Apple’s Original Content Is Further Along Than You Think

  • Apple has 16 new shows in the works, comparable to Netflix in 2013 (its first year of original programming) when it had released 13 originals.
  • We expect Apple to spend $900M on video content in 2018, growing to $4.2B by 2022.
  • Original video content is defensible and adds to Apple’s Services segment.

We believe Apple’s investment paradigm is shifting, centered around the Services segment. In CY18, Services should account for 14% of revenue, growing to 20% by CY23. Content is an emerging part of the Services pillar, as evidenced by the success of Apple Music, now with over 50M paying subs. Original video content is a new category for Apple and represents optionality to Services revenue growth and is not yet reflected in the value of AAPL shares.

Framing up the opportunity. While off to a disappointing start, (Carpool Karaoke and Planet of the Apps), we believe Apple is making measurable progress in original video content that will begin to contribute to Services growth starting in 2019 or 2020. Content could ultimately account for $10-$15B in annual revenue (Netflix will do $16B  in 2018) and 3-5% of overall Apple revenue.

Key content hires. At the helm of the company’s content efforts are Jamie Erlicht and Zack Van Amburg, who Apple hired away from Sony in 2017. Erlicht and Van Amburg ran Sony’s primetime series division since 2005. They will report directly to Eddie Cue, who runs Apple’s Services business. Apple has also hired an array of industry veterans from a range of backgrounds including streaming platforms like Hulu and Amazon Studios, and mainstay media companies like WGN America and Legendary Entertainment.

Apple’s content pipeline:

  • Amazing Stories – Apple plans to spend ~$5M per episode on a 10 part sci-fi/horror series originally created by Steven Spielberg in 1985. Source
  • Are You Sleeping – A thriller drama series based on true crime novel by Kathleen Barber. Source
  • Central Park – Comedy that tells the story of how a family of caretakers living in Central Park ends up saving the park & the world. Source
  • Dickenson – Documentary about the early life of poet Emily Dickenson starring Hailee Steinfeld. Source
  • Home – Will offer viewers a “never-before-seen look inside the world’s most extraordinary homes” and the minds of the people who created them. Source
  • See – Straight-to-series epic world-building drama set in the future. Source
  • Untitled Damien Chazelle Project – Details of the series’ plot are under wraps. This project will be the first time Chazelle has written and directed every episode of a series. Source
  • Untitled Kristen Wiig Project – Comedy series produced by Reese Witherspoon, inspired by Curtis Sittenfeld’s upcoming short story collection “You Think It, I’ll Say It.” Source 
  • Untitled M. Night Shyamalan Project – Straight-to-series psychological thriller. Source
  • Untitled Morning Show – Morning show drama starring Jennifer Aniston and Reese Witherspoon. Source
  • Untitled Ronald D. Moore Project – Ronald D. Moore, developer of Battlestar Galactica, explores what would have happened if the global space race had never ended. Source
  • Swagger – Profile on the early life and career of NBA star Kevin Durant.  Source
  • Little America – Based on a series of true stories featured in Epic Magazine that paint a portrait of America’s immigrants. Source 
  • Foundation – Based on Isaac Asimov’s iconic science fiction novels published between 1942-1993. Source
  • Shantaram – Drama series based on “Shantaram,” a 2003 novel about a man who escaped an Australian prison only to hide out in the slums of Bombay. Source
  • Little Voices – Tells the story of finding authenticity in the crowded and diverse New York musical landscape. Source

Apple is about 5 years behind. At first glance, it appears Netflix’s lead in original content is insurmountable. Netflix will end 2018 with close to 1,000 original titles and spend an estimated $3.5 billion on new titles this year. Keep in mind that almost half of that content is outside of the U.S. That compares to Apple, which has 2 titles out today and another 16 in the works (to be released in 2019 at the earliest), expecting to spend about $900 million this year. However, history is on Apple’s side, given that just five years ago Netflix had 13 original titles including the debut season of House of Cards. In other words, with the right resources, which Apple has, Apple’s original content titles can ramp from just under two dozen to potentially over one hundred. We note that Apple has stated they are focused on quality vs. quantity.

Apple’s Advantage. It’s an understatement to say that the video streaming landscape is competitive. Apple, once again, is late to the game but has an opportunity to change the game. Specifically, Apple can change the game around content streaming customer acquisition. Just like Netflix, HBO, and Hulu, Apple’s stories and production quality are first class. What separates Apple is the company’s access to 1.3B active devices through which they can subtly encourage adoption. Apple Music’s market share gains over the past two years are a testimony to the power of coupling Services with widely adopted hardware. An unrelated advantage is Apple’s brand, which, at its core, represents quality and attention to detail, and should translate into favorable initial adoption.

Apple Music’s market share gains over the past two years are a testimony to the power of coupling Services with widely adopted hardware.

How will Apple’s video content be distributed? Consuming video on Apple devices is confusing. Between the iTunes Store, Music, TV, Podcasts, Books, and News apps, it is unclear where to discover and consume Apple’s video content. This presents an issue as they attempt to bolster content offerings going forward. While it is unclear how the video streaming service will be branded and delivered, we expect the iTunes Store to fade away, folding its content into the existing Music, TV, Books, and Podcasts apps.

Content is an emerging area of investment. It’s no secret that original content will be an emerging area of investment for Apple in order to boost the increasingly important Services revenue line. The good news is that cord cutting is undeniable and consumers are now paying for multiple monthly streaming services. Multiple streaming services means there will be a handful of content provider winners. We think that over the next 5 years Apple will ramp its original content investment from an estimated $900m this year to an estimated $4.2B in 2022.

UPDATE: On Friday, June 5th, Apple announced a “unique, multi-year partnership” with Oprah Winfrey. She will work with Apple to, “create original programs that embrace her incomparable ability to connect with audiences around the world.” This is a high-profile win for Apple, as Oprah brings with her a global brand and experience across television, print media, film, and more. This marks the 17th project that Apple has in the works.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.’

FAANG vs the World

In venture, our job is to swing for grand slams because venture returns follow a power law function where your biggest winner is going to provide the majority of your return. Base hits do not add up to a grand slam, even if they let you score a run.

Enough baseball.

In a way, the same observation applies to the public markets. We all know the power of the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), but it’s even more apparent when we put it into context with numbers. As of June 6th, those five stocks totaled over $3.25 trillion in market cap. By comparison, the 610 other stocks in the Technology sector total $5.6 trillion in value (excluding any FAANG stock in the Technology sector).

And FAANG dwarfs the unicorn market too — the 65 known US-based unicorns as of the end of May total just about $340 billion in value, a tenth of FAANG. Certainly, some of these unicorns will continue to grow, but is there one we can justifiably argue will be big enough to insert itself into the FAANG conversation? Maybe Uber or Airbnb. Maybe Magic Leap if it delivers on its vision. Maybe some company that figures out artificial general intelligence.

Whatever the next FAANG-type company might be, it has to do something grand. Facebook and Google have transformed information consumption, Apple gives us products to interact with that information, and Amazon lets us have anything we want delivered to our door. They’ve meaningfully changed the world. Perhaps grand slam is too common to describe this occurrence. The FAANG companies are really quadruple doubles. Who plays baseball any more anyway?

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Apple Readies to Fight for Your Monthly Video Wallet Share

Conclusion. Get ready for another $10 a month drag on your credit card. It’s a rebranded, all in one Apple video and music offering in 2-3 years.

An Emerging Area of Investment. It’s no secret that original content will be an emerging area of investment for Apple, given it will boost the increasingly important Services revenue line. The good news is the trend of more cord cutting is undeniable and consumers paying for multiple monthly streaming services. Multiple streaming services means there will be a handful of content provider winners. The bad news is Apple’s efforts in content have been limited to “learnings” (Carpool Karaoke and Planet of the Apps). We think that will change over the next 5 years as Apple ramps its original content investment from about $500m in 2017 to our estimate of $4.2B in 2022. It’s worth noting this will still lag our 2022 estimates for original content spend (excludes catalog spend) by Amazon at $8.3B which will likely surpass Netflix at $6.8B.

Fighting To Reach 75m Subs. We define a winning content platform as having 75m+ monthly subs. That’s a tall order given it’s a crowded field with more than 200 subscription video services in Sep-17 (Parks Associates). These video services are working to catch up to the creative achievements of existing players. In 2017, HBO won 29 Emmys, (most for the 17th straight year), Netflix won 20, NBC 15, and Hulu 10. Looking at monthly subs, today’s leaders are Netflix (estimated to end 2017 with 115m subs) and Amazon (~80m global Prime subs). Hulu is the 3rd largest with 12-15m U.S. subs, but that doesn’t clear our 75m hurdle. Apple should be able to quickly expand their sub base given they have a running start with just over 30m Apple Music subs that will have access to the video offering for the same $10 per month. Even though Apple employs the “iTunes Store” nomenclature to sell most of its video content, we expect an all in one offering (music and video) to take the form of a rebranded Apple Music sometime in the next 2-3 years.

This note puts Apple’s content ambitions in context with the other players.

Apple. With over 30m Apple Music subs, Apple aims to bundle the music offering with an expanded selection of original content video (essentially two shows today) and will steer clear of license catalog content. Apple cares about original content because it will grow Apple’s Services business. Services will account for about 14% of revenue in CY17, growing at a high-teens rate for the next several years, which is more than double the growth rate of Apple’s hardware business. Separately, Services carry a gross margin which is around 2x Apple’s overall GM of 38%. We note content margins are slightly higher than Apple’s current business based on other streaming services’ margins that are around 45%. As Apple continues to invest in original content over the next few years (we estimate it will be around $800m-$1B in 2017), Services gross margin could decline by 3-5%, which would pressure overall Apple gross margin (currently at 38%) by about 0.5%. We expect will generally have a positive view of this growth vs. margin trade off given this is an investment in a measurable revenue generating in addition to Apple’s core business.

Adding Talent & Shows. Apple announced in early November they are developing a new TV show for its streaming service starring Jennifer Aniston and Reese Witherspoon. They beat out bids from Netflix and Showtime for the rights and could possibly spend over $10 million an episode, according to WSJ. The show, which doesn’t have a script yet, will follow the lives of morning news talk show anchors (think Today Show or Good Morning America). This is the second major content announcement for Apple recently, after announcing it is teaming up with Steven Spielberg to reboot his Amazing Stories series. On top of these two upcoming shows, Apple has been filling the ranks of its programming team with experienced entertainment executives. In late October Apple hired Jay Hunt, a rock star in UK original content, and in June hired Jamie Erlicht and Zack Van Amburg from Sony. Separately, these hires tie back to the acquisition of Beats and Jimmy Iovine joining Apple. Iovine was instrumental in bringing Erlicht and Amburg to Apple and has been the point man for Apple’s push into the original programming. Iovine has deep knowledge and a wealth of experience in the music industry — we consider him a “tastemaker” — and will likely work to expand their video offering into original programming, alongside their existing audio offering.

Rebranding Apple Music & iTunes. Obviously, what is offered with ‘Apple Music’ and in the ‘iTunes Store’ is more than just music, and is another data point Apple lags behind on name changes. Looking back, they were ‘Apple Computer, Inc.’ until 2007 when Steve Jobs decided to ditch ‘Computer’ to better reflect the products the company sold (the first iPhone model was released in 2007). In 2016, they dropped ‘Store’ from their physical retail locations, indicating the stores are more of an experience than simply a place where you buy things (e.g. Apple Fifth Avenue, Apple Lincoln Park, or “I need to stop at Apple”).  With the rebranding and expansion of its content library Apple’s positioned to be a player in original programming.

Netflix. With 115m subs globally  (54m in the U.S) and expected to spend $7-8B in content in 2018, Netflix is the gold standard for over-the-top original programming. Over the years they have won 37 Emmy awards on 128 nominations, and hoping to increase that as they are expect to release 80 original films in 2018. Netflix’s strategy is to keep a steady stream of diverse content coming, as opposed to HBO for example with a few high-profile releases. They certainly have those prestige shows – Stranger Things, Narcos, The Crown, to name a few – but that is not the (sole) objective. Instead, Netflix focuses on offering a content library with a broad range of appeal to its diverse subscriber base, seeking overall commercial success ahead of critical successes here and there. They’re also rolling out this strategy internationally by continually entering new markets and even offering original shows in the local language for those international markets. Currently, native-language shows are available in Spain, Japan, Mexico, South Korea, Brazil, France, and Italy. Netflix has the largest library, budget, and geographic reach of the streaming services and will continue to be a formidable force for many years to come.

Hulu. Subs of 12-15m, U.S. only. Hulu will spend around $2.5 billion on content in 2017. While Amazon and Netflix will both spend more than twice that this year, it’s important to remember that Hulu is only available in the US, while Amazon and Netflix are both distributed internationally. Hulu also is not aiming to be a leader in original programming, instead using it to supplement their focus on licensing quality content from major TV networks. However, they have still had success with their original programs. The Handmaid’s Tale won an Emmy for Outstanding Drama Series, the first such award for a pure streaming service. They have begun bundling their service with others’, notably offering college students both Hulu and Spotify Premium for only $4.99/month. They have Cinemax and HBO add-ons to their service as well, though there are no discounts involved and are simply integrated into the Hulu app. Hulu’s approach is to offer as much quality content as possible, both originals and programming licensed from major networks (recently added 7,500 episodes in Q3).

Amazon. Subs of -90m Worldwide. We believe Amazon Studios’ content spend is budgeted at $4.5 billion for 2017, and they have recently communicated will increase in 2018. On the Sep-17 earnings call, Amazon said they were “bullish” on video given it helps drive more engagement and purchases on Amazon. Prime Video is only available to Amazon Prime members, and Prime members (as expected) spend about 3x more money than non-members. Amazon recently announced they’re expanding Amazon Studios, even after they’ve had management shakeups in the unit in the past month. Amazon Studios’ head resigned amid sexual harassment allegations, and they’ve added new heads of both scripted and unscripted content. Coupled with these management changes is a strategy change. CEO Jeff Bezos had indicated he’s looking to find a high-profile series with global appeal, and recently acquired the rights for a TV show based on J.R.R. Tolkien’s writings (i.e. The Lord of the Rings). Amazon paid $200-$250 million for the rights to the Tolkien IP (Bezos paid $250 million for The Washington Post in 2013), and will shoot two seasons for a reported $100 million each, bringing the financial commitment to nearly $500 million. This has the potential to legitimize their video entertainment ambitions in the eyes of non-Prime customers.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Feedback Loup: College Panel

We recently hosted a panel of 8 college students from the University of Minnesota. The goal was to better understand how millennials think about social media, communications, video, VR, AR, the selfie generation, the future of work, and privacy. Here’s a summary of what we learned:

Text Is Dying

  • Quote: “Texting replaced email, and photos have replaced text messages”.
  • Message: Text is being used less frequently by each of our panelists. They view text as a formal way to communicate. Snap, Facebook and Instagram are the preferred communication platforms, with Facebook settings being switched to photos only. The panelists mentioned tech platforms promoting messaging within games as a way to maintain usage.
  • Takeaway: Text is slowly going away, replaced by video and photos. Text is viewed more as a formal way to communicate.

Fake News

  • Quote: “I like Snap for news.”
  • Message: Our panelists get their news from a wide variety of sources. 7 of 8 panelists are not concerned about fake news. Snap was the most popular way to aggregate news from traditional sources (3 of 8), followed by mainstream news outlets; e.g., CNN and WSJ.
  • Takeaway: Professional news is still respected but not paid for by these college students.

The Future of Work

  • Quote: “It’s scary. If we can’t have cashiers, truckers and fast food jobs. . . how will people live?”
  • Message: College students know they are entering a workforce that will have dramatic changes over the next 30 years. They have concerns about who’s going to control everything as resources become more concentrated. The University of Minnesota offers a class titled “Size of the Future” that addresses the risk of job loss to automation. The group did consider these changes when thinking about a career, with an increased interest in a more technical education that feels more defensible. Ultimately these students believe that the negative impact of lost jobs will be partially offset by the positive impact of new industries being formed.
  • Takeaway: College students understand that the workforce is changing. They envision social challenges emerging from displacement of workers with lower levels of education. But they believe a college education will ensure that their futures are safe.

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When Will Apple Win Its First Oscar?

We think Apple will win an Oscar in the next five years. That’s how long it will take for Apple to scale its original content spend from less than $200m today to $5-7b. The reason why expect $5-7b in Apple original content spend in five years is because Apple must catch up to Netflix and Amazon, the former of which will likely be spending more than $10b per year at that point. Before diving more into the question, here are a few key data points that we think are relevant to the discussion:

  • Amazon recently beat rival Netflix to be the first streaming service to receive significant Academy Award acknowledgement for Manchester By The Sea, with 6 nominations including one for best picture.
  • Netflix has received a total of five Oscar nominations, all in the best documentary category, since it began purchasing the rights to original content.
  • Apple is serious about content. The company will debut two exclusive shows, “Planet of the Apps” and “Carpool Karaoke”, this spring on the Apple Music platform.
  • Revenue from Apple’s Services segment, including the iTunes Store and Apple Music, is a key growth driver for Apple over the next several years. See more on Apple’s Services business in our piece, The 5 Focuses, which outlines Apple’s top five priorities, including Services.
  • We expect 2017 original content spend of about $7b from Netflix, and $6b from Amazon. Amazon includes a la cart cost.  Excluding a la cart we estimate Amazon original content spend is $4b. While we expect Apple to increase its content spend gradually over several years, the company has more than enough resources to participate in the same way.

As we’ve written before, we believe Apple innovates by taking small but deliberate steps forward (see our piece on Apple’s baby steps here). They did it with the iPod, they did it again with the iPhone and the iPad, and we see them doing the same in original content for their entertainment platforms. On their most recent earnings call, Tim Cook said, “In terms of original content, we’ve put our toe in the water doing some original content for Apple Music, and that will be rolling out throughout the year. We’re learning from that, and we’ll go from there.” His comments remind us of the way the company has talked about Apple TV for the last decade, often describing their work in the category as “pulling a string” to see where it leads.

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