Apple TV Plus will be bigger than Netflix, if Apple does a billion things just right

Let's talk about Apple TV Plus, Apple's new streaming TV service. The big news this month is the price and reach of the service. Apple TV Plus will be $4.99 a month, but all new iPhone, iPad, and Mac buyers will get a year of the service for free.

When we last looked at the service, we didn't know pricing or distribution. We thought it was likely to be in the ten-buck-a-month range, putting it on a par with other streaming services. The company had showcased some premium, HBO-level quality shows, and it seemed like Apple was setting itself up to be more of an HBO competitor than a Netflix knock-off.

But compelling shows or not, who was going to spend ten dollars a month for a starting selection of ten shows?

Then there's Oprah. Oprah is an entertainer in a class all her own. She's hugely beloved, and, more to the point, has an amazing following. When she appeared onstage at the Apple TV Plus announcement, she declared her reasoning for being part of the project as, "'Cause they're in a billion pockets, y'all."

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This, at the time, seemed like the usual Apple hyperbole. Sure, Apple has been tremendously successful with phone sales, but a fee-based online streaming service is a whole different game. With just a few shows, and the fee in the way, not to mention the stupid and confusing name, how could Apple TV Plus reach even a few million viewers, not to mention a billion?

As it turns out, Apple may have found a way. The company clearly pitched this to Oprah back during the planning stages, and while her "in a billion pockets" may be more aspirational than actual, the potential is there.

Let's look at some numbers

A year ago, Tim Cook said that Apple sold nearly two billion iOS devices in the 11 years the iPhone had been on the market. Given the additional year since that statement, we can safely assume Apple has exceeded that number by some amount.

So, when it comes to "in a billion pockets, y'all," Oprah is right, in that there are probably that many iPhones (plus or minus) in use. Now, if those iPhone users were all watching Apple TV Plus, that would be a tremendous viewing audience. But Apple isn't going to be able to pull in all those users. More on that in a bit.

By comparison, at the beginning of this year Netflix was reported to have 139 million paying subscribers. The two key concepts here, of "paying" and "subscribers," are not necessarily connected. We'll get back to that later, too.

Oprah herself is so famous, in part, due to the success of the 25-year run of The Oprah Winfrey Show, which went off the air in 2011. Her final show pulled in 16.4 million viewers. That was the highest-rated daytime TV show in history.

Let's look at three other numbers, and then we'll have our base set of starting variables to unpack the Apple TV Plus strategy and opportunity.

First, let's look at Netflix's content offerings. According to Variety, Netflix has 47,000 TV episodes and 4,000 movies in its catalog.

Second, by contrast, Apple's Apple TV Plus page lists 10 shows. They all look great, but with a line-up of 10 episodes per season, subscribers might have a total of 100 episodes across the entire streaming service.

Also: Will Apple TV Plus be worth it? Here are three full trailers to help you decide    

Third, let's look at Apple's iOS sales numbers. We know iPhone sales are declining. That said, Apple did ship 36.3 million iPhones in Q3. Sales in Q3 are always going to be less than Q1 sales, so let's give Apple a little benefit of the doubt and say that they sell 160 million units a year. That's accurate, plus or minus 10 million or so.

Before we move on, let's recap:

• Apple has sold about 2 billion phones, and are currently selling about 160 million a year
• Netflix has 139 million paying subscribers watching 47,000 TV episodes and 4,000 movies
• Oprah's last show drew 16.4 million viewers
• Apple TV Plus has 10 shows and maybe -- maybe -- a hundred episodes

Bigger than Netflix

In the title of this article, I make the assertion that Apple TV Plus could be bigger than Netflix. Obviously, that's not in terms of size of content library. Even if Apple bought up Disney (and Disney Plus), the combined libraries would only reach approximately 20% of the size of Netflix' gargantuan selection.

But what about audience size? For someone as famous (and wealthy) as Oprah, reach is what it's all about, even more than the cash. And here's the thing: Apple may have the reach.

Apple is making a very smart move when it comes to attracting talent. They're building a huge audience. Apple can do this because the company has an enormous user base. But rather than just hope they can convince their customers to buy Apple TV Plus, Apple has thrown a nuke into the streaming services ring.

Apple is giving away a free year of Apple TV Plus to everyone who buys a new iPhone, iPad, or Mac. By doing so, Apple is overcoming one of the biggest barriers of entry to audience-building: cost to consumer. There will be roughly 160 million people who will have access to Apple TV Plus for free.

Add to that all the rest of Apple's customer base, many of whom might want to see one of the shows on offer, and be willing to pay the $4.99 a month price of entry. Heck, I'd pay five bucks a month to any streaming service that offered new Stargate episodes. Some of Apple's shows seem as compelling, with See giving off a definite GoT-meets-Vikings vibe.

That's why I said "paying" and "subscribers" are different things. Sure, Apple wants to make Apple TV Plus into a profitable service. But when you realize that Mac sales are just a rounding error when compared to iPhone sales -- and Apple's Mac business is bigger than McDonalds' worldwide revenue -- it becomes clear that Apple TV Plus won't touch Apple's bottom line for years.

But if Apple can attract A-list celebrities to do A-list projects, that's something else again. Netflix has shows by people who would have wanted to be guests on Oprah. Apple has Oprah. That can make a big difference, if it's done right.

Also: How Apple will crush Android with services, bundling, and cheap devices  

The discoverability challenge

Discoverability is also a big issue. With 47,000 TV episodes, getting your show noticed on Netflix can be a challenge. My wife and I watch a number of fabulous Netflix originals, but it's hard to find them buried among the vast tracts of content Netflix offers.

Once a viewer has signed into Apple TV Plus, discoverability is not difficult. There are only 10 shows. Even after two or three years, there will probably be less than 50. As a result, celebrities like Oprah, Steven Spielberg, Jennifer Aniston, Reese Witherspoon, and Steve Carell have a much better chance of having their work actually seen by subscribers.

By reducing the friction of attracting subscribers by providing a free year, Apple is able to present the reach top celebrities crave.

But even with a free offering, Apple has some challenges. For example, how exactly do new iPhone buyers find out about the Apple TV Plus service? Is Apple counting on customers opening the Apple TV app on their own? Apple doesn't put ads on the phone itself. Does Apple just put a flyer in the box? Or will Apple blitz the TV networks and YouTube with ads?

Getting it right

This is where Apple has to get everything right. Because even with a billion pockets and a 160 million instant subscribers, Apple has to get those folks watching Apple TV Plus. And, of course, after the year, Apple either has to extend its free offering or hope they can somehow convert the majority of watchers into paying subscribers.

Statistically, that doesn't happen. Usually, conversions range from about 0.2% to a wild best case of 5%. 0.2% of 160 million is 320,000. Five percent of 160 million is eight million. In other words, from Apple's free program, they're likely to keep somewhere between 320,000 and eight million as paying subscribers.

As for that two billion? Here, you're talking even smaller numbers. When I was doing direct marketing, we found that cold conversions might reach a high of 0.02% across most industries. Applied to Apple's two billion installed base, 0.02% is 400,000 -- not a big number when it comes to the reach we've been talking about.

Next, let's look at the revenue opportunity for Apple. Best case is they convert all 160 million trial subscribers into paying subscribers. At $4.99 per month per subscriber, that's about $800 million in revenue a month, or about $9.6 billion. That's absolute best case. The hard fact is, nothing converts at 100%.

The more likely best case is the 5% conversion number, or eight million subscribers. Eight million subscribers, far fewer than Netflix has, would contribute a paltry $480 million to Apple's bottom line. For a company that made $265 billion in 2018, that's chump change.

So here's the question Apple has to ask: Is it worth losing the initial reach of Apple TV Plus (and the attraction that offers top-tier entertainment producers) for the paltry best case revenue scenario? Or would it be far smarter to keep offering Apple TV Plus for free, or at least for free with purchase, and build a stellar content library and a huge audience?

I don't think they can do both. I don't think Apple can attract enough paying subscribers to provide the reach A-list celebrities demand. On the other hand, if Apple keeps offering Apple TV Plus for free, they have a chance to blow Netflix' subscriber numbers out of the water and keep attracting the best content producers on the planet.

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