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Apple Just Took Its Next Big Step in Streaming Video

Adam Levy, The Motley Fool

Apple (NASDAQ: AAPL) just made a very big update to its TV app on iOS and tvOS.

No, not that update. Apple TV+ is still set to launch sometime this fall.

But the upgrade to the current TV app includes the launch of TV Channels, which allows users to subscribe to the over-the-top streaming video services of premium channels such as HBO, Showtime, Starz, and EPIX directly through Apple.

Users will be able to stream content from available channels directly in the TV app instead of being sent to another app. Apple hopes it can provide a better user experience and generate more subscription revenue while it's at it.

While the changes may seem merely cosmetic for users, they could have a major impact on Apple's subscription services business and its own efforts in streaming video.

The Apple TV App on Apple TV, iPad, and iPhone.

Image source: Apple.

How TV Channels makes things different

TV Channels might not seem all that different than just subscribing to various over-the-top services in their respective apps. Apple handles subscriber billing in both cases, and the content shows up in the TV App. But there are a few subtle differences both consumers and investors should take note of.

As noted, content from Channels will stream directly in the TV App. That's because Apple is hosting the content itself. That also means Apple has access to viewer data it couldn't see before, like what shows subscribers are watching and for how long. While its privacy efforts will prevent it from aggregating that data and using it to inform its content-creation decisions for Apple TV+, it can still use the data to make better recommendations and sell additional subscriptions.

Another added feature of Channels is the ability to download content to your device. Most over-the-top subscriptions (HBO Now, for instance) don't allow users to download content to their devices for offline viewing. If that feature is important to a consumer, they may opt to go through Apple TV Channels to get it instead of subscribing directly.

There's a big drawback for subscribers, though, which may be a big source of frustration. Users will only be able to stream their subscriptions on devices that support Apple's TV App. Right now that's only Apple devices and select Samsung smart TVs. Support for Roku and Amazon's Fire TV is coming, but it's not here yet.

Changing the model for subscription revenue

It's unclear exactly how Apple splits revenue with content providers when a consumer subscribes to a Channel. Re/Code previously reported Apple was working on a wholesale model with networks like HBO, enabling it to sell the subscription any way it wants and pay a flat fee per subscriber. Other outlets report Apple is operating under a revenue-split agreement, giving it less control over pricing.

Either way, Apple should be able to produce better economics for its video distribution services. In a wholesale agreement, Apple exercises full control over how much revenue it keeps by adjusting the price per channel at will.

In a revenue-split model, Apple should be able to command a higher percentage of revenue for smaller streaming services by arguing that it provides a boost in reach. That said, the most popular services should get a discount since they're not as reliant on Apple for attracting viewers to their services. Amazon, for example, takes 50% of revenue for smaller providers in its Prime Channel service. That's well above Apple's standard 30% take for in-app subscriptions in the first year.

Paving the way for Apple TV+

TV Channels could help pave the way for a successful TV+ launch later this year. Channels provides an opportunity for Apple to increase engagement with the TV App and get consumers used to the idea of interacting directly with Apple for streaming video. Keeping users in the TV App when they want to stream content from a supported Channel also provides an opportunity to reengage users when they've finished watching whatever they selected.

Importantly, Apple will have access to users' viewing data, so it can recommend Apple TV+ shows that fit their viewing patterns, potentially increasing consumer interest in Apple's originals when they launch later this year.

As Apple gears up for its big bet on original content, TV Channels will become a key part of the company's strategy. The bigger Apple's ecosystem of streaming Channels, the more likely it can attract more people to the TV App, increase awareness for its original content, and increase subscribers for both TV+ and its TV Channels.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon and Apple. 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 recommends Roku. The Motley Fool has a disclosure policy.