Increasing Profitability vs Diversifying Risk
It seems that every hardware, media, and telecom company is chasing media content these days. And with good reason. Competing solely on the basis of price is a brutal business. Original content is one of the few things proven to engender customer loyalty and cause people to switch to your service.
Apple (AAPL) is no exception. Judging by the hires that they’ve been making, they are definitely on the road towards Apple original content. I think it’s great that Apple is starting to get into the media fray. Anything that can pull customers away from other services and keep them in your ecosystem is worth the investment.
The big question now regarding Apple’s media aspirations is what part of their business are they trying to grow? Apple Music is a cross-platform service available to both iOS and Android users for a monthly fee. Is Apple simply trying to increase service revenue? Or are they trying to support their hardware ecosystem, reduce churn, and get people to switch from Android to iOS?
If increasing service revenue is the goal, their media budget would be much lower. There would be much less profit in stealing Spotify or Google Music users than there would be in increasing hardware sales. And it’s unlikely that anyone would drop Netflix or HBO for Apple. Video services are fast getting to the point where people are having to drop one service to add another.
There would both be more risk and reward to utilize media to augment their hardware ecosystem. Worldwide, Android controls over 80% of all smartphone usage. Even garnering 1% of Android users who switch to iOS would yield exponentially more profit than what they would get from increasing the Android version of Apple Music. It doesn’t take long for Apple’s famously fat margins on their iPhones and iPads to really add up to a mountain of money.
It’s hard to say which path Apple is taking at this point. They seem to be moving slowly and methodically as opposed to making a blitzkrieg assault. So I lean towards thinking that Apple is more interested in diversifying their risk and using media to augment their services revenue. This would give them a hedge should their iPhone revenue ever stall or decrease.
Using media to supercharge their hardware sales would be much more profitable. This would entail making all their original content available only to iOS users. However, they would stay in the same situation as they’re in today where “as the iPhone goes, so goes the business.”
This is a very interesting situation to contemplate because there is no clear-cut, obvious way that Apple should go. The answer to this question goes beyond spreadsheets. It relies on how good a handle Apple has on predicting the market’s reaction to different variables.
Now available in iBooks —> The Tesla Bubble
The big question now regarding Apple’s media aspirations is what part of their business are they trying to grow? Apple Music is a cross-platform service available to both iOS and Android users for a monthly fee. Is Apple simply trying to increase service revenue? Or are they trying to support their hardware ecosystem, reduce churn, and get people to switch from Android to iOS?
If increasing service revenue is the goal, their media budget would be much lower. There would be much less profit in stealing Spotify or Google Music users than there would be in increasing hardware sales. And it’s unlikely that anyone would drop Netflix or HBO for Apple. Video services are fast getting to the point where people are having to drop one service to add another.
There would both be more risk and reward to utilize media to augment their hardware ecosystem. Worldwide, Android controls over 80% of all smartphone usage. Even garnering 1% of Android users who switch to iOS would yield exponentially more profit than what they would get from increasing the Android version of Apple Music. It doesn’t take long for Apple’s famously fat margins on their iPhones and iPads to really add up to a mountain of money.
It’s hard to say which path Apple is taking at this point. They seem to be moving slowly and methodically as opposed to making a blitzkrieg assault. So I lean towards thinking that Apple is more interested in diversifying their risk and using media to augment their services revenue. This would give them a hedge should their iPhone revenue ever stall or decrease.
Using media to supercharge their hardware sales would be much more profitable. This would entail making all their original content available only to iOS users. However, they would stay in the same situation as they’re in today where “as the iPhone goes, so goes the business.”
This is a very interesting situation to contemplate because there is no clear-cut, obvious way that Apple should go. The answer to this question goes beyond spreadsheets. It relies on how good a handle Apple has on predicting the market’s reaction to different variables.
Now available in iBooks —> The Tesla Bubble
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