Can Apple Afford to Sell Video for $4.99?

Apple Inc. (NASDAQ: AAPL) has announced its new Apple TV+ service, along with upgraded iPhones, watches and iPads. The new hardware, management says, is not the core of the company’s future growth. Services are. Apple TV+ is at the core of that strategy.

Apple has a long way to go in the services business if it is going to be the engine of the company’s expansion. In the most recent quarter, the segment had revenue of $11.5 billion, against Apple’s total of $53.8 billion. Apple management reasons that it has one of the largest installed customer bases in the world via its hundreds of millions of iPhones and Macs. Apple has tremendous brand loyalty too, based on large studies of brand loyalty done every year.

What Apple does not have, and is used to having, is a lead. It was first into the mass smartphone business, first with a large music service and first with an app store with tens of thousands of apps that made the iPhone much more useful to consumers. In streaming media, however, it must compete with giants Amazon and Netflix. There also is a small army of other services, including Hulu and extremely well-funded offerings from Disney and WarnerMedia. It is a crowded field. And most people do not subscribe to four, or five or six services. Most research shows consumers subscribe to one or two.

What Apple does have is a below-market price. Apple TV+ is priced at $4.99 a month. Whether it can make money at that level only Apple’s management knows. Based on industry data, it cannot make much.

Apple also has a thin lineup of programs now. It is not even close to the libraries of Netflix and Amazon. It is not an exclusive collection of content like Disney+.

The base cost of a Netflix subscription is $12.99. Many people have been subscribers for years, and Netflix has 150 million subscribers worldwide. By some measures, it has almost 30% of the streaming customers in the world. Amazon’s streaming service comes with Prime, a subscription service that offers other benefits, from free delivery of products bought at to special prices on items sold at the world’s most popular e-commerce site as well. Prime memberships cost $12.99 a month. Amazon has over 100 million Prime members worldwide. A video-only membership costs $8.99.

Apple enters the market with an installed base of hardware and a below-market price. It also enters the most crowded entertainment market in the world, years and years behind the leaders.