In a prior article I discussed the potential of Apple TV+, and with its official announcement we got a sneak peak at what could be one of the biggest streaming TV alternatives to Netflix and Amazon Prime streaming. What makes this new streaming service unique is that it’s one of the first standalone services from Apple (AAPL) that can be accessed via any Smart TV and even for Roku and Amazon Fire streaming devices.
What was not discussed at the March 25th special event was the pricing for Apple TV+, but there’s no denying that they put in more effort and thought into the streaming bundle than what many would have anticipated heading into the event. Furthermore, it helps us to imagine further growth and expansion of the service and software-based revenue model that Apple is now heading towards, which makes the company more like Microsoft, but with more emphasis on entertainment, media, mobile gaming and music, as opposed to software productivity, social networking, console gaming, and networking services.
That being the case, it’s still a steep up-hill climb to build a meaningful subscriber base, but it’s definitely doable given Apple’s unique application via Apple TV app with a solid user interface, and dedicated device. The strategy Apple has employed with Apple TV+ is on premium content, and with an unlimited financial budget (when compared to other studios), Apple could become one of the biggest movie + TV show streaming franchises in the entire business assuming they build-up the size of its content library and maintain emphasis on original shows and movies.
There were some recognizable franchises like Sesame Street that will be brought back to life, and interesting producers and directors like Steven Spielberg, J.J. Abrams, and Oprah Winfrey. Furthermore, the casts for many of these original Apple TV shows are some of the most recognizable faces and names like Jennifer Aniston (from Friends), Sara Bareilles (music artists), Steve Carell (The Office) and so forth.
It’s certainly a star laden line-up with some of the biggest producers and directors in the business. After all, what matters most in the TV production business is the track record of the cast and behind the scenes producers and directors. In this area, Apple has its bases covered, but where it could struggle is with the initial adoption scenario where it’s content library with an emphasis on quality won’t be as expansive as the content libraries offered by both Amazon or Netflix.
Apple Analyst Michael Olson following the event highlighted in recent note:
We are raising our AAPL price target to $201 from $187. Our price target multiple is now 15x vs. our previous target at 14x CY20E EPS of $13.39. Based on the company’s announcements of various new and updated services offerings today, we believe there is potential for services revenue upside in FY19, which could increase investor optimism around the growth of higher margin revenue and drive slight multiple expansion.
Apple TV+ seems more comparable to HBO Now, because there’s less emphasis on licensing shows, and more effort put towards in-house production to help differentiate the product. Furthermore, Apple TV+ is likely to feature some insanely great TV shows and original films as well.
What’s difficult with anticipating the growth trajectory of Apple TV+ is the ability to establish tentpole franchises that could break into the mainstream in a way that’s similar to the Walking Dead (60M+ live viewers) or Game of Thrones (10 million viewers).
Because, the product is more comparable to HBO Now, it’s worth citing some of the metrics for the individual streaming product from Time Warner, which has 5 million subscribers approximately. The stand-alone streaming application originally launched in 2015 roughly 4-years later and is sitting on a subscriber base that’s significantly smaller when compared to Amazon Primes’ 105 million subscribers (Morgan Stanley estimate) or Netflix’s 140 million subscribers.
Though, to be fair Amazon Prime Video bundles way more in the way of add-on features tied to the retail buying experience on the Amazon app whereas Netflix first launched its streaming service back in 2007 and had built-up its content licenses and original programming for an entire decade now (becoming the industry and category leader in streaming video).
The challenges that Apple will face with building an in-house production arm is quite steep, though it’s certainly an expansive enough of a market with enough recurring revenue potential to make the in-house effort worthwhile. Unlike Amazon, Apple doesn’t have to split content production cost with fulfillment costs. Whereas, when compared to Netflix, Apple’s not at a shortage of financial resources to fund further production of shows and films and it could even go on an acquisition spree.
Apple TV+ is going to cost Apple a steep sum of money that will take a while to recoup until the subscriber base catches up to production cost, which may set shareholder back by perhaps several billions of dollars. Long-term it sways from the Apple Services margin thesis whereby Apple’s gross margin from the segment was 62.8%, whereas Netflix reported gross margins of 31.2%. Even with a massive subscriber base, Netflix’s gross margin is half that of Apple’s Service business, which points to the incremental revenue opportunity not adding as much upside to profits.
It’s not the most attractive business among Apple’s increasing services portfolio, but there’s certainly a growth runway tied to streaming TV programming that’s attractive long-term. The streaming TV model has a much higher saturation point than what’s implicit with Netflix’s recent string of successes, and I imagine that one day, Netflix could be one of the few subscription products that could break past 500 million subscribers.
Hence, there’s a very compelling reason for Apple to be in this market, because it not only diversifies its revenue, but it also has a very long growth runway. Also, Apple’s balance sheet is massive, and even with the initial costs tied to launching the service, perhaps it’s a good in-house investment of resources, as opposed to the laziness of returning capital via share buybacks (which we like), but more importantly, Apple needs to invest more of its financial resources ($245 billion in cash), so even if it’s a bit of a drain financially with significant up-start cost, it’s better than leaving the cash sitting in a bank vault where yields are non-existent. In a hunt for investment yield, the streaming service sounds a lot better than treasury notes at this point.
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