Apple Inc.’s (NASDAQ: AAPL) music streaming service, expected to cost about $10 per month, probably will not significantly increase the company’s revenue. But the company’s TV streaming service, expected to be unveiled in the fall, could be a different story.
If the music service will not move the needle for Apple financially, why is the tech giant bothering to launch it?
One clue may come from a 2012 Forbes article that described the company’s overall strategy. Apple launches “desirable offerings and features to create lock-in and switching costs,” the article stated. In other words, Apple often creates services and features not in order to generate revenue from them directly, but as a means of selling the products it does make a significant amount of money on.
So Apple likely believes that the service will help convince some iPhone and iPad users who may be thinking of switching over to other companies’ products to instead buy the latest Apple offerings. It probably also hopes that the music streaming product will be so good and convenient that it will help spur some Android users to switch over to the iPhone and iPad.
Well-known Piper Jaffray analyst Gene Munster believes that the music service will “benefit the iPhone user experience, but not add in any meaningful way to the company’s finances,” according to Theflyonthewall.com. However, Munster contends that the streaming service, along with Apple Pay, will boost the stock’s multiple because it will show investors that the company is still innovating.
Apple’s strategy for its TV streaming service may be somewhat different, though. That service is expected to cost $30 to $40 per month. Additionally, Apple may make the service available only through its Apple TV product, which costs $69 each.
A quick calculation suggests that the company would generate $12.6 billion of revenue if it sells 30 million subscriptions to the TV service for $35 per month, which is at the outside range of possible. Selling 20 million of its TVs would generate another $1.38 billion of revenue. Products generating $14 billion of revenue would move the needle slightly, even for Apple, as analysts predict that the tech giant will have $232 billion of revenue this fiscal year.
The TV streaming service could bring in even more money for Apple if the company sells movies on demand through it and somehow finds a way to integrate paid advertising. Of course, Apple, like the cable companies, will have to pay significant fees to content providers, so not all of its revenue from the streaming service and resulting Apple TV sales will flow to the tech giant’s bottom line. As a matter of fact, with the fees, profits may be marginal. However, the service could be good for customer retention.
Speaking of cable companies, they could be the big losers if Apple’s TV service really takes off. Since the service is expected to include many well-known channels but cost less than a cable subscription, some consumers might decide to rely on Apple TV and Netflix and ditch their cable service. (Given Netflix’s low cost and its high penetration and customer satisfaction levels, that company doesn’t figure to be significantly hurt by Apple’s service.)
Apple’s streaming music service looks like just another add-on service, designed to increase sales of its hardware. However, the TV streaming service could be a real money-maker, although the product will have to face off against new, competing packages from DISH and Sony, which cannot afford to surrender the market. But Apple’s popularity should give it a significant advantage over those companies.