Word came out last week that Apple had earmarked $1 billion towards creating or acquiring new media content shortly. Like other big companies such as Netflix, Amazon, and HBO, the race is on to either create original content or acquire content that would help them boost their offerings to their customers and in turn, increase their subscriptions and services revenue.
When I saw that Apple was only committing $1 billion to this venture (Netflix’s budget is $6 Billion, Amazon’s is about $4 billion, and HBO’s is $ 2 billion) it got me wondering why Apple is spending so little on the kind of content their competitors are rushing to create.
Philip Elmer-Dewitt publishes the best newsletter about Apple called Apple 3.0. He shared a note from Royal Canadian Bank analyst Amit Daryani about Apple’s $1 Billion Media fund. If you are a serious Apple follower, I highly recommend you subscribe to this newsletter-Worth every penny if not more.
Here is a highlight of the note Amit Daryani sent to his clients and Mr. Elmer Dewitt shared in his newsletter
If AAPL can get an additional 7-8MM paid Apple Music subscribers, it would recoup the $1B investment (after paying record labels’ share of subscription) in three years. Given the double digit growth in music streaming subscribers and a 20-25 million paid subscriber gap between Spotify and Apple Music, upside to market share gains could be significant. We think this itself provides AAPL sufficient incentive to sustain the level of these investments.
Also, over the longer term, content investments open multiple possibilities including:
• strengthening iTunes media sale/rental business,
• launching an Apple TV exclusive streaming service,
• leverage in negotiating with media companies, and
• driving M&A strategy.
Ultimately, we think the investments fit well with AAPL’s goal of doubling Services business by 2020.
I believe that Mr. Daryani’s view is the correct way to view what Apple will do with a big part of this $1 billion fund. Although they may earmark a portion of this for some original content or licensed video programming, I agree that the bigger priority is to invest this in an area that would pretty much guarantee they grow their services business via their music subscriptions faster.
Today, Spotify has 140 million users while Apple has 27 million as of June of 2017. While Apple still has high aspirations around Apple TV, I just don’t sense it has the same priority that Apple Music has in Apple’s short term strategy. More importantly, music is an area that Apple knows and understands while creating original content for Apple TV has a deep learning curve and would require budgets north of $5 billion just to compete with today’s leaders in streaming video.
Apple’s streaming music service is getting better and has been a big part of their growth in services revenue. However, given the world wide audience, they have to IOS devices, innovating around their music service and bulking up on special deals with artists would help them make a real return on the $1 billion being invested in media shortly than they would if they used that money specifically for original video content.
That said, I believe this $1 billion media fund is probably the tip of the iceberg when it comes to Apple eventually opening up the purse strings and investing billions more in both music and video content over time. But this first $ 1 billion gets them on the road to eventually being more aggressive in both mediums that can help them get to their goal of doubling service revenue by 2020.