Impact of Apple's upcoming video service 'likely small,' analyst argues
Goldman Sachs doesn't seem impressed at the potential for an Apple subscription video or news service, with the firm not seeing a large material value in the offering for Apple, or for investors.
Apple has looped in people like director/producer J.J. Abrams for original content.
"While new Video and/or News products might help to increase iPhone stickiness they seem unlikely to make much of an impact on Apple's bottom line," Rod Hall wrote in a new memo to investors, seen by AppleInsider. Even if the video service gains 20 million subscribers by the end of 2020, and charges them $15 per month, that would only boost consensus earnings forecasts by 1 percent, he estimated. If the service costs $10 per month, that would only raise earnings 0.4 percent.
A better scenario for Apple would be popularizing an Amazon-style bundle of multiple services, Hall argued. That might mean video, iCloud Drive, Apple Music, and Apple News Magazines, which like the video platform should appear at a March 25 press event.
"The key question for us on this is what the anchor value in such a bundle would be from the point of view of a consumer," Hall said. "In the case of Amazon it is free shipping but in Apple's case the core driver is less clear to us."
Other analysts have worried that Apple won't be able to compete with video rivals like Netflix or Disney in terms of quantity or quality, and that it may be years behind without any special reason to subscribe beyond particular shows.
Reports have also claimed that Apple executives like CEO Tim Cook are exerting a heavy hand with original content, insisting on family-friendly material and positive depictions of technology. That could irritate both studios and viewers used to the relatively free reins of services like Netflix and HBO.
Goldman Sachs is more pessimistic than some investment firms, maintaining a "neutral" rating on Apple stock and a $140 price target -- below its current $187 value.
AppleInsider will be live from the March 25 press event, which begins at 10 a.m. Pacific time, 1 p.m. Eastern.
Apple has looped in people like director/producer J.J. Abrams for original content.
"While new Video and/or News products might help to increase iPhone stickiness they seem unlikely to make much of an impact on Apple's bottom line," Rod Hall wrote in a new memo to investors, seen by AppleInsider. Even if the video service gains 20 million subscribers by the end of 2020, and charges them $15 per month, that would only boost consensus earnings forecasts by 1 percent, he estimated. If the service costs $10 per month, that would only raise earnings 0.4 percent.
A better scenario for Apple would be popularizing an Amazon-style bundle of multiple services, Hall argued. That might mean video, iCloud Drive, Apple Music, and Apple News Magazines, which like the video platform should appear at a March 25 press event.
"The key question for us on this is what the anchor value in such a bundle would be from the point of view of a consumer," Hall said. "In the case of Amazon it is free shipping but in Apple's case the core driver is less clear to us."
Other analysts have worried that Apple won't be able to compete with video rivals like Netflix or Disney in terms of quantity or quality, and that it may be years behind without any special reason to subscribe beyond particular shows.
Reports have also claimed that Apple executives like CEO Tim Cook are exerting a heavy hand with original content, insisting on family-friendly material and positive depictions of technology. That could irritate both studios and viewers used to the relatively free reins of services like Netflix and HBO.
Goldman Sachs is more pessimistic than some investment firms, maintaining a "neutral" rating on Apple stock and a $140 price target -- below its current $187 value.
AppleInsider will be live from the March 25 press event, which begins at 10 a.m. Pacific time, 1 p.m. Eastern.
Comments
I only subscribe to Netflix to watch "particular shows". It started with House of Cards but then I found a few more that I like. What's to say the situation will be any different with Apple? Granted, if they're really launching with 11 shows they may have a long way to go, considering Netflix has a lot of original content that I have no interest in whatsoever and only a few that I like. It's like Netflix is just throwing whatever they can against the wall to see what sticks. So far, according to the rumors, that isn't Apple's current approach.
Unlike most companies, Apple does not start with the profit and back into the product that will generate that profit.
Instead, they create a great product that improves people's lives and derives its profit from that.
Of course a video service, just starting out, and likely some shows free to begin with (for Apple device owners) isn't going to have much of a pure financial impact on its own. It likely won't in 3 years either, even if successful, given the overall Apple business.
I am not sure Apple will be successful with their video service either. But we have to see that play out. Apple has done well with music, and I hear Apple News so far.
Lots of indirect value to Apple with their own video service (if it is moderately successful):
- Seat at the content table, which could get more subscription services to use the TV App (which could have more stickiness value, and be key to Apple TV value).
- Part of other broader content bundle (video, music, news/magazines)
- Overall another reason to stick with Apple devices
- Cultural relevance
But sure - Goldman has run the numbers...
A few good original shows will not be reason enough for most people to subscribe. I'm a big Star Trek fan (as I imagine many of us here are), but I'm not paying $10/month for CBS to watch that one show. Admittedly, I find Discovery to be rather weak, but even if it was amazing, I still don't think I'd pay $10/month for it. Instead, I'm going to wait for the season to end, subscribe for a month, watch the whole season, and cancel. Netflix, on the other hand, I gladly pay for each month because there's enough content that interests me.
Netflix's approach is actually the better approach, though. What sticks for one group of people doesn't stick for another. What one person finds terrible, another loves. You have to offer a wide variety of content to attract a wide viewership. Netflix understands this and has the subscriber numbers to prove it. No one else comes close. Apple's video service with succeed or fail based on the service itself, not the original programming. The original programming will no doubt sweeten the deal, but the service itself has to improve upon the television experience enough to make customers switch or add yet another monthly charge to the credit card. I think this is going to be a challenge for Apple.
Apple recognizes that there is only so much time in a day that people can be consuming video. Yes there are the heavy users but for people like me, I may only watch 1-2 hours on a typical day, there isn’t enough time in the day to make 80-100 dollars a month for full cable or for 6 streaming services worth while. It IS a waste of money for many people. However, the content providers did not want to relinquish control over how and when their content can be viewed and so here we are.
Apple, I believe, is not trying to become Netflix. That is something that may happen organically after many years (kinda like how some artists refused to put their music on iTunes initially, now most have finally accepted that Apple’s model does provide benefit in this new world). I can see the same thing happening with Apple’s subscription; not much older content when it launches... but give it enough time and things could start changing. What I think Apple is trying to do is become a high end YouTube. With the ability for good quality content to be produced entirely on consumer level products, individuals wanting to reach a larger audience, could put their stuff on Apple TV. And just like that the individual becomes their own content manager and does not have to worry about distribution. This is something I think the content providers are not used to, they create and distribute content and therefore collect all the money. They are not used to paying for distribution. In short, this is something that Apple is in for the long haul. People are just becoming open to what consumption of content could be outside of what television has been for all these years. They’ve got time to steer people’s understanding to be in line with what they see the solution to be.
**I really have no clue what I’m saying here... just thinking aloud.
A la carte pricing works great if you only want to subscribe to one or two services. Otherwise you're better off with cable. I'm not sure it's really about content providers not wanting to relinquish control either. Not every show is going to make money. The bundled cable model, in essence, has the more successful shows (and channels) subsidizing the less successful ones. I don't think anyone has figured out how to make this work. That's why we're seeing services like DirecTV Now and PlayStation Vue and Hulu with live TV. They've essentially moved the cable bundle to the Internet. They still nickel and dime for services like DVR. There are still commercials. You're still stuck with channels you don't want to watch but have to pay for anyway.
Netflix is the only one who is truly thinking differently about content. Content is why they exist. They aren't a hardware company or online shopping behemoth looking for an additional revenue stream. Netflix is the first global television provider and they've managed to build this massive worldwide service completely free of advertising. I'm looking forward to Apple's announcement, but I don't have high hopes. I'd love for them to deliver a radical new approach to content delivery, but my gut tells me they'll be delivering something far more mundane.
I can't say that I follow re: a "high end YouTube", but I think you're right that this is all a long game. The advantage Apple has over everyone else is that hardware is their bread and butter. If Netflix doesn't get it right, they are out of business. If Apple doesn't get it right, it would be embarrassing given the public's perception of them as an unstoppable "disruptor", but they'd be just fine and on to the next thing.
$1.5 Billion Home Pod
$18 Billion Apple Watch
$4.3 Billion Air Pods
$3.8 Billion Apple TV
Granted, these are not Apple Socks and iPad covers, but just (casually almost) billion dollar companies all by themselves.
So the Apple original content might provide some incentive and stickiness to the platform I suspect it is not meant to be a stand alone profitable venture, right out of the gate. Like all of Apple’s services, they are intended to grease the wheels of the company so it can sell more hardware. In this case Apple TV boxes. Time will tell if this is what pans out.