Apple Facing New Video Challenge – Report

Apple's share of movie rental and sell-through revenue is falling sharply, according to a recent report in the Wall Street Journal (subscription required). The company's market share has dropped from well over 50% to between 20-35% since 2012 while Amazon.com Inc. (Nasdaq: AMZN) saw its share grow to about 20%. That's not an entirely fair comparison since the Amazon estimate also includes subscription video-on-demand, but it does show that Amazon is growing and Apple is shrinking.

Factor in subscriber growth for Netflix Inc. (Nasdaq: NFLX), now with 50.85 million US subscribers; and pay-TV providers like Comcast Corp. (Nasdaq: CMCSA, CMCSK), who are also now selling digital videos; and you can see that Apple is facing tough competition.

The overall market for digital video rentals and sales are growing at a steady pace, so even with declining market share, Apple Inc. (Nasdaq: AAPL) can point to increasing revenues. But losing 15%-30% market share -- if the estimates are correct -- would be a worrying trend in the longer term.

The increasing popularity of subscription video-on-demand (SVoD) services is also affecting other online streaming business models. According to analysis from PricewaterhouseCoopers International digital video viewership and revenue is moving towards Netflix and Amazon-type monthly all-you-can-eat services, rather than the pay-per-title model followed by Apple.

While Apple's overall services business continues to grow, video has been a persistent challenge for the company. Perhaps the reason is Apple's overwhelming preference for doing things its own way.

Much of the company's success has come from an uncompromising approach, both to technology innovation and its own pricing/revenue sharing. But given the complexity of the video industry, and the multiple powerful stakeholders that need to get on board to support a new service, Apple's approach might be too uncompromising. Partnerships are important for everyone in this business, and the company seems to be working on this. It is building distribution relationships with SVoD services like Netflix and HBO, for example.

Apple's meanderings in the video desert could also be an opportunity for pay-TV providers. In the past, partnership efforts have not had much success because neither party was willing to give up control of the user interface and service, but Apple may have to accept that more flexibility will be required moving forward.

— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation

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