By Gene Munster
CNBC reported that Apple (AAPL) plans to give away some of its forthcoming original video content to Apple device owners as a part of a new digital TV strategy (likely starting in Mid 2019). We can not confirm if this is, in fact, part of Apple’s strategy but we believe it’s the right approach for the company, because it advances their mission as Services company.
A Free Content Strategy Is the Right Approach — 4 Reasons Why:
- Quickly build awareness of Apple’s video content with about 1 billion consumers (Netflix currently has 130M+ paying subs, Amazon Prime 100M+).
- Increase hardware retention, an important component of Apple as a Service.
- Drive usage of Apple’s pre-installed TV app that allows users to sign up for third party subscriptions (HBO, Showtime, Starz), from which Apple takes a cut.
- Build a loyal viewer base that Apple could upsell to a range of paid options.
Details of CNBC’s Reporting
According to CNBC, starting as early as next year Apple’s pre-installed TV app will house both free original content produced by Apple (see details here) and other third party subscription video services. CNBC added that Apple is looking for a marquee series that could serve as the foundation of a paid subscription video service down the road.
We expect Apple to spend $900M on video content in 2018, growing to $4.2B by 2022. While the initiative is off to a disappointing start (think Carpool Karaoke and Planet of the Apps), we believe Apple is making measurable progress in original video content. Previously, we had expected video would begin to contribute to Services growth starting in 2019 or 2020, and video content could ultimately account for $10-$15B in annual revenue (Netflix will do $16B in 2018) and 3-5% of overall Apple revenue. If CNBC’s report proves to be accurate and Apple continues to give away its original content, our video estimates may be too high.
Taking a Page from Amazon’s Playbook
Apple’s original content, whether free or paid, is an incremental value-add that makes the Apple ecosystem more appealing. Essentially, Apple is taking a page from Amazon’s playbook. Amazon includes extensive video content and essentially gives away hardware like Echo Dots to Prime customers aiming to increase the likelihood of a Prime member renewing their subscription. Apple as a Service involves expanding the range of services unique to Apple that are available on your devices which, in turn, make it more likely consumers will replace an old iPhone with a new iPhone.
Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio.