Apple Needs to Get Serious in the Battle Against Netflix, Amazon

One of the most important growth businesses for Apple has been its services division. It brings in about $7.5 billion a quarter now, and it could be a Fortune 100 business if it was ever spun off on its own.

In thinking about Apple's services business over the last few weeks, two conversations I had with Sony co-founder Akio Morita and Steve Jobs many years ago came to mind.

Not long after Sony purchased a movie studio, I had the privilege of interviewing Mr. Morita on one of my trips to Japan. At the time, Sony was known primarily as a hardware company that made TVs, portable music players, and stereo equipment. So why a movie studio? Mr. Morita told me that he saw movies as just "digital bits," which represented important content that could be shown or used on his devices.

Keep in mind this was over a decade before the idea of content tied to devices was really in focus and showed the incredible foresight Mr. Morita had as Sony's CEO. Unfortunately, once he retired, Sony lost its portable music lead to Apple and the iPod, not to mention laptops, smartphones, and tablets. Today, Sony faces competition from smart TVs and PC gaming and challenges due to constant restructuring, cost cutting, and a senior leadership that does not seem to see future consumer trends.

Steve Jobs was a real fan of Mr. Morita and had a similar view of digital content, especially music. When I spoke with Jobs, he made it very clear that Apple is a software-first company. Its goal is to use software, hardware, and services to tie people to its overall ecosystem.

So it's been surprising how far behind Apple is when it comes to investing in content beyond music. The chart below shows Apple investing about $1 billion on non-sports video programming in 2017 compared to Netflix, which spent $6.3 billion, and Amazon at $4.5 billion. This year, Netflix could spend up to $8 billion.

That said, perhaps Apple has its eye on some bigger prize in the content space. Yes, it could create more original content and go after existing shows, but it might make sense for Apple to take a page from Sony's playbook and buy a major movie studio, or at the very least, acquire some dedicated production companies that already have proven content and the ability to create more shows quickly.

As Apple SVP Eddy Cue said at SXSW recently, "we know how to create apps, we know how to do distribution, we know how to market. But we don't really know how to create shows."

While that may be true, it could it could use its hefty bank account to acquire that kind of knowledge and capability. Buying a movie studio may not make sense, but purchasing a proven TV production company could help it compete with Netflix, Amazon, and beyond.

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