It's been over three years since Netflix (NASDAQ: NFLX) began offering subscription to Apple s (NASDAQ: AAPL) ] App Store, forking over 30% cuts of subscriptions sold through the appropriate distribution channel. In 2016, Apple managed its subscription fee structure, where the cut dropped from 30% to 15% after the first year, rewarding developers who are able to maintain long-term relationships with customers. Nevertheless, even the reduced 15% cut increases over time, especially since Apple's overall contribution is minimal.
In August, Netflix launched "testing" to lead new and return customers to subscribe outside the app, cut Apple and
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VentureBeat last week reported that Netflix has now officially made the decision to kill.
The move follows a similar from May when Netflix drew support for billing through Alphabet s Google Play. This moved also allowed existing members to continue billing through Google Play, but the payment method is not available to new and returning customers.
This means that Netflix has now removed subscriptions for the subscriptions efficiently for new and returning users on the two dominant mobile platforms.
What this means for Netflix
Netflix now has over 130 million paid membership globally, but domestic and international segments have very different dynamics. The US core market is quite mature and saturated, with membership growth rapidly declining. Netflix added just 1 million paid subscriptions in the US in the third quarter. In other words, Netflix shifts its focus on its US business from membership growth to profitability.
On the international front, Netflix is far less profitable at first, with a deposit margin of only 17% (compared to 39% in the US). The company is already making progress with increasing international profits and cutting intermediaries out of the equation will strengthen these efforts.
What This Means to Apple
Netflix's move is not a blow to Apple, which has been aggressively focused on increasing its service business. That segment is very profitable precisely because the company does not have to do much operationally to earn its cut of third-party sales, and paid subscriptions are a core support for the service sector.
Paid subscriptions have become an important metric operation that Apple now includes in revenue calls. The company had 330 million total paid subscriptions at the end of the fourth quarter.
In addition, Apple is preparing to launch its own video streaming service in 2019, making it a direct competitor to Netflix. CEO Tim Cook instantly recognized the upcoming service for the first time during the summer, and the growth of third-party video subscriptions is part of what motivates Apple to build a similar service. "Some of [paid subscriptions] are third-party video subscriptions and we see the growth going on there," Cook said. "It's like 100% year round."
Suzanne Frey, an executive in Alphabet, is a member of The Motley Fools Board. Evan Niu, CFA owns shares in Apple and Netflix. Motley Fool owns and recommends GOOGL, GOOG, Apple and Netflix. Motley Fool has the following options: long January 2020 $ 150 calls on Apple and short January 2020 $ 155 appeals to Apple. Motley Fool has an information policy.