Apple's video content strategy is coming into focus, and the company's plans look ambitious. Management's goal is to develop its own video service to distribute original content to more than a billion Apple devices. Apple will compete with Netflix and every other video content bundle. However, there will be a twist in Apple's strategy.

Background

While Apple has long held a desire to rethink television, there has been one missing link: content. This lack of content played a part in Apple initially positioning Apple TV as a hobby. Unattractive TV industry dynamics, including a problematic go-to-market strategy, played a much larger role.

Over the past seven years, Apple has been trying to create some kind of video content service. In 2009, Apple thought about becoming a cable distributor. The idea was met with little interest from content companies. Apple then turned to partnerships. Time Warner Cable had shown interest in working with Apple on a new type of paid TV service. Apple also approached Comcast with a similar idea of joining forces to launch a cable package with a revolutionary, new user interface. Apple met resistance. Unlike the music industry in the early 2000s, the cable industry was still doing too well financially to look at Apple as some kind of last resort. Apple's plan to partner with distributors was dead.

Apple's next plan involved bypassing cable distributors and going straight to content companies to deliver content over the internet. The idea was to disrupt the large cable bundle by offering a slimmed down bundle of the most popular 20 to 30 cable channels for a lower monthly price. However, there were severe disagreements over money. Content companies wanted to include more of their channels in the bundle in order to bring in more revenue. Apple knew a low price was needed to insure customer adoption. Even Disney, a company thought to be a close Apple ally, couldn't reach a deal with Apple.

This left Apple in an awkward situation when it came time to unveil its updated Apple TV box in September 2015. Apple is now positioning apps as the future of TV. The logic is that consumers will rely on a number of video apps from other companies for content. While this situation will suffice in the near-term, Apple has never stopped looking for ways to set itself apart from the competition in terms of delivering content to a global audience.

Why Video?

For a company that is all about being focused and saying "no" to most product ideas, Apple's continued interest in video content may seem strange. However, Apple is increasingly dedicating resources and attention to video content for two reasons:

Content (video and music) streaming has become a must-have feature for mobile ecosystems. Changing industry dynamics has led to a new breed of content distributors getting into original content creation.

With technology companies battling each other for our time and attention, offering video content streaming has become a crucial requirement for a vibrant mobile ecosystem. While people may be spending less time consuming content via large cable bundles, an increasing amount of time is being given to smaller content bundles, including Netflix, Sling TV, PlayStation Vue, HBO, Hulu, Amazon Video, and YouTube.

This move to paid video streaming has altered industry dynamics. New distributors now have the customers to invest significantly in developing original video programming. Netflix is on track to deliver 600 hours of original content this year. The plan is for Netflix to increase that total to 1,000 hours in 2017. Netflix plans on spending $6 billion on content in 2017, which would be close to the $7.3 billion expected to be spent by ESPN this year. It is only a matter of time before Netflix spends more than ESPN on content. Meanwhile, Amazon is on pace to spend more than $3 billion on content this year. One consequence of this development has been a "brain drain" impacting traditional cable companies. Talent, both in front of and behind the camera, is moving to where the eyeballs (and money) are located, which is increasingly found at Netflix and Amazon.

Given these changing market dynamics, Apple in a precarious position as the company increasingly finds itself relying on competitors to provide high-quality content to Apple customers. We see how Apple has tried to avoid or diffuse this type of dependency when it comes to hardware components. The same is now happening with video content.

Apple's Video Strategy

After years of trying to figure out TV and video content, Apple's latest video strategy marks its most ambitious plan yet. Apple will compete with Netflix, Amazon, HBO, Disney, and every other content company by moving into original video programming. The greater flexibility attached to original video programming will make it possible for Apple to distribute content around the world. Apple will produce its own shows with the goal of launching an Apple Video streaming service. However, Apple has no plans to compete with content companies along traditional terms.

In 2014, Apple didn't buy Beats for $3 billion just as a music streaming play. Instead, Beats was Apple's content streaming play. The Beats acquisition and resulting Apple Music service will serve as the foundation for Apple's broader content strategy. We are already starting to see the early stages of this plan taking shape.

Apple's video strategy:

Use Apple Music to mask original video programming ambitions. Check. Expand to other types of original video programming. Check. Position Apple Music as a carrot for an "Apple Video" streaming service by offering a combined Apple content subscription including Apple Music and Apple Video.

Notice how Apple began its original video programming strategy by creating content for Apple Music - everything from Taylor Swift's concert video to music artist interviews with Zane Lowe, head of Beats 1 radio. Apple then expanded its focus to fund Vital Signs, a six-episode scripted series about Dr. Dre. Since Apple doesn't have enough original content for its own video streaming service, the company's efforts in video are being used to push Apple Music subscriptions. Customers paying for Apple Music will also get access to Apple's original video programming (much of it related to music).

Instead of competing head-to-head with companies like Netflix and Amazon in terms of the offering a certain amount of original programming, Apple would look to bundle its original video programming into a larger Apple entertainment package that includes Apple Music. Over time, Apple could expand to include various types of licensed content including live sports, which Apple has reportedly shown some interest in from time to time.

There is a reason Apple has been so forthcoming with providing updates to the number of paying Apple Music subscribers. In addition, Apple Music executives have been doing quite a bit of press over the past year. Apple is trying to build credibility in Hollywood and boost Apple Music subscriptions. A stronger Apple Music service will give Apple a better chance of success with a streaming video service.

Apple Studios

It will be difficult, if not impossible, for Apple to succeed with original video programming without having the right culture for such endeavors to flourish within Apple. My theory is that Eddy Cue will be given reign over a new Hollywood arm within Apple for producing content. This "Apple Studios" would produce content in house (applies to both video and music ambitions). There were many interesting things going on with Apple's exclusive with Frank Ocean a few months back.

Apple Studios would sit uniquely within Apple's organizational structure. As seen in the following chart, Apple Studios would be an entity positioned in such a way as to contain a certain level of independency within Apple. However, Apple Studios wouldn't be completely cut out of Apple.