Apple (NASDAQ:AAPL) is increasingly looking to its Services division for revenue to reduce reliance on iPhone sales. It’s also hard at work on a streaming video service. Netflix (NASDAQ:NFLX) has the third-highest-grossing app on the App Store, but is struggling with slowing subscriber growth and is looking for ways to reduce expenses.
The two companies are on a collision course, with Netflix now forcing new iOS subscribers to pay via a website instead of through the iOS app in some markets, including Canada. Doing so means Apple misses out on its cut of the Netflix subscription revenue.
This has the potential to turn into another epic battle between tech giants, like the one currently being fought between Amazon (NASDAQ:AMZN) and Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google division.
“Testing the iTunes Payment Method” for Netflix Subscriptions
TechCrunch is reporting that Netflix has implemented a measure that prevents new subscribers in 33 countries — including Canada, Australia, Great Britain and India — from choosing to pay for their new Netflix subscription through the Netflix iOS app. Instead, they are directed to the Netflix website to create their account and enter billing details.
The company confirmed to TechCrunch that it is “testing the iTunes payment method” in select markets. It started with a few countries in June, then expanded the test to 33 countries in August. Subscribers who have already signed up through the app are able to continue paying through iTunes, and Netflix says the test will end Sept. 13.
Why is Netflix Doing This?
There are two factors that are likely at play here, but they both roll up to Apple.
The first is that Netflix subscription growth is slowing. NFLX stock tanked a few weeks ago, after its Q2 earnings revealed it added 1 million fewer new subscribers than expected. At the same time, it is spending $8 billion on programming for 2018. If the company is looking for ways to cut costs, eliminating Apple’s cut on in-app subscriptions is a tempting target. AAPL currently takes 30% of Netflix subscription fees for the first year, and 15% for subsequent years.
The second factor? Apple is throwing money around on original programming as it ramps up for the expected launch of its own video streaming service. That would put it in direct competition with Netflix. So why would NFLX put more money in a competitor’s coffers by giving it a cut of Netflix subscriptions?
Risks to Netflix?
There is a risk to Netflix that it could lose potential new subscribers who download the app from the App Store, but don’t want to exit and go to a website to create their account and arrange for payment. Some people load up their iTunes accounts with Apple gift cards (which are often available at discounted prices) and use this balance to pay for Netflix, but this scenario doesn’t work if the Netflix subscription is being paid for outside of the app.
It’s always possible that Apple could try to find a terms of service violation and threaten to remove the Netflix app. But this scenario seems unlikely as it would put iPhone and iPad users at distinct disadvantage compared to those with devices running Android.
It’s also possible that the move might force Apple to the negotiating table. The company already made the concession of dropping its cut to 15% for ongoing in-app subscriptions in 2016. Netflix is the third-highest-grossing app on the App Store, and the prospect of losing that revenue stream might be enough for AAPL to entertain further reductions in its cut of those in-app Netflix subscriptions. If Netflix goes, so could other subscription services, hitting the Services revenue Apple is counting on for future AAPL stock growth.
The test Netflix is running is probably evaluating both of those scenarios: new subscriber resistance and Apple’s reaction.
As TechCrunch points out, Netflix already nixed the ability for new Android customers to pay via in-app subscription in May, so the precedent is there. We’ll have to wait until the end of September, when NFLX says the test will wrap up, to find out what the outcome of poking Apple will be.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
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