Apple, Wall Street and Hollywood Are Lost in Translation

(Bloomberg Gadfly) -- Apple Inc. is comfortable navigating the cultural chasm dividing Hollywood and Wall Street, but those two species don't always speak the same language. Allow me to provide a translation. 

Apple has shifted course again lately in its years-long effort to become a destination for television shows and movies. Apple's ultimate intention isn't clear, but the current tactic is to buy lavish entertainment programming. Apple has hung out its "open for business" sign in Hollywood by showing a willingness to write big checks for TV series or movies from the likes of Steven Spielberg. 

On the other side of the chasm, investors in Apple have been watching its sorties into entertainment with curiosity. It's far less important to them than prospective sales of Apple's newest iPhones, but Wall Street analysts do periodically ask Apple executives about their plans in entertainment. The responses tend to be Apple's typical rhetorical feints.

Now that Apple's plans are becoming a tiny bit clearer, it's time to deliver a hard truth to Hollywood and Wall Street about Apple's entertainment project: Both sides might be disappointed. 

First, a hard truth for Hollywood. The Hollywood Reporter wrote last week that entertainment heavy hitters don't know much about how Apple plans to market and air TV series and movies that the company is negotiating to buy. To bring some information from the other species, Wall Street thinks Apple is getting deeper into entertainment as a way to make iPhones and its other gadgets more appealing to potential buyers and to keep existing Apple hardware owners hooked. The bet is Apple might be trying to create something like Netflix, a subscription entertainment option following in the footsteps of its Apple Music service. 

Hollywood should know that if that's Apple's goal, then the company might make its version of Netflix work only on Apple devices and maybe only for its smartphones, tablets and the Apple TV gadget. Is Spielberg willing to limit the potential audience for his reboot of the 1980s science fiction series "Amazing Stories?" Apple devices aren't in every home and pocket, although the audience is not small. Apple sells more than 200 million iPhones each year, which gives Apple a larger potential global audience than Netflix with its 99 million paying customers worldwide.

If, on the other hand, Apple wants to make its entertainment offerings open to everyone, Hollywood might need a reminder that Apple hasn't proved to have good taste in entertainment -- witness its "Planet of the Apps" reality show for Apple Music -- nor the technology chops to give good programming the effective distribution it deserves. Its iTunes software works on Windows computers and more, but it's a mess and is losing ground as a way for people to buy or watch TV shows and movies. The Apple Music app for Android phones has a lackluster customer rating of 3.5 stars out of five in the Google app store. 

For the Wall Street side of the chasm, I don't think it has come to grips with the financial implications if Apple wants to create a version of Netflix. Investors have grown enamored with Apple's software and services businesses because they generate a growing pile of money at what are estimated to be much higher profit margins than selling iPhones and Macs. Apple has said its "services" business, which includes its cut of revenue from app downloads, the AppleCare warranty program, Apple Music subscriptions and more, will double in sales over four years to roughly $50 billion. That's a huge business.

But if Apple develops a Netflix-like video service, it won't have the same financial profile Wall Street expects from Apple's other services. Just look at Netflix's skimpy Ebitda margin of 6.9 percent in the last 12 months, compared with 31 percent at Apple. If Apple's services margin is deflated by the company's push into entertainment, that also dents the investment idea that the business is a profit cushion even if iPhone sales continue to slow. 

The predicament Apple faces in entertainment is part of the company's awkward transformation. The revolutions Apple produced in computing with the iPhone and in music listening with iTunes are harder to come by. CEO Tim Cook has been promising for five years a revolution in video entertainment but instead has delivered a series of aimless or failed strategies.

The company absolutely has the cash and cachet to deliver some thrilling TV series and movies, and the world will make a big deal about them. But Apple hasn't yet proved that it's more than just another checkbook for Hollywood, nor has it shown investors that its programming strategy will do much for the bottom line.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

To contact the author of this story: Shira Ovide in New York at sovide@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.