Written by Summary
Apple has tried to build a strong streaming service by investing heavily in the last few quarters.
However, it is still way behind other competitors with less than 20 million paid subscribers in US and Canada.
The streaming video business could end up becoming a big money pit for Apple with an estimated budget of over $100 billion over the next decade.
High churn rate within its streaming service will limit Apple’s ability to increase stickiness within its ecosystem and get pricing leverage for other products and services.
Despite some good shows, Apple’s current streaming strategy could become a big headwind to earnings over the next few quarters.
Nikada/iStock Unreleased via Getty Images Apple (NASDAQ: AAPL ) has been ramping up its investment in the streaming video segment hoping to attract more paying customers. However, it is still far behind most competitors like Disney ( DIS ), Netflix ( NFLX ), HBO ( WBD ), Amazon ( AMZN ), and others. According to Variety, Apple had mentioned that it has less than 20 million paying customers in US and Canada in the last quarter which allowed the company to pay discounted rates to its production crew. Another estimate mentioned by Observer is 8.1 million paid subscribers in US. These are abysmal numbers when compared to HBO and Disney which were launched after Apple TV+. Even with the lowest subscription rate of $4.99/ month in the industry, Apple could find it difficult to reach a sizable number of paid subscribers within TV+ over the next few years.
The churn rate for TV+ is one of the highest in the industry. This limits the ability of the company to gain a loyal subscriber base and use its TV+ subscription as an anchor service to promote other services and products. The streaming video business is a money pit that requires billions of dollars in annual content investment. It is likely that Apple’s content budget will exceed $100 billion during this decade. At this rate, the streaming business will likely play a big negative impact on the earnings growth of the company which will be a headwind for Apple stock. Subscribers are still elusive
According to the company’s management, the paid subscriber base in US and Canada is less than 20 million. The company has delivered some Emmy winning shows and we still do not see any major uptick in subscriber base. Even if we take a long-term view of these investments, Apple would need to show at least some progress in subscriber numbers to justify the level of investments. It is spending close to $6.5 billion annually on streaming content which was 10% of the net income in 2020. Observer Figure 1: Apple’s slow progress in the SVOD industry. Source: Observer, Antenna
The dearth of content could be a lingering issue for the company. Apple has some hit programs like “Ted Lasso”, “For All Mankind” and “The Morning Show”. However, it creates the issue of short-term subscription to the service. Looky-loos take subscription for some time and cancel their membership after watching their desired content. This creates a massive issue of churn rate. Apple’s churn rate is the highest in this industry.
According to a report by Antenna , Apple’s quarterly churn rate is a staggering 15%. Compared to this, Netflix had a churn rate of only 2.5% and Disney had a churn rate of 4%. Hopefully, as Apple invests heavily over the next few years which should increase its original content library, the churn rate would get lower. Money pit
While talking about the long-term potential of the streaming business, many analysts forget that this is one of the biggest money pits. Disney has already announced an increase in investment to over $30 billion. Netflix is investing over $15 billion. Amazon spent $11 billion on original content in 2020, $13 billion in 2021 and could easily ramp it up to over $20 billion in the next few years. This makes Apple’s investment look paltry even though the company is spending a big chunk of its profits on this service.
It should not be a surprise if Apple ends up spending over $100 billion in the streaming business in this decade. Even at this investment rate, it would be at the fourth or fifth spot within this industry in terms of investment. This shows the amount of money that is swirling within the streaming video space. Economies of scale work very well within this industry. If Netflix decides to invest another billion […]
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