Apple TV+ and gaming made a huge splash last year. We haven't heard much from them since
New York(CNN Business) At Apple's September product launch event last year, two of CEO Tim Cook's splashiest announcements were about the company's new digital subscription services: Apple Arcade and Apple TV+.
But the hype around them has waned as they grapple for attention with other prominent digital entertainment services.
In the first nine months of 2020, year-over-year revenue growth from Apple's services business was 16%, almost exactly the same rate as during the first nine months of 2019. While still a healthy performance, that means growth in the services business didn't accelerate this year despite the launches of Apple TV+ and Apple Arcade — and a pandemic that drove higher demand for digital entertainment across the industry.
Some analysts expect services may again be a point of focus at Apple's Tuesday event — the announcements could include Apple TV+ bundles with other content offerings (along with news about the Apple Watch and iPad).
Apple (AAPL) is still predominantly a hardware company, although services are a huge growth opportunity and 20% of the company's overall sales. They're a way for Apple to earn some extra billions from its customers in between device upgrades — of which there could be many: The 5G iPhone 12 is expected to be unveiled at a separate event later this fall and could drive a huge number of iPhone sales.
But if Apple wants to maximize the potential of its services business, it will have to make them more appealing to the hundreds of millions of people who buy its gadgets.
"To me, (digital services are) still complementary to the bigger picture," said Dan Morgan, senior portfolio manager at Synovus Trust Company. "Apple is still an engineering company, they still need to come out with new products, and the hardware is going to drive growth."
How have Apple's entertainment services performed?
Apple's foray into the streaming wars launched with a number of promising content options, including a talk show from Oprah and "The Morning Show" series starring Jennifer Aniston in her first series since "Friends," which scooped up several awards. (CNN's Brian Stelter was a consulting producer on "The Morning Show.")
But since then, Apple TV+ has struggled to keep pace with the deep bench of content available from other players in the space.
"They've not entered the market with such a big splash, like Disney+ did with 'Madalorian,'" said Zak Shaikh, vice president of consulting for global media and entertainment with Magid. "They've got to build greater volume ... 'The Morning Show' garnered a lot of critical acclaim. But it's not just about having that one, big splashy show that gets nominated, it's about the volume."
Its relatively small content library is likely due at least in part to the fact that Apple has spent a fraction of what bigger competitors like Netflix invest in creating exclusive content, analysts say; although, as one of the world's biggest companies, Apple could choose to shell out more.
"I don't think it matters as much whether in this first year that they've broken any records," Shaikh said. "They're definitely going for high-quality, and high-quality global (content). You'll start to see the fruits of that in a couple of years. As long as they survive... Not every service is going to survive the next five years because there's too many options."
At $4.99 a month, Apple TV+ is cheaper than many other streaming services, which is a selling point. But for Apple to maintain subscribers long-term, especially after its "free year" offer ends, it will likely need more content. Apple has not released Apple TV+ subscriber numbers, and did not respond to a request for comment about the platform's performance.
Shaikh said his firm's research indicates that Netflix, Hulu and Disney+ are the three most well-liked streaming services among Americans, with Apple TV+, Amazon Prime and HBO Max grappling for the fourth slot. That could be a tricky spot to be in, given that people are unlikely to subscribe to every streaming service out there.
"Even though it's priced less than Disney and Netflix and a lot less than HBO, I think the future of Apple TV+ is only going to be as a giveaway to Apple hardware," said Jeffrey Cole, CEO of the Center for the Digital Future at USC Annenberg. "I don't think it's going to earn very many subscribers on its own, it doesn't offer enough to compete with Disney and Netflix."
Cole added that he thinks the "best case" for Apple TV+ is that customers will pay for a subscription for a month or two to watch certain shows or movies, end their subscriptions, but then sign up again for another month when new exclusive content is released.
Many of Apple's other subscription services face similarly steep competition.
Apple Arcade brought a curated selection of new games to the online gaming space at a bargain price, and provided an option to Apple users who don't own consoles or PCs. But experts say it likely also needs to offer more content if it wants to maintain loyal users and garner the kind of attention that gaming bets from other tech players, such as Amazon's Twitch or Facebook Gaming, do.
Bloomberg reported in June that Apple Arcade was canceling contracts with some game developers as it sought to generate new offerings and keep subscribers on the platform.
Apple's podcasting business, too, faces a growing challenge from Spotify (SPOT), which has invested heavily in exclusives and expanding internationally.
Morgan said he hopes Tuesday's event might offer more insight into Apple's vision for the digital services business — and whether it's really aiming to compete with big entertainment services like Netflix (NFLX), or just to offer add-ons and incentives for Apple customers.
"They're kind of like, 'We've got our hands in everything.' But what's your focus?" Morgan said, adding that he hopes the focus will remain on making standout hardware products. "If they can continue growing their user base with their great engineering, then the services fold in, and you get that halo effect."
