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Is Apple Too Late to Streaming Business?

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Apple (AAPL - Free Report) is finally going to unveil its much-anticipated video streaming service this afternoon. This subscription service is an attempt by the once $1 trillion company to broaden their portfolio to drive top-line beyond the legendary iPhone. The iPhone showed its first revenue decline for a holiday quarter in over a decade, down 15% from last year’s sales. Luckily the company was able to offset a lot of that decline with a 19% growth in service revenue and further growth across their product portfolio. Apple is starting to realize that they can’t rest the future of the company on the shoulders of the iPhone as they’d done in the past. With the tech landscape becoming more and more competitive Apple is going to have to look for new ways to generate revenue, and they’re optimistic that this streaming service will be a home run.

Apple has for years been integrating their services into their iPhone product approach, making it almost a necessity for customers to use Apple services with their Apple products, which include iCloud ®, Apple Pay ®, and Apple Music ®. With gross margins on services being considerably larger than margins on Apple’s physical products being 63% and 34% respectively, moving into subscription based revenue drivers like this new video streaming service that they’re ostensibly unveiling today, makes sense. Apple is attempting to hedge its bets with services that can be used outside of their products.

The question we need to ask ourselves as shareholders or potential shareholders is, how much penetration is Apple going to get in the video streaming market when they are so late to enter the space? They will be competing with Hulu, Amazon Prime Video (AMZN - Free Report) , Disney’s (DIS - Free Report) new streaming service and last but definitely not least Netflix (NFLX - Free Report) , which no other stream service has been able to match. All of these streaming services have had years to root themselves with original content and exclusive rights to content, how will apple gain a competitive advantage in this arena?

From the chart below you can see that AAPL (blue line) has tracked very closely with the rest of the FAANG participants (Facebook, Amazon, Netflix, and Google). With relatively consistent top-line and bottom-line growth as well as a swell of free-cash-flow there doesn’t appear to be any requisite for alarm.

 

 

What concerns me most of all is the 15% revenue decline in their largest money maker having even broader implications on their services, which are mostly only accessible with Apple products.

Investing in their own subscription streaming service could either be exactly what this company needed to hedge its portfolio or it could be a money pit that throttles the company. This is all dependent on the exclusive and original content that this service will be able to offer, which will no doubt burn up a lot of that free cash flow. Their advertising/marketing team will also be put to task getting customers to add Apples streaming services to their library of video streaming apps. We should know more about the service itself and management’s plan after the unveiling this afternoon.

Shares of Apple, Amazon, Netflix and Disney are all currently rated Zacks Rank # 3 (Hold).

 

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