Summary
Apple wants to use its subscription business to improve the growth runway of its Services segment.
However, several subscription segments are facing strong challenges due to an increase in competition.
Lack of an anchor service will be a major hurdle for Apple as it tries to gain subscribers for its Apple One plan.
Netflix and Disney stock have recently been punished for poor net subscriber additions.
Apple’s massive valuation can also be at risk if its subscription strategy falls apart with poor subscriber base and high investments.
Nikada/iStock Unreleased via Getty Images Apple’s ( AAPL ) strategy to build a strong subscription business is facing new headwinds as competition increases in many services. Apple Music is facing higher competition from Amazon Music ( AMZN ) and YouTube Music ( GOOG ), which can lead to a fall in ranking within the streaming music industry. Apple TV+ is also showing poor subscriber additions with a very high churn rate. This is despite Apple gaining several award-winning shows and investing billions of dollars in this service. Higher investment in TV+ to gain subscribers will be one of the biggest drags for future earnings growth.
Poor subscriber additions have led to a massive correction in Netflix ( NFLX ) and Disney ( DIS ) stock. If Apple fails to impress Wall Street with its subscription strategy, we could see an increase in bearish sentiment towards the stock. The core issue within Apple’s lineup of subscription options is that it does not have an anchor service that acts as a must-have for customers. Amazon has built such a service in its core Prime membership, which has allowed the company to show over $30 billion in trailing twelve-month revenue within its subscription segment with a year-on-year growth of 30%. Investors should closely follow the subscriber additions of Apple to gauge the long-term potential of the stock. Increase in competition
There has been a massive increase in competition in businesses where Apple offers subscription options. Apple Music is facing greater headwinds due to the growth of Amazon Music and YouTube Music. Both Amazon and Google have a strong base of smart speaker users which allows them to offer seamless service within the music streaming business. Google’s YouTube has been a particular surprise. It has rapidly gained over 50 million paid subscribers within its Premium and Music plan. This is quite high when compared to the last Apple Music subscriber base announcement of 60 million. Figure 1: Apple Music is closely followed by Amazon Music and YouTube Music. (MIDiA Research) A recent report from MIDiA Research shows that Apple Music had 15% paid subscribers in this industry while Amazon Music had 13% and YouTube Music has 8%. It would not be shocking if Amazon and Google overtake Apple Music by the end of 2023. A big change in streaming music rankings will be viewed as negative for Apple stock.
Apple TV+ is also facing challenges as the competition heats up in this space. Disney has announced annual investment of over $30 billion while Netflix has been investing over $15 billion in its content. Amazon had a content budget of $11 billion in 2020. Compared to this, Apple TV+ has an annual spend of $6.5 billion which is quite low. Despite delivering some good content, Apple TV+ has a very low subscriber base. According to Variety , the company mentioned recently that it had less than 20 million paid TV+ subscribers in US and Canada. Figure 2: Apple’s slow progress in the SVOD industry. (Observer, Antenna) No anchor service
Apple has added new services like Fitness+ to its subscription options. But without a strong anchor service, Apple would find it difficult to gain customers to its bundled One plan. Amazon has done an excellent job in building its Prime membership as an anchor service. It is now adding new services to this membership, which has helped in improving the subscription revenue over the last few quarters. Figure 3: Amazon’s subscription revenue is over $30 billion in trailing twelve months. (Amazon Filings) Amazon has recently announced another price hike for Prime membership in the U.S. and has also made a 50% price hike in India which shows the confidence of the management to retain its members despite higher prices. At the current growth rate, Amazon’s subscription revenue should cross $100 billion level by 2025. This will lead to an improvement in the company’s moat. Amazon could also end up increasing its investment in original content using subscription revenue which […]
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