Apple builds content hub with Apple TV +

Apple (NASDAQ: AAPL) is far from on a par with a streaming giant like Netflix (NASDAQ: NFLX), but since Apple TV + initially launched a year ago, the tech titan has racked up an impressive lineup of original programming. While the selection is still lacking compared to competing services, it’s clear that Apple is going for quality over quantity, and with its massive war chest, Apple TV + could become a major force in the entertainment industry. shortly.

Apple originals are recognized

During the unveiling in March 2019, Apple touted its video streaming service as the destination for the highest quality originals. Dozens of the biggest names in the entertainment industry have been put forward as partners to create original content for the new service, including Steven Spielberg, Bill Murray, Spike Lee, Ron Howard and JJ Abrams, among other movie heavyweights.

Over the past year, Apple released 47 originals spanning comedy, drama, action, documentaries, and kids’ shows, and some of those movies and shows are already garnering praise from connoisseurs. Earlier this year, the Apple originals received a total of 18 Primetime Emmy nominations – a record for the most nominations of any streaming service in the first year of launch.

Where Apple hasn’t had the capacity to create enough big hits to fulfill its service, it has used its cash reserves to go out and acquire what it needs, like the action-war thriller. Doggy style with and written by Tom Hanks. Apple acquired the rights to the film from Sonydivision of company images after theaters close during the pandemic.

It has been reported that about a third of those who watched Doggy style were new to Apple TV +. The liberation of Doggy style has been so successful that Apple is reportedly interested in releasing several new movies per year, with a few blockbusters added.

Apple has the resources to be a major player in streaming

Analysts originally expected Apple to spend $ 1 billion on new content in the first year, which matches the level Disney planned to spend on Disney +. But in June, reports revealed that Apple was increasing its content budget to $ 6 billion. That’s about half of what Netflix currently spends per year on additions to its content library.

Apple ended fiscal 2020 with $ 84 billion in net cash, which management has gradually reduced by returning capital to shareholders in the form of dividends and share buybacks. But the company still produces more cash than it needs to invest in the development of new iPhones, iPads, Macs, portable devices and other products. The sale of millions of these products last year generated $ 73 billion in free cash flow. Suffice it to say, Apple can spend pretty much whatever it needs to develop Apple TV + for the long haul.

What does Apple TV + mean for action?

By itself, the growth of Apple TV + will not move the needle for Apple. If Apple TV + attracted 200 million subscribers, a level similar to Netflix, it would only marginally increase the value of Apple’s business. Consider Netflix has a current market cap of $ 223 billion, but that’s not a lot compared to Apple’s market cap of $ 2 trillion.

Additionally, Apple TV + subscribers are less monetized than Netflix subscribers. Netflix charges $ 8.99 per month for a basic plan, but Apple TV + only costs $ 4.99 per month. In addition, Apple is offering a free year of service for a limited time to anyone who purchases a new iPhone, iPad, Apple TV, Mac, or iPod Touch.

However, Apple TV + has an important role to play in growing the value of Apple’s service business. Evercore ISI analyst Amit Daryanani estimates that all Apple services, including News +, Arcade, and the App Store, could generate more than $ 100 billion in revenue per year by fiscal 2024. According to Daryanani’s estimates, this would represent 30% of Apple’s annual revenue and 45% of gross margin over the next four years. It would move the needle.

Apple recently launched the Apple One subscription plan, which could go a long way in attracting new subscribers. With a single subscription, users get access to Apple Music, Arcade, News +, Fitness +, iCloud, and Apple TV +, and at $ 29.95 per month, the subscription is a substantial reduction on what these services would cost individually. .

There are 1.5 billion active devices worldwide that make up Apple’s installed base. While selling iPhones is still the bread and butter of the business, services give it plenty of leverage to increase revenue per user and deliver more returns to investors. For example, Apple’s investments in streaming would allow Apple TV + to gradually increase subscription fees by $ 4.99 per month.

This is how subscription services can add an element of pricing power for Apple, which would help smooth out some of the inconsistent revenue performance from selling iPhones. They represented half of its total income last year.

Services are a profitable revenue stream that grew 16% in fiscal 2020, reaching $ 53 billion in annual revenue. Many investors are counting on this growing business to offset the slowdown in iPhone sales. The more Apple can build its content library and increase the value of Apple TV +, the faster service revenues will grow and fuel that tech stock higher in the long run.