Why Apple made the unusual move to sell its streaming service for next to nothing

Key Points
  • Apple priced its streaming video service, Apple TV+, at $4.99 per month, which is cheaper than any other major service. It's also giving customers a year of Apple TV+ for free if they buy a new iPhone, iPad, Mac or Apple TV box.
  • The company was forced to keep the price low as more competitors prepare to launch their own services with larger video libraries full of popular shows and movies.
  • But Apple's pricing and free trial also puts it in a position to rapidly build a subscriber base that can be charged more once its video library grows.
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Apple rarely sells anything at a discount.

Between its $1,000 iPhones and pricey accessories like the $159 AirPods, the company has built a reputation for convincing customers to pay a premium for anything with the Apple brand.

But that's not the case with Apple TV+, the company's new video streaming service that will launch on Nov. 1.

On Tuesday, Apple announced pricing details for the service. It costs just $4.99 per month, making it the cheapest of all the major streaming services today. Apple will also give away a free year of Apple TV+ when a customer buys a new iPhone, Mac, iPad or Apple TV box.

As the streaming wars heat up with new competitors like Disney, NBCUniversal and WarnerMedia poised to launch their own subscription services, Apple was backed into a corner on pricing. Apple TV+ will only have a small handful of shows at launch, compared with the massive media libraries of proven and popular content its rivals will offer. It simply can't stack up to its streaming rivals yet.

So, how does Apple TV+ fit into Apple's overall strategy to boost its revenue for digital services revenue? And why is it priced below Netflix, Disney+, Hulu and all the others?

Let's break it down.

Apple TV+ will launch with small library of original shows and won't have licensed shows from third parties. The service will only have nine original shows when it launches on Nov. 1. While they'll feature top talent like Jennifer Aniston and Jason Mamoa, the library pales in comparison to Netflix's wide array of shows and movies and Disney's vast library of "Star Wars," Marvel and Pixar content. Good luck getting someone to pick Steve Carell over Luke Skywalker.

As great as Apple's shows may seem, it's simply not as good of a value you'd get from rival services. And it's likely no coincidence Apple priced Apple TV+ $2 below Disney+ and will launch just weeks ahead of it.

The one-year free trial sets Apple TV+ up to be one of the largest streaming services within a few months. Apple is expected to sell about 70 million new iPhones through the holiday season, according to most analysts, plus millions more Macs, iPads and Apple TVs. All of those purchases will convert to new Apple TV+ subscribers thanks to the one-year free trial offer. And a year from now, when Apple will have even more shows, many of those customers will likely feel convinced enough to start paying.

Eventually, Apple's video library will grow, which will justify a price increase in the future. That $4.99 per month price will likely stick around for a few years until Apple feels confident it has enough stuff for people to watch to justify a price increase. By that time, it'll have tens of millions of subscribers thanks to its low price and free trial offers. Once those people are hooked, a price increase will be easier for those subscribers to swallow.

It's the same pricing strategy that's worked so well for Netflix over the last few years: get subscribers hooked, then start charging them more.

It'll help sell more iPhones. Apple is still the iPhone company. Even if iPhone revenues make up less of Apple's overall revenue, the iPhone is still the core of Apple's business. Any service that increases the stickiness of Apple's hardware and keeps users upgrading is a win for Apple. For now, Apple TV+ is more of a marketing tool to sell more hardware, and it's well worth the billions per year Apple is spending to produce original programming for the service.

This is a long-term services play for Apple. It probably would've preferred to charge a lot more for Apple TV+, but given the stiff streaming competition, it's better off building a massive subscriber base today so it can start charging them more down the road.

Disclosure: CNBC is owned by Comcast's NBCUniversal unit.

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