Writing for Investor’s Business Daily, Patrick Seitz has crunched the numbers and come to the same conclusion that I have. Services isn’t a significant business if you try and look at it as a hardware replacement.
Jefferies analyst Timothy O'Shea said Friday that the Apple video service is unlikely to "meaningfully reaccelerate services growth," which has been slowing.
“If we assume that Apple charges $15 per month and takes a 30% cut from content producers, Apple would need to have 250 million subscribers on its platform to represent just 5% of overall revenue by 2023," O'Shea said in a note to clients. "Net, we are not yet convinced that streaming can cause an inflection in company-level growth." —Patrick Seitz, Investor’s Business Daily
It’s wrong to portray Apple’s new push into services as an answer to slowing or declining hardware sales. Even if Apple hardware sales were on track for another record-breaking year with no signs of slowing down in the near future, Apple would still be getting into the media content services business. This push into media services would be happening regardless of how the iPhone is doing.
As I’ve written before, the financial models of trying to use services as a revenue generator in lieu of iPhone or iPad hardware don’t work. The services revenue is only a net gain for Apple if they don’t lose these highly profitable segments, even at a services margin of 64%. So I don’t think Apple will ever do anything with services or iOS that would potentially jeopardize iPhone sales. And services that will primarily rely on your installed user base are more like pseudo services in my book.
Apple has always followed the principle that people didn’t actually desire the device. They wanted video conversations with their grandmother. They wanted to catch the latest episode of their favorite show while stuck in an airport. Or while out running they wanted some pump-me-up music while attacking that last hill. You buy an iPhone because of what it brings to you. Kind of like you buy a car because of where it can take you. The hardware represents a gateway to something else that you really want.
Apple’s new foray into services is more about removing friction for the user and improving the total user experience. Yes, it’ll increase revenue but that’s not the driving force behind the whole services push. It’s an added side-benefit. Even if Apple could achieve success on the same scale as Netflix, the added media revenue would still be smaller than the iPad business alone.
“If we assume that Apple charges $15 per month and takes a 30% cut from content producers, Apple would need to have 250 million subscribers on its platform to represent just 5% of overall revenue by 2023," O'Shea said in a note to clients. "Net, we are not yet convinced that streaming can cause an inflection in company-level growth." —Patrick Seitz, Investor’s Business Daily
It’s wrong to portray Apple’s new push into services as an answer to slowing or declining hardware sales. Even if Apple hardware sales were on track for another record-breaking year with no signs of slowing down in the near future, Apple would still be getting into the media content services business. This push into media services would be happening regardless of how the iPhone is doing.
As I’ve written before, the financial models of trying to use services as a revenue generator in lieu of iPhone or iPad hardware don’t work. The services revenue is only a net gain for Apple if they don’t lose these highly profitable segments, even at a services margin of 64%. So I don’t think Apple will ever do anything with services or iOS that would potentially jeopardize iPhone sales. And services that will primarily rely on your installed user base are more like pseudo services in my book.
Apple has always followed the principle that people didn’t actually desire the device. They wanted video conversations with their grandmother. They wanted to catch the latest episode of their favorite show while stuck in an airport. Or while out running they wanted some pump-me-up music while attacking that last hill. You buy an iPhone because of what it brings to you. Kind of like you buy a car because of where it can take you. The hardware represents a gateway to something else that you really want.
Apple’s new foray into services is more about removing friction for the user and improving the total user experience. Yes, it’ll increase revenue but that’s not the driving force behind the whole services push. It’s an added side-benefit. Even if Apple could achieve success on the same scale as Netflix, the added media revenue would still be smaller than the iPad business alone.
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