By Gene Munster
At Apple’s (AAPL) “It’s Show Time” event, the company positioned its Services business as a natural extension of their integrated hardware + software ecosystem. Apple put a refreshing bullseye on success for Services: to enrich people’s lives.
Each of the services announced contributes to that mission and has “Apple” fully baked in. Specifically, the company highlighted guiding principles for their services: ease of use, attention to detail, privacy, curation, personalization, and family sharing. Inspiring stories that bring us together, gameplay that includes more users and creators, and improved ease of use and new insights into spending habits are all features of the new services that embody those principles. Yesterday, Apple extended its customer experience and extended the company’s reach into the lives of its massive and growing user base.
Quantifying Apple’s New Services: $20B+ Per Year by 2023
Each of the services announced yesterday will add meaningfully to revenue and accelerate growth in Apple’s Services segment. In total, the four services announced could add more than $20B per year in high visibility revenue within five years and would bring Services revenue to about 25% of Apple’s total revenue, up from about 16% today. While we are maintaining our estimate of $78B in Services revenue in 2023, the levers to achieving that number are more clear. Here’s our take on Apple’s new services and the potential for each to contribute to Apple’s top line in five years:
- Apple TV+ and Apple TV Channels: $15B. Apple is differentiating Apple TV+ as a premium offering in a space full of “good enough” content. Apple TV+ will focus on timely, relevant, wholesome content that connects and inspires people. It will take a long time for Apple to establish an association with the activity of watching long-form content (as Netflix has done), but Apple has made it clear that the company is serious about original content.
- Apple Arcade: $3B. Apple advanced its lead in casual gaming with Apple Arcade. The offering could solve the App Store’s biggest issue: gaming content that nickels and dimes the gamer. That’s never felt authentic to the Apple user experience. We’re optimistic that Apple Arcade will make it easier to discover and enjoy high-quality casual games on iOS without in-app purchases or ads.
- Apple Card: $1.5B. In our view, Apple Card offers a user experience around payments and personal finances that only Apple can deliver. Unlike Apple Pay, it can be used anywhere. And unlike existing credit cards, Apple appears to be putting the customer first. Apple Card will have higher friction levels than Apple Pay, which is active on about 25% of iPhones in the US. Additionally, we see this as the most unique service announced yesterday, as we are familiar with news, video content, and gaming subscriptions, but have not seen this level of transparency and ease of use around consumer credit and payments before.
- Apple News+: $500M. Apple News+ delivers value, particularly for current subscribers of some of the marquee providers (e.g., The Wall Street Journal). Time will tell if Apple is able to corral other providers into the service. We’re also cautiously optimistic that the News+ initiative will turn out better than Apple’s Newsstand effort that was scrapped in iOS 9 in favor of Apple News. Instead, News+ stands on the shoulders of the free News app, increasing its likelihood of success. Here, Apple is leveraging the existing News user base (that reads 5B stories per month) to monetize news content.
Apple’s Marketing Engine Running Full Steam
Apple’s “It’s Show Time” event unleashed the power of its marketing engine on entirely new categories (original content, credit card, subscription news, and subscription gaming). At some level, each of these categories is commoditized, but Apple’s marketing savvy, combined with the existing hardware and software ecosystem and user base, brings new excitement. Just as Apple has done in hardware and software, Apple’s brand will be the primary differentiator with these new services. The company has successfully extended its brand into new categories with a 1B loyal user base ready to subscribe.
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.
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