Will Apple Succeed In The Video Streaming Business?

by Trefis Team
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With sales of iPhones and other hardware cooling off, Apple (NASDAQ:AAPL) has been turning to its Services business to drive growth. The company is expected to launch its own streaming video service this year, taking on the likes of Netflix and others. In this note, we take a look at what the service could mean for the company.

We have created an interactive dashboard analysis on Breaking Down Apple’s Services Revenue. You can modify the various drivers to arrive at your own estimates for Services revenue.

Services Business Has Largely Been Commission-Driven Thus Far

While Apple’s Services business has recently been the biggest driver of the company’s growth, growing at about 20% over the last few years, we estimate that about two-thirds of Services revenues come in the form of commissions from third parties, for app sales, licensing and other services. However, this business faces some challenges as some developers and digital service providers are pushing back on the cut Apple takes. For instance, Netflix indicated that it would be stopping in-app subscriptions on Apple (NASDAQ:AAPL) devices, as it looks to bypass the commission that Apple charges on subscriptions made via iOS apps (related: How Much Does Apple Stand To Lose As Netflix Stops In-App Subscriptions?). Apple typically takes a 30% commission from subscriptions initiated on its platform over the first year, with the number dropping to 15% from the second year onward. The company takes a 30% cut on app sales. While we don’t see a decline in these commission-based revenues, Apple could be looking to hedge its bets by providing more of its own services along the lines of iCloud and Apple Music.

Content Will Determine The Uptake Of The Service

While Apple has a large installed base and the technology required to drive its streaming foray, the quality of content will ultimately decide the uptake of the new service. Competition in the streaming market has been heating up; while over half of U.S. households have a Netflix subscription, Disney has plans for its own streaming service and AT&T is also prepping to launch its own offering. These companies are likely to significantly outspend Apple in terms of content. Netflix spent upwards of $8 billion over the first 9 months of 2018, compared to Apple’s estimated $1 billion in content spending last year. However, Apple is apparently looking to create a niche for itself, sticking to family-oriented fare, focusing on high-quality shows with a broad appeal. While original content could make up a large part of the titles, we believe that Apple may have to leverage programming from other media players as well. For instance, the company could buy content from the likes of MGM, Paramount or Lionsgate.

Apple Is Opening Up To Providing Its Services On Other Platforms

Apple has shown some signs that it was open to expanding its Services business via partnerships over the last few months. In November, the company announced that its Apple Music service would be available on Amazon’s Echo devices. The company also recently said that Samsung would start including an iTunes app in its Smart TVs, allowing users to buy and rent movies and videos. These moves could indicate that the company is setting the stage for its streaming business, which could be hampered if it were limited to just the Apple TV device, which still has relatively low penetration.

How Large Could Streaming Service Be For Apple?

It’s not clear what business model Apple will follow for the streaming service. While it’s most likely that the company will make it a paid service with a monthly subscription, we also believe that Apple may begin by offering it as a free perk that comes with its devices or with Apple Music subscription. Apple could also opt for an ad-supported model, although this is less likely. To be sure, it could take a few years for the service to scale up meaningfully. If we assume that the company is able to garner 50 million subscribers (under 5% of its total device installed base) who pay on average about $7.50 per month, the streaming service could add about $4.5 billion to the company’s top line by 2022.

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