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Why Netflix won't be part of Apple TV

Apple and Netflix, for better and for worse, have changed how we spend our leisure hours. In the process, the two companies have upended old media habits and created new ones.

[NEW YORK] Apple and Netflix, for better and for worse, have changed how we spend our leisure hours. In the process, the two companies have upended old media habits and created new ones.

Apple's iPhones have already ported over big portions of people's brains, and Netflix exploded TV time slots, creating the binge and the endless content screen. Where else can you find a soothing Japanese reality show like "Terrace House" and a Brechtian, mind-bending drama like "Russian Doll" in one place?

While setting the standard in their chosen areas, Apple and Netflix have gotten along in the past, for the most part. But that period of peace between the two tech giants is about to change.

On Monday, Apple will unveil its most ambitious media project yet — a news and entertainment bundle that is likely to offer access to magazines, newspapers, music and, perhaps most intriguingly, original shows and films. And when a tech giant like Apple jumps into entertainment, it's going to create waves.

Famous for its teasing product demonstrations, Apple will play host to Hollywood at its Cupertino, California, campus so it can show off what Reese Witherspoon, JJ Abrams, M Night Shyamalan and Steven Spielberg (he's of the view that Netflix films should not get Oscars) have done with the more than US$1 billion the company has laid out for its new ambitions.

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The amount it has spent on new material is nowhere near the US$10 billion Netflix will plow into content this year, but Apple has something Netflix does not: more than 1 billion devices all over the world, which amounts to an infrastructure. That beats out the 139 million people worldwide who have subscribed to Netflix. If Apple is suddenly able to fill the screens of those devices with its own content, as well as programming from other companies it has struck deals with, it will turn itself into a beast sure to put a scare into Netflix.

The cordial relations between Apple and Netflix showed signs of fraying last November, when Netflix, led by Reed Hastings, stopped allowing people to sign up for its service through Apple's iTunes store.

Apple had been charging Netflix 15 per cent on every sale, a blanket condition of being in the App Store. Now, new subscribers can still download the Netflix app on an Apple device, but they will be sent to an external website to submit payment details. (In the wonky world of Internet transactions, where you make the purchase determines how, or if, Apple gets a cut.)

In a second sign of frayed relations between the two companies, Netflix has decided to opt out of the Apple bundle, which will upsell subscriptions to HBO and CBS in addition to its original programming. Netflix's absence from the new platform says a lot about the state of play in the highly competitive streaming industry: a fight is brewing over how content is distributed.

Mr Hastings explained it at a Netflix earlier this week: "Apple's a great company. We want to have people watch our service — or our content on our service. And so we've chosen not to integrate into their service, because we prefer to have our customers watch our content in our service."

The key word here is "service". 

Put it another way: Netflix is a service, or a pipe, that would sit on another service, or pipe, if it agreed to be included in the Apple bundle. And if it had joined forces with Apple, Netflix also would have received little to no data about who is subscribing or watching its stuff. Further muddying the company's identity, from the Netflix point of view, would be the fact that Apple users who spooled up "Stranger Things" or "Orange Is the New Black" may not be aware that they're watching a Netflix show. Retaining the brand is as important as owning the data.

Apple and Netflix (and others) are now in competition to become the main pipe for digital video — what television is fast becoming — and fixating on other contests, like who wins the most Emmys, is secondary to owning the pipe. The companies are battling for credit card numbers, email addresses and direct access to consumers.

The focus on Apple's programming makes for a tantalising narrative, given how long Silicon Valley in general and Apple in particular have remained agnostic about owning content. But original Apple fare, like the program set at a morning show starring Witherspoon and Jennifer Aniston, is just the appetiser. The main draw is the bundle, the one-stop service for all kinds of media. Apple's shows are likely to be free for a period to entice users into other subscriptions, such as CBS and HBO and Starz, with Apple functioning as the reseller.

But Netflix is also in the resale business. Although the company promotes its many "originals", it doesn't actually own a lot of the shows associated with the service. "House of Cards" and "The Crown", to cite two examples, are licensed.

Netflix's programming strategy is something of a mystery, because there isn't a clear through-line on the shows it buys or makes, resulting in a hard-to-define hodgepodge. But that's by design. Netflix has long maintained that its brand isn't about any particular aesthetic, like HBO's. It's a service that aims to serve up shows for all kinds of viewers, from people who like the teenage thriller "You" to those who are tempted to click on the tile for the dystopian Polish sci-fi show "1983"

The same might be said for Hulu, Amazon or Comcast, all of which fund original content while also marketing other content from channels — like HBO or CBS — within their platforms.

Not coincidentally, Comcast announced its own streaming bundle just days ahead of the Apple showcase. Customers who only have Comcast's broadband service can spend an extra US$5 a month to get free streaming movies and TV shows from ad-supported services like Pluto and YouTube. They can also go through Comcast to purchase an HBO or a Netflix subscription. It's meant to be a one-stop shop for your streaming needs, not so different from what Apple is proposing.

A nuance worth noting: Netflix is willing to work with Comcast — a competing distributor — and not with Apple because Netflix sees Apple as the bigger threat. Netflix executives are worried the tech giant will crack the streaming code faster than Comcast, according to two people familiar with the company who were not authorised to talk publicly. Another way of putting it: Silicon Valley companies are wary of what their next door neighbors are capable of.

Netflix has 60 million customers in the United States, making it one of the largest distributors in the country. Comcast, the nation's largest cable company, has 25 million broadband customers. Hulu has 25 million. Amazon Prime has 97 million, but not all are watching its videos.

Their reach is minuscule compared with Apple, which has more than 1.4 billion devices in use around the world, including more than 900 million iPhones. That scale explains how Apple Music, a streaming service the company started offering in 2015, garnered more than 50 million paying users so quickly.

It also explains why HBO (owned by AT&T), Showtime, CBS and Starz could show up on Apple's service Monday. The sheer volume of mobile devices in circulation is hard to ignore. Even before it starts offering original programming, Apple is arguably the biggest entertainment distributor on the planet.

Still, HBO's inclusion in the Apple bundle raises questions. Its owner, AT&T, is already a large distributor, with roughly 160 million wireless customers. The company also plans to start its own streaming service — which will include HBO programs and the properties it gained through its acquisition of Warner Bros., like "Wonder Woman" and "Friends" — by the end of the year.

From HBO's perspective, allowing itself to become part of Apple's streaming effort is not that different from selling its wares via Comcast or DirecTV. It's just another sales outlet. Even HBO's own streaming service, HBO Now, had a slow start until Amazon Prime started marketing it. With the push from Amazon, the number of HBO Now subscribers nearly doubled, to 5 million. (HBO has more than 7 million online customers, with those who subscribed through Amazon counting for a smaller proportion.)

But that kind of indifference could cut against AT&T's own plans to sell content directly to people. The wireless giant will have to weigh the value of the distribution muscle of Apple or Amazon or Hulu against its own needs. Why did AT&T buy Time Warner (which also included CNN, TNT and Warner Bros) if not to jump-start its own streaming bundle?

Without explicitly trying, Apple has built itself into a media colossus.

So what does mean for everyone else?

Mr Hastings said it best on an October earnings call when he talked about the flurry of new entrants into his area of expertise: "The game is on."


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