In the face of declining iPhone sales, Apple has repeatedly hinted that it will be relying more and more on services for future revenue growth. But to beat Netflix and Amazon in video streaming, it will have to acquire a Hollywood studio, according to an analyst at investment giant Wedbush.
While Apple could still continue to develop content on its own, purchasing a video production studio that already owns a rich library of television shows and movies could place it at an advantage. Additionally, developing video content organically could take too long letting rivals open a gap that will be difficult to close.
According to Daniel Ives, an analyst at Wedbush Securities, the time to make that acquisition is now:
Now is the time for Apple to rip off the band-aid and finally do significant content [mergers and acquisitions] with the landscape ripe. Otherwise it will be a major strategic mistake that will haunt the company for years to come, as content is the rocket fuel in the services engine and currently missing in the portfolio.
As Apple’s revenue from traditional segments such as hardware has been declining, sales in the services segment have been growing. During the holiday shopping quarter, revenues from the services business (including the App Store and Apple Music) reached $10.8 billion. The gross margin in this category also increased year-on-year from 58.3% to 63%, beating analyst estimates.
Apple currently boasts of 360 million subscribers (both third-party and its own services) in this segment. The iPhone maker has set a target of 500 million subscribers by 2021. According to Ives, a ‘key missing piece in the Apple portfolio’ has been a video streaming service and this will be crucial to ensure Apple reaches and exceeds targets.
Compared to Amazon and Netflix Apple has also grossly underspent on video content. Currently, Apple spends around $1 billion annually on content. Last year Amazon was estimated to have spent approximately $5 billion on content while Netflix spent $12 billion.
For Netflix, this was a 35% increase from the $8.9 billion that the streaming service spent in 2017. This year Wall Street analysts expect Netflix’s content spend to increase by 25% to $15 billion according to Variety . By 2020 the streaming service’s content budget is expected to rise to $17.8 billion.
In a CNBC interview earlier, Ives had listed some Hollywood studios that Apple could consider acquiring and this included Sony. At the time, Ives predicted the iPhone maker would make the acquisition this year:
You need content, you need fuel in that engine. They’re lacking original content and lacking video content, which is why we believe they’ll buy a large film studio in 2019. We’ve talked about potentially Sony, Lionsgate, A24 – a CBS or Viacom is potentially still on the table as well as a Netflix, as that’s the key to drive the services business.
While acquiring a large Hollywood studio could help Apple’s video streaming ambitions, the question is whether it will. Apple characteristically avoids mega deals and the largest purchase it’s ever made was that of Beats five years ago. The iPhone maker spent $3 billion to buy the music accessories firm. This is despite boasting of cash reserves of around $250 billion.