Watch out Netflix/Amazon – Apple Wants To Make Films Too

Apple will invest $1 billion for original digital video programming. How does the tech giant's budget stack up to its competitors like Netflix, Hulu and Amazon?

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Apple Inc. (AAPL) has set a budget of roughly $1 billion to procure and produce original content over the next year, according to people familiar with the matter–a sign of how serious the iPhone maker is about making a splash in Hollywood.

Combined with the company’s marketing clout and global reach, that immediately makes Apple a considerable competitor in a crowded market where new media players and traditional media companies are vying to acquire original shows. The figure is about half what Time Warner Inc.’s HBO (TWX) spent on content last year and on par with estimates of what Amazon.com (AMZN) spent in 2013, the year after it announced its move into original programming.

Apple could acquire and produce as many as 10 television shows, according to the people familiar with the plan, helping fulfill Apple Senior Vice President Eddy Cue’s vision of offering high-quality video–similar to shows such as HBO’s “Game of Thrones”–on the company’s streaming-music service or a new, video-focused service.

Apple declined to comment.

 

The budget will be in the hands of Hollywood veterans Jamie Erlicht and Zack Van Amburg, poached in June from Sony Corp. to oversee content acquisition and video strategy. They exited their Sony contracts a month early and started working this month from Apple’s Los Angeles offices, where they are taking over programming responsibilities from the Apple Music team, according to the people familiar with the matter.

Elbowing into the crowded video business won’t be easy. Amazon and Netflix Inc. have considerable head starts and far bigger programming budgets. Apple also has to avoid jeopardizing its 15% cut of subscriptions from its app stores for video services like Netflix (NFLX) and HBO Go–a growing contributor to its $24.35 billion in annual services revenue.

Programming costs can range from more than $2 million an episode for a comedy to more than $5 million for a drama. An episode of some high-end shows such as “Game of Thrones” can cost more than $10 million to produce.

The back-to-back success of the original shows “House of Cards” and “Orange Is the New Black” is credited with building Netflix’s business. At the time they were released the company’s annual budget for original and acquired programming was about $2 billion; this year it is expected to spend more than $6 billion.

For its video service to gain relevance, Apple needs at least one hit, according to the people familiar with the plan. The company’s initial video efforts–“Planet of the Apps,” launched in June on Apple Music, and “Carpool Karaoke,” launched last week–were criticized by reviewers.

With $215.64 billion in revenue last fiscal year and more than $261 billion in cash on its balance sheet, though, Apple could quickly ramp up spending on content.

Mr. Van Amburg and Mr. Erlicht have begun meeting with Hollywood agents and holding discussions about shows Apple could acquire, the people familiar said. The men also hired former WGN America President Matt Cherniss to oversee development, the people said.

Mr. Cherniss will assist with finding programming. He previously worked with Mr. Erlicht and Mr. Van Amburg to bring the Sony shows “Underground” and “Outsiders” to WGN. Mr. Cherniss also has movie experience, having worked as a production executive at Warner Bros.

Apple is eager to shore up its existing video business–renting movies and TV shows through iTunes–which has been challenged by the rise of video-subscription services that offer programming for a monthly fee. Last year, iTunes generated an estimated $4.1 billion in revenue, but its share of the movie rental-and-sales market has declined to less than 35% from 50% in 2012.

Apple is hoping that original video bolsters the appeal of movie rentals and other iTunes offerings–a critical piece of its services business, which also includes App Store sales, Apple Pay and Apple Music. The company aims to double that business to about $50 billion by 2020.

Joe Flint contributed to this article.