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Apple CEO Tim Cook.
- Apple is spending $1 billion on video, which sounds like a lot. But Netflix has spent $29 billion in the last decade.
- "It could take years and still not move the needle," Barclays analyst says Mark Moskowitz says.
- Apple has a $200 billion war chest to spend, which is why so many analysts think a large acquisition is in order.
Apple TV currently exists as a plug-in for your regular TV, and you can stream some shows on it. But it has never been the giant, sexy new television product that Apple-watchers have always wanted.
For years, Apple has teased its fans with the idea that it will turn Apple TV into an actual standalone TV device or a full-blown on-demand video streaming service to rival Netflix or Amazon.
And yet it never comes to pass.
Apple has started investing in original video content, such as "Carpool Karaoke" and "Planet of the Apps," which can be seen via iTunes and Apple Music. That has led some to believe that Apple is at the beginning of a giant on-ramp of original video content investment which will result in a powerful rival to Netflix. Former Piper Jaffray analyst Gene Munster, for instance, predicted that Apple's annual original video investment budget would rise to $8.3 billion by 2022.
But an analysis of Apple's finances by Barclays analyst Mark Moskowitz shows that Apple is nowhere close to spending enough money on video to build a product or content library that could compete with Netflix or Amazon.
This is the context:
Barclays
Apple is spending $1 billion, which sounds like a lot. But Moskowitz points out that Netflix has already spent $29 billion in the last decade. "It could take years and still not move the needle," he says:
"In our view, although the investment is large in size, it is nowhere near the scale committed by its rivals. We believe Apple should either invest more aggressively on content to launch a streaming service, or stop this effort and focus solely on music. The current pace of investment might not produce a competitive streaming product that adds value to its services franchise."
"... the $1 billion original content budget, if true, is unlikely to be enough to launch a competitive video streaming offering compared to rivals. Incumbents including Disney, NBC, CBS, Amazon, Netflix, Hulu, and HBO are expected to spend significantly more than Apple on content."
It is not merely that Apple isn't currently spending enough. It is that the other companies - Netflix etc. - are accelerating their spend faster than Apple. Netflix's "cash content cost is also estimated to grow at 30% and 28% in C2018 and C2019 to $12.6 billion and $14.7 billion. Even if Apple plans to become the 'next HBO', which is smaller in size but offers premium content, it will need to at least double its content spending to beef up the collections. "We expect Apple to spend materially more if it doubles down on video streaming and media content acquisition," Moskowitz says.
And there is another problem. For all the headlines generated by Netflix and Amazon's new shows, the meat of the business is reruns, Moskowitz says:
"... a study from Nielson indicated that 80% of time spent by U.S. consumers on SVOD services is still on reruns of old shows and movies, not newly developed original content. Unlike Amazon and Netflix who not only have original content but also offer popular reruns and classics, Apple does not have a streaming deal with content owners. It will have to renegotiate for streaming rights individually by titles or packages, which will be different from sale-based revenue sharing model where Apple takes 20-35% cut for each movie/show sale or rental income."
In other words, Apple could quadruple its spending on new shows and still only be hitting 20% of the demand, because people love video streaming services for their vast back catalog of oldies, which Apple doesn't have.
Apple, of course, does have a lot of money to spend if it wants. The Trump Administration's corporate tax cuts allow the company to bring back about $200 billion held overseas. That money was previously "stuck" because of the tax cost of repatriating it to the US. It is that vast chunk of cash which is fuelling speculation - from Citi, Goldman Sachs, and Barclays - that, eventually, Apple will use it to acquire a company like Netflix or Disney. Doing that would be a lot easier than building a new video library from scratch.