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Can Apple Afford to Make Its Streaming Video Service Free? Can It Afford Not to?

As Apple has inched closer to the launch of its Apple TV Plus streaming video service, Disney's shockingly low price on its own cord-cutting service may have Cupertino rethinking its plans.

Bloomberg reported on Monday that Apple is mulling a $9.99-a-month price tag on Apple TV Plus. According to the report, which cited unidentified sources, the company is aiming for a November release with a small lineup of original series that would expand over time.

At first blush, that price tag makes sense for Apple. While it's $1 more than Netflix's starting price of $8.99 per month, it's also less than the $11.99 monthly charge that Hulu uses for streaming video with no ads.

But come November, Netflix and Hulu may not pose the biggest challenge to Apple TV Plus. That honor could instead go to Disney, which will be fighting the iPhone maker for streaming video subscribers when it launches its own streaming video service, Disney Plus, this fall.

Disney plus pricing equals pressure

Earlier this month, Disney dropped a bomb on competitors like Netflix and Apple when it announced that Disney Plus will launch in the U.S. on Nov. 12 at a price of $6.99 per month or $69.99 per year.

Disney Plus won't have all the content library of Netflix or Hulu, but it will be the exclusive streaming home to the company's wildly popular properties, including the Walt Disney Animation Studios classics, content from the Marvel Cinematic Universe, Pixar films, Star Wars titles, new original series, and more.

That could be a problem for Apple. Disney has built a cheap service with content people around the world love, and it begs the question of whether Apple should consider a dramatic move—like a free pricing tier or a bundle with other Apple offerings, to attract subscribers. According to Bloomberg's sources, Apple is also considering offering a free trial on Apple TV Plus while it builds its content library.

But a free trial isn't a panacea. Apple will still need to make the argument that its service, at $9.99 per month, is worth more than Disney Plus's—with its bigger, more attractive library of content—at $6.99 per month.

Apple's sales pitch to viewers will be about quality over quantity. In a June interview with The Sunday Times, Eddy Cue, Apple's senior vice president of Internet software and services, said that Apple's planned business model for Apple TV Plus is not to deliver "the most." It's all about "creating the best." In other words, the company is betting its customers will be willing to pay more for better programming, instead of for simply more shows.

Nothing is free

According to a report by the Financial Times released yesterday, Apple has invested more than $6 billion in programming, a cost that will likely stop Apple from making the drastic move of offering Apple TV Plus for free, Creative Strategies analyst Tim Bajarin says. The company will want to see a return on that investment, after all.

Instead, in a standalone service, both Bajarin and Wedbush analyst Michael Pachter believe a $10-a-month price point for Apple TV Plus is more likely. Anything higher than that and Apple TV Plus could run the risk of looking too expensive. Bajarin thinks a drop to $8.99 is about as low as Apple would want to go.

Indeed, Apple's willingness to invest that much in content illustrates a clear shift for a company that, for years, has centered its business on hardware. Now, with slumping iPhone sales and concerns that a U.S.-China trade war will hurt profits even more, the company is turning its attention to its fast-growing Services business by investing heavily in Apple TV Plus, Apple Arcade, and other digital services. Ultimately, the iPhone-maker hopes to grow Services revenue to $50 billion next year. (Services raked in $37.2 billion for Apple in 2018, and is at $33.8 through nine months in the current financial year, by comparison.)

Pachter says that Apple can technically "afford to price [Apple TV Plus] as low as zero," but he, believes it'll carry a cost.

Still, if a freebie isn't in the plans, a bundle could be. Pachter thinks bundling Apple TV Plus with Apple Arcade could be worth $20 per month, he says.

"They each need to be offered as a separate service that can stand on their own," says Bajarin. "But a bundled service if priced aggressively would be attractive, especially to families with kids."

Can hardware win a media war?

What Apple lacks in a back catalog it wins out in an established customer base. "Apple has over a billion iOS users and has a very large audience to market Apple Plus services to over time," Bajarin says.

Oprah Winfrey, who has partnered with Apple on Apple TV Plus, made that same argument in March.“They’re a company that reimagined how we communicate … [they’re] in a billion pockets, y’all," she said at the Apple TV Plus reveal in March. "That represents a major opportunity to make a genuine impact.”

And it's a tact Apple has used countless times in the past to great effect. The company unveils a new service, makes it available only on its own platforms, and makes it easy for its existing customers to access the service. Apple did it with iTunes, iCloud, and Apple Music. It could now do follow the same course with Apple TV Plus. And if the content as good as Apple hopes it is—and it restricts Apple TV Plus to the company's hardware—it could also help sell more Apple TV boxes, which have a healthy margin.

But none of that will eliminate the pricing pressure Disney Plus is clearly putting on Apple and other streaming providers. Apple may have some advantages and a major addressable market, but Disney Plus is a clear and present danger with a price point to match.

Ultimately, one thing is certain: If the programming on these services flop, at least the battle for streaming dominance will be worth watching.

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