One of the often-heard refrains regarding Apple (NASDAQ: AAPL) is the slowing growth of its flagship iPhone, as customers keep their devices longer and global smartphone sales have slowed to a snail's pace in recent quarters.
Apple's response has been to focus on increasing sales in several key areas, including services and other products. That strategy is set to get a big boost, according to one analyst, that could result in revenue of $37 billion over the next several years -- its entry into streaming video.
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Sooner than you think
Morgan Stanley analyst Katy Huberty has crunched some numbers, and believes that many people are underestimating the contribution that video will make to Apple's top line and how soon it will be making its appearance. In a note to clients, she wrote, "We believe that Apple Video will become a reality sooner than investors think."
Huberty also posited that Apple could potentially take a couple of different approaches when entering the increasingly crowded streaming market to stand apart from the existing services. Apple can either introduce a stand-alone service, or combine its original content with its music subscription in a bundled service.
An Apple stand-alone video service could be priced at $7.99 a month, wrote Huberty, in order to compete with existing offerings from the likes of Netflix (NASDAQ: NFLX). "We forecast that an Apple Video streaming service with high quality but limited breadth could be priced at the low end vs. competitors, or $7.99 per month, and reach over 50 million paid subscribers by 2025," Huberty wrote. For comparison, Netflix currently boasts 124 million paying members worldwide. If those assumptions pan out, Apple Video could be a $4.4 billion stand-alone business by 2025.
A more lucrative path would result from combining Apple's video, music, and news offerings into a bundle. "We believe a bundling of Apple's video content with Apple Music and the Texture news and magazine subscription service into a $12.99 per month unlimited Apple Media' service (in-line with the current cost of a Hulu and Spotify bundle) would make the most sense," Huberty wrote.
The analyst listed five reasons a bundle would be better than video alone:
- It would allow for differentiation versus established peers.
- It would reduce dependency on big video hits early on.
- It could be perceived as a "higher value" service by consumers.
- Users would only need to navigate one integrated payments platform for all of their video, music, and news services.
- It could drive greater user engagement, subsequently improving overall customer stickiness.
An Apple Media bundle like the one suggested could potentially see a compound annual growth rate (CAGR) of 21% through 2025, and be worth $37 billion -- 64% higher than if Apple Music and Apple Video were offered as separate services, according to Huberty's calculations.
Must see TV?
If asked to name any of Apple's current original programs, you'd probably be hard-pressed to come up with an answer. Thus far, the company's contributions to the streaming market have been a couple of ill-conceived early efforts, namely Carpool Karaoke and Planet of the Apps, as both were widely panned by critics. These programs were available to Apple Music subscribers.
Apple is planning to spend more than $1 billion on content in 2018, and has signed a stable of high-profile talent to projects this year, including Steven Spielberg, Reese Witherspoon, Jennifer Aniston, and M. Night Shyamalan. Other elite Hollywood names include Kevin Costner, Martin Scorsese, and Clint Eastwood.
Each of these household names brings instant credibility to Apple's efforts -- even before they come to fruition. Combining Apple's fast-growing subscription music service with an as-yet-to-be-released video streaming service could be just the thing to vault Apple into the next stage of its evolution.
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Danny Vena owns shares of Apple and Netflix. The Motley Fool owns shares of and recommends Apple and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.