U.S. Markets open in 2 hrs 36 mins

Apple Needs Netflix and HBO More Than They Need It

Adam Levy, The Motley Fool

Apple (NASDAQ: AAPL) is preparing to launch a couple of new services next month, according to reports. The company is expected to introduce a subscription news aggregation service based on its acquisition of Texture last year. It's also going to launch a service for aggregating streaming video, anchored by its $1 billion investment in original content.

But Apple has butted heads with some big-name media companies when it comes to their share of sales. Apple wants to keep 50% of revenue from its news subscription service, according to The Wall Street Journal . Meanwhile, Apple will reportedly take 30% of subscription video revenue for its video service.

It's no surprise companies are balking at those fees, which are higher than the standard fees Apple charges. Netflix (NASDAQ: NFLX) notably removed the ability to subscribe to its service in app due to the fees Apple charges. To think it would pay a higher fee to give Apple even more access to its viewer data makes no sense.

Apple's TV app on iPhone and iPad.

Apple's TV app on iPhone and iPad. Image source: Apple

Apple needs to consider a loss leader strategy

If Apple wants to make its content aggregation services a success, it ought to consider offering free publicity to services like Netflix or AT&T -owned (NYSE: T) HBO Now. Both services are popular enough that the lost revenue from subscriptions is minimal, but their ability to draw customers to Apple's new service could be great.

According to a survey from Parks Associates , 36% of households subscribe to two or more streaming video services. If Apple provides a convenient way for subscribers to see all of their paid content in one app, it ought to attract a lot of viewers to its platform. That opens the door for Apple to sell them additional subscriptions to less well-known services based on what they watch in more popular channels like HBO or Netflix.

Apple will have a much harder time convincing consumers to change their behavior otherwise. Sure, it's investing a lot in its own content to draw viewers, but that won't necessarily make it a hub for video entertainment.

It's not clear how Apple plans to divvy up news revenue from its subscription service. If the formula weighs content from Entertainment Weekly with the same value as in-depth reporting from The Wall Street Journal or The New York Times , it's easy to see how the latter two might get upset. The Wall Street Journal charges as much as $39 per month for a subscription while, EW costs less than $2 per month.

Apple doesn't really have the upper hand

What Apple is offering media companies like Netflix, HBO, The Wall Street Journal , and The New York Times is access to its massive audience of 1.4 billion active devices -- 900 million of which are iPhone users. But these bigger companies don't need direct access to Apple's audience.

Netflix spent over $2 billion on marketing last year; everybody knows about Netflix and its hundreds of originals. HBO led the world in Emmy nominations for 17 years before Netflix topped it this year. You'd be hard pressed to find a news reader that's never considered The New York Times or The Wall Street Journal .

The point is, if consumers want to find quality content, they'll find the aforementioned companies with or without Apple's help. Apple only provides value to smaller media companies that may focus on smaller niches or might not have the marketing budgets to reach their full potential audience. That's where it can extract value.

Apple needs to stop worrying about the margins on its services and negotiate special terms with the leaders in subscription video and news in order to get them on board with its services. It's going to be a challenge to attract customers without those deals in place, even if all 900 million iPhone users will instantly get access to $1 billion in content. A smaller margin of a bigger business is a lot more valuable than a big margin of a small business.

More From The Motley Fool

Adam Levy owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy .