandable that an understated announcement would be under-appreciated. But I would not be nearly so quick to dismiss. The new channel Apple is adding is Amazon (AMZN) Prime Video. Prime Video was the source of some friction between the two companies over the past few years.
For years, Amazon has been trying to get its Video app onto the Apple ecosystem, with only mixed results. There is a Prime Video app for iOS mobile devices, but until now not for the Apple TV streaming box. After several years of negotiations failed to produce a breakthrough, Amazon even banned Apple TV - along with Google's (GOOG) (GOOGL) Chromecast - from being sold on its website right before the 2015 holidays.
CEO Jeff Bezos claimed it was confusing to customers that Amazon was selling hardware that didn't have the Prime Video app installed on them. Outside observers said it was really Amazon flexing a new source of leverage in the negotiations with Apple for the Video app.
Apple TV Struggles
There is little debate that Apple has had a problem with its TV division over the past year and change. Despite refreshing the Apple TV as recently as 2015, it reported a Y/Y drop in device sales in the 2016 holiday quarter. While Amazon Fire TV was already slightly outselling Apple TV in 2015, in 2016, my research suggested that Fire TV pulled ahead from a 10% edge over Apple TV to outselling by three to one, or more. Fire TV more than doubled while Apple TV sales fell in absolute as well as proportional terms.
It is more debatable what the cause of that shortfall is. Certainly being removed from the largest e-commerce website couldn't have helped matters, but Apple TV was banned in 2015 and sales held up relatively well that year, only falling in 2016. Perhaps the product refresh masked the impact of the Amazon ban the first year and then as upgrade fever cooled the effect became more apparent.
The Power Of Prime
Another possibility, however, is that Fire TV's advantage over Apple TV lies not in the websites it sells on, but in the service it offers. Fire TV offers Amazon Prime Video, and Apple TV doesn't.
While at one time that would have probably been no great matter, as I and others have been reporting for a while now, Amazon Prime has closed the gap with industry leader Netflix (NFLX) much quicker than anticipated. Amazon content spending has reached close to parity with Netflix, and in addition to the critical accolades - Oscar nominations, Emmy awards, etc., - it has also received the most important endorsement of all, consumer engagement.
Amazon Prime is now the third-largest video streaming service in the US after Netflix and YouTube, and its rate of growth is higher than either. YouGov's most recent study has even found engagement hours among 18 to 34-year-olds has reached near parity for Amazon and Netflix. That is, Millennials are now watching as many hours of Prime as they are of Netflix.
Prime Boost Will Be Substantial
The decision to bring Prime Video to Apple TV should help boost Apple TV sales in two ways. First, Amazon will apparently agree to restore Apple TV sales on its website as soon as the app goes live. Again, it's not entirely clear how much this ban actually impacted Apple TV sales, but certainly getting back on Amazon's website can't hurt matters.
Second, Amazon Prime Video should itself serve as a new selling point for Apple TV. When customers were trying to decide which of the two devices to buy, Apple TV or Fire TV, Apple TV was hobbled by its lack of access to what we now know was an increasingly popular streaming service. Prime Video coming to Apple TV for the very first time should do much to level that playing field, though Fire will still retain certain advantages, such as a more highly-regarded voice assistant in Alexa as well as a lower selling price. Still, Apple has a much larger customer base, and now with Prime will be that much more compelling to consumers.
The Significance of TV Sales
So, I expect Apple to sell significantly more TVs as a result of this announcement. I will now just briefly explain why I think that matters far more than some might think.
Apple TV is a far more important product category than some give it credit for. While revenues from the TVs themselves are a drop in the bucket for the uniquely successful company Steve Jobs built, the market they provide access to is not. Streaming boxes are increasingly the primary method of video engagement for more and more people. And they seem poised to only continue to become so, as Hulu Live and YouTube TV and others streaming-cable services are piped through streaming boxes instead of cable boxes.
Video entertainment, in turn, is a $500 billion a year industry, and as tech companies increasingly become its gatekeepers, their 30% commission will apply to a larger and larger share of that pie. That 30% commission goes to whichever company's hardware happens to be in a given consumer's living room.
Even accounting for costs to maintain a streaming infrastructure and perhaps some competitive pressure reducing actual commission rates - Apple already cut some rates to 15% - the potential revenue streams from follow-on digital content sales to TV owners dwarf the current revenue flows from iTunes and App Store by an order of magnitude. There is considerable potential for TV's revenues, all-in, to exceed the all-in revenues of the Macintosh and iPad segments that are getting most of the coverage right now.
At 15% of just 20% of the TV market, the tech company's cut comes to $15 billion per year. Factor in potential game sales as well as continuing growth in the TV market itself, as well as the potential for a higher share of the market, and the real number is almost certainly far higher.
Apple had a very busy day yesterday, and the iMac and MacBook absolutely deserve the coverage they are and will continue to receive. Apple took a big step forward on the Macintosh and iPad yesterday. But the significance of this "small tweak" to their TV strategy should not be understated. Nor, regardless of whether investors think this step will help or not, should the importance of winning the living room TV tech war.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.