Apple share price: will video streaming give it a boost?

‘It’s Show Time!’

Apple is expected to announce its big push into video streaming when it holds an event on Monday 25 March at its headquarters in Cupertino, California, US. Having invited reporters to the event, titled ‘It’s Show Time’, it is widely anticipated that Apple will showcase two new subscription services: one for video streaming and one for its news, which has been revitalised after the acquisition of magazine aggregator Texture last year.

The company has toyed with TV and video services for a decade and already has a foundation to build on with Apple TV. It has, however, stepped up its efforts significantly over the last 18 months after hiring senior executives from Sony Pictures Television and commissioning billions on original programming with famous directors including Steven Spielberg and JJ Abrams.

The bar has been set high. Apple has openly said it is aiming to shift the business from one that relies on selling hardware to one that feeds off services and subscriptions because sales of its star product, the iPhone, have past their peak and continue to slow.

Apple to launch video streaming service

Numerous media reports have labelled Apple’s new service as a competitor to take on existing players like Netflix and new services being launched by the likes of AT&T and Disney. However, opinion is split as to whether Apple is looking to directly rival them or act as a middleman that can take a slice of the pie from all of them.

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Apple is reported to be spending anywhere between $1 billion-$3 billion on its initial round of original programming – far below the $10 billion-plus budget of Netflix and only a fraction of Apple’s huge cash-hoard. It is reported to have up to 30 productions in the pipeline, but Apple is building a library from nothing and that will not be enough to attract customers.

Therefore, unable to fully benefit from the rapid uptake of ‘cord-cutting’ services and growth in video streaming services on its own, it is thought Apple is looking to launch a new aggregation platform that, in the simplest of terms, would act as the ultimate personalised TV guide. Its existing TV app used by iPhone and Apple TV users already prioritises displaying individual shows based on personalised suggestions and this is expected to be the model for the new service. The idea is that Apple will showcase individual shows from different providers under one store format, rather than displaying a grid of apps from different streaming and catch-up services like Smart TV’s, Google Chromecast and other devices currently do.

If true, this ultimately means Apple is not looking to directly compete but act as a middleman that helps boost sales for existing services in return for a cut of the transaction. It is bread and butter stuff and is already in operation in other parts of the business. For example, Apple simply hosts the App Store, allows others to build content, and then uses its reach to sell that content for a (up to 30%) fee.

So why, if Apple is aiming to be an aggregator, is it investing in its own programming? While Netflix has churned out a huge amount of original material and won applause from some in the film industry for commissioning productions that others would have rejected, Apple is thought to be more selective and aiming for higher-quality, blockbuster content.

This tactic makes sense if Apple is aiming to be an aggregator. It only needs one hit to attract new customers – look at Amazon which, despite offering a poorer overall library relative to Netflix, has attracted customers by investing in big productions like The Man in the High Castle and The Grand Tour. If Apple can get those customers through the door and they can also access their favourite shows from other providers, then Apple ultimately wins the subscription. If successful, then consumers – torn between which subscription to buy – will embrace Apple’s model of bringing all their favourite content under one roof. If it gains traction, then other service providers could face a tough battle in maintaining the number of direct subscribers (rather than watching content through Apple). It is likely Apple will look to bundle content and services, such as offering its own content with titles from HBO and Starz (as an example) at a lower price than what someone would pay to subscribe to them all individually. If Apple cuts the price of services and introduces a new middleman tax by taking a cut from other providers, then the industry’s margins could be severely hit.

Although Apple may have the ability to throw cash at creating content and could easily afford to buy an existing streaming service outright if it wanted to, its unique selling proposition in this market is not its deep pockets but its reach. There are 1.4 billion Apple devices actively in use around the world, 900 million of them iPhones, and it is clear why Apple sees a huge opportunity. Only 360 million customers are currently subscribing to existing services like Apple Music, so, assuming the majority of people only have one device, there is plenty of room to grow. And, when you consider those services are already generating $10 billion in quarterly revenue for Apple ($40 billion annual run-rate relative to last year’s annual revenue of $266 billion), the prospect becomes even more attractive. It has already demonstrated the value of its reach with Apple Music, which quickly managed to snap-up over 50 million users despite lagging well behind pioneers like Spotify.

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Apple will undoubtedly look to bundle its new services with existing ones like its music and cloud storage offerings, much like Amazon offers numerous subscriptions and services under a singular Amazon Prime subscription (although it does exclude some services, like audiobook platform Audible, and charges a premium to subscribers for access) in an attempt to improve loyalty and sales. Apple has other services such as iTunes, iCloud and Apple Pay to help compliment its offering.

Read more about how Amazon uses the ‘flywheel’ strategy

Is Apple aiming to be the gatekeeper of video streaming?

If Apple’s new service can become the one-stop shop for video streaming then it places the company in a strong position. As the host of any content that is streamed (rather than simply linking back to the provider’s own platform) it captures the valuable viewing and user data. It would also take control over pricing away from the streaming services and allow Apple to dictate the cost of bundles and content.

That will sit uncomfortably with the rest of the industry. While streaming services will be keen to tap-into Apple’s vast reach and generous budgets they will have to also give-up direct access to data and the ability to charge their own prices. Still, with Apple only producing a small amount of its own content, the reception its plan gets from other players is crucial if the company is to have a compelling offer for consumers.

Apple needs to work with video streamers, not against them

Apple is reportedly in talks with several big companies about including their content as part of its new subscription service. Companies such as Viacom and CBS are thought to be signed up as they are both focusing on supplying content rather than launching their own services, but the matter is more complicated when it comes to its larger potential partners. Both AT&T, the owner of HBO and WarnerMedia (formerly TimeWarner), and Disney are in the process of launching their own streaming services to capture as much value as possible from their large libraries packed with big-name titles and brands. For example, Disney has already cut material it was previously licensing out to Netflix to bolster the attractiveness of its own service.

It is not to say that these companies will not supply any content to Apple, but they will be highly selective. For those working both with and against Apple, it will prove a delicate balancing act that aims to maximise the value of content through Apple without compromising their own services. For Apple, it needs to maximise the value it can poach from existing providers without scaring them off and leaving it with no content to show.

One company that has made it clear that it has no intention of working with Apple is Netflix, which may be considered a significant blow considering the vast amount of content Netflix could potentially supply to Apple. Netflix chief executive officer (CEO) Reed Hastings was quick to clarify that 'we want to have people watch our content on our service' and state it wouldn’t be supplying any content.

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How much could Apple’s video streaming service be worth?

There may be hype building about Apple’s video streaming service but some have already started to question the value of the opportunity. Goldman Sachs has forecast Apple will charge somewhere in the region of $10 to $15 per month for its service but says that 20 million people subscribing at the top-end of that price range would generate just $3.6 billion in annual revenue by 2020. The assumption it will secure 20 million subscribers could be deemed conservative and the bank’s sales forecast is nothing to be sniffed at, but it is only a drop in Apple’s overall sea of sales worth $266 billion last year.

Plus, while video streaming will be just one of many digital services up Apple’s sleeve, those prospects will do little to install faith in the company’s ambitious target to generate $50 billion in services revenue in 2020.

Apple share price: where next?

Apple shares have fallen back with the wider tech market after it became the first publicly-listed company to boast a valuation of over $1 trillion last August. Shares are trading around 16% lower than their peak in 2018 but have rallied in 2019. Apple shares are up 24% since the start of 2019 and have jumped 4.8% this week alone. However, with a valuation of $920 billion, Apple is still narrowly trailing Microsoft as the most valuable company, currently worth $922 billion.

Apple share price jumps 3% on news of streaming service