Apple (NASDAQ: AAPL) is about to drop $1 billion on original content over the next year, The Wall Street Journal reported this week. The notable budget puts the tech giant alongside big Hollywood spenders like Netflix, Amazon (NASDAQ: AMZN), and Time Warner's HBO.
Continue Reading Below
Despite the growing competition in the hot original content space, a move to invest in its own programming would make sense for several reasons.
Expanding Apple Music
The most immediate reason for Apple to invest in original video content is to better differentiate its Apple Music service, which Apple has recently started rolling out original TV shows on. Launched two years ago, Apple Music has proven to be a worthwhile investment for Apple, attracting 27 million paying subscribers. Sure, Apple's music service is still well behind Spotify, which boasts 60 million paying subscribers, but the fact that it has been able to garner 27 million paying subscribers in such a short time easily justifies further investment in the service.
By adding original video programming to Apple Music, the service will stand out from chief music-streaming competitor Spotify, which is primarily a music service. Further, original Apple content would give Apple more of a unique value proposition to attract more first-time paying users. Citing "people familiar with the matter," WSJ said Apple could be planning to acquire and produce as many as 10 television shows with its $1 billion budget.
Reinforcing Apple's "sticky" ecosystem
Continue Reading Below
But original video content is likely about more than its Apple Music service. Over the long haul, original content could create an entirely new pillar for Apple's business, further entrenching customers into the sticky Apple ecosystem of hardware, software, and services.
As Amazon invests aggressively in video, it has already seen success in making original video programming a key component of the overall attractiveness of its Prime membership, so much so that the company is increasing its video content budget from an estimated $2.7 billion in 2015 to approximately $4.5 billion in 2017, according to eMarketer. By launching its own original content, Apple could similarly help bolster the overall attractiveness of the Apple ecosystem, driving more customer loyalty and spending.
It's easy to see why Apple would want to build out its services offerings even further. Apple has witnessed the power of recurring subscriptions across its business -- whether they are Apple Music subscriptions, or subscriptions to popular apps like Netflix, Hulu, or HBO NOW. By the end of its third fiscal quarter of 2017, the number of paid subscriptions across Apple's services offerings hit more than 185 million, up 20 million in just 90 days. Further, Apple's services segment, in general, is on fire. In the trailing 12 months, the segment has generated $27.8 billion of revenue, up over 20% year over year.
Of course, there's always risk to new initiatives like this. For instance, overall value added to Apple's business from original content may not end up exceeding production costs. Further, Apple's product- and software-driven culture could clash with Hollywood, ultimately creating new problems that could distract leadership from Apple's bread and butter: the iPhone. Fortunately, however, much of this risk is mitigated by the fact that $1 billion is nearly play-money for Apple. Not only does Apple have $261.5 billion of cash and marketable securities on its balance sheet, but it is currently generating over $50 billion a year in free cash flow.
Considering how original video content could not only differentiate Apple Music, but also reinforce the overall strength of Apple's ecosystem, there's no reason Apple shouldn't drop $1 billion on content over the next year. The market for original content has largely been proven -- and Apple's massive cash hoard allows the company to make big bets without creating much risk for shareholders.
10 stocks we like better than Apple
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Apple wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 1, 2017