A new frenemy: Apple is going Hollywood. But it’s been a bumpy ride.

With hardware sales lagging, Apple is placing a big bet on future revenue growth coming from its services business, which pulled in $10.9 billion in revenue last quarter and grew by 19 percent over the previous year. That services business includes other media products such as Apple Music, Apple News and iTunes. But video — including original video — is crucial.

But Apple’s path to the Steve Jobs Theater next week hasn’t exactly been smooth. The tech giant that values secrecy and control over everything else has proven to be an irksome, if not outright difficult, partner for the entertainment community. Intrusiveness among Apple executives when it comes to creative notes, and a lack of information on Apple’s strategic plans for its streaming video offering, has led some entertainment veterans to question how committed Apple is to original video productions over the long term.

Apple’s channels business, meanwhile, will go up against competitive services from Amazon and Roku, both of which have surpassed Apple in terms of connected TV device market share. And not every network has welcomed the chance to be resold by Apple.

But Apple has more than $200 billion in cash on hand. The company is a marketing machine and has iPhones in the hands of hundreds of millions of people across the world. Which makes it hard to count the company out.

“Can Apple succeed?” said a longtime entertainment executive who is familiar with Apple’s current relationship with Hollywood. “It’s really up to Apple.”

Apple did not respond to a request for comment by press time.

A divide between Silicon Valley and Hollywood
Apple has already spent more than $1 billion on original programming, according to The New York Times. The company has roughly 30 shows in its pipeline, with close to a dozen shows either completed or close to wrapping production. Apple plans to produce even more shows in 2020, according to the report.

That spending power has drawn big names including Reese Witherspoon, M. Night Shyamalan and Oprah Winfrey.

But Apple’s “broadcast sensibility” — top Apple executives want family-friendly shows that can attract a wide audience — has made it difficult for some producers to pitch the company. “There’s a lot of second-guessing: ‘Is this too edgy for Apple?” said a source that has pitched shows to Apple. (Apple has more recently played down how squeamish it gets with anything remotely resembling edgy.)

Once a show is greenlit by Apple, producers then have to deal with two sets of notes: the “network” notes that come from the Hollywood executives hired by Apple to oversee its original programming; and the “brand” notes, which often come from Apple executives who are more interested with how the Apple brand is portrayed than what makes sense for the actual story, said multiple sources familiar with the matter. For instance, if a show set in the future depicted a futuristic version of an Apple product, Apple executives would ask for that to be removed; they would prefer using an existing Apple product — which wouldn’t make sense for a show that’s set in the future, a source said.

Beyond the creative, Apple’s habit of tightly controlling all aspects of its business has created difficulties for the part of Hollywood that works “below the line.” Vendors ranging from color-correction houses to visual effects companies to music houses now have to deal with Apple’s security protocols, which makes managing and transferring assets much more difficult, sources said.

“That stuff may work in a software-development system, but it doesn’t work in production,” said a source. “It’s tech once again not ever saying let’s understand how something is done and conform to those traditions.”

Apple has assembled a great team, but is it committed to original programming?
Apple has a strong creative team in place to make great TV shows. Former Sony Pictures TV presidents Zack Van Amburg and Jamie Erlicht, who oversaw the studio when it made shows such as “Breaking Bad,” are in charge of Apple’s original programming efforts. Their team includes longtime entertainment executives such as Matt Cherniss and Morgan Wandell, who are in charge of domestic and international content development.

And with a programming budget of more than $1 billion, with plans to produce even more shows in 2020, Apple is certainly set up to make a splash.

“There’s nothing that should prevent them from having good shows,” said a source familiar with Apple’s content team.

But entertainment insiders are still skeptical about how committed Apple is over the long term in producing original TV series. Some point to Netflix’s content spend, which will be well above $10 billion this year, as proof that, increasingly, a billion dollars is not enough to truly compete in OTT video.

Others point to the fact that for Apple, video is not central to the strategy, but a piece of a broader strategy to build out a services business. If Apple’s original shows don’t drive people to subscribe to other Apple products, will the company just cut bait and focus on the areas that are working? Apple CEO Tim Cook is reportedly active in giving notes to show producers, but is he committed to original programming in the way that Amazon CEO Jeff Bezos is; Bezos, after all, was directly involved in Amazon landing the rights to “The Lord of the Rings” franchise.

“All they need is three killer shows,” said an executive at a TV studio that is currently pitching Apple. “No one knows what the product is going to look like yet, but if there’s a pocketbook that’s open, there’s going to be interest [from Hollywood]. And by the way, [original content] might be a loss leader for them to drive sales of other products — and that’s fine.”

Other entertainment sources are not so sure.

“Until they go out and buy a network or studio, I don’t know how committed they are as an original content player,” said a head of a U.S cable network.

Apple isn’t competing with Netflix, it’s competing with Amazon
While Apple’s original programming budget and pursuit of expensive shows with top talent positions the company as a true rival to Netflix, Apple’s ambitions steer more in the direction of Amazon. Amazon is producing original series to drive more people to subscribe to Prime and shop on Amazon. Similarly, Apple is using video to drive people to use more Apple products and services.

Including Apple’s Amazon Prime Video Channels clone that will reside next to Apple’s original series on the TV app. Apple is planning to launch this wholesale service with 15 programming partners, including Showtime and Starz, according to The Information. While Apple started contacting video programmers last year for its channels service, the company raced to finalize deals with programmers before the March 25 event, sources said.

Apple will collect roughly 30 percent of subscription revenues generated by the channels program, according to sources familiar with the matter. With Amazon collecting between 30 percent and 50 percent of subscription revenues generated by its own program, Apple has the opportunity to recruit video programmers turned off by Amazon’s terms. But in the past, video programmers have also had issues with Apple’s 30 percent first-year tax in iTunes — and at least with iTunes, users are still subscribing and signing into the programmer’s own app versus an aggregated ecosystem such as Apple’s and Amazon’s channels businesses.

“They’re the new frenemies,” said an executive at a cable network that will distribute channels with Amazon and Apple. “On one hand, they represent organic growth for your SVOD content, but at the same time, you’re disrupting your own product a bit.”

What’s more, Prime Video Channels is already a blockbuster: the program will generate $2.6 billion in revenue in 2019, according to estimates from BMO Capital Markets. In doing so, Amazon, which currently accounts for 35 percent of HBO Now subscribers, will pay out $1.8 billion to channel owners this year, according to BMO’s report.

Meanwhile, Roku also launched its own Prime Video Channels clone in January, offering subscriptions to channels from Showtime, Starz and Epix.

Amazon and Roku both have greater distribution in the U.S. than Apple TV. According to a Parks Associates report from last May, Roku has a 37 percent market share in the U.S., followed by Amazon Fire TV with 25 percent; Apple TV, which does not offer a cheaper option such as the Fire TV Stick, had a 15 percent market share at the time.

“Apple is a fraction of the consumption we see on Fire TV,” said the cable network executive. “I’m confident they will create 12 to 20 hours of fantastic content, but creating a whole ecosystem that people go to night after night as their default place for consumption? That’s going to take a tremendous amount of spend.”

Or maybe just all the money in the world.

This story has been updated to correct a typo on how much cash Apple has on hand.

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