By Gene Munster of Loup Ventures

• 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
• Dickinson – Documentary about the early life of poet Emily Dickinson 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.

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.

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.

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.

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