Apple (AAPL) is trading with the trade war on Tuesday, as is par for the course, but longer-term investors may want to tune into its streaming efforts as details emerge.
While shares of the tech giant fell about 1% in early morning trading, some optimism is building as CEO Tim Cook and co. gear up for a Sept. 10 event expected to hail the release of new iPhone 11 products and bridge the gap to the much-anticipated 5G shift.
For longer-term investors, November could also be an important month to keep Apple catalysts in mind, after a Bloomberg report surfaced suggesting the company will be looking to steal some thunder from Disney (DIS) as it preps a launch of a competing streaming service in November as well.
Pivotal Price Point
The service that Apple is reportedly pouring billions into is said to be priced at $9.99, adding intrigue to the question of how many streaming services consumers will maintain as Viacom (VIAB) -CBS (CBS) , Netflix (NFLX) , Amazon (AMZN) , AT&T (T) , Alphabet (GOOGL) , Comcast (CMCSA) and Disney all vie for eyeballs with competing products.
"With consumers assembling their own bundles, respondents were also asked how much they are willing to pay for ALL video content they subscribe to. Counter to current practice, most respondents (~60%) indicated they would be unwilling to pay more than $50 per month, well below average traditional video ARPU of $90 in the U.S. today," a recent UBS survey reveals. ARPU refers to average revenue per user.
"Only 13% of respondents were willing to pay for more than 3 online video services," the research report adds. "Younger demos and higher income households were generally more willing to have multiple services, but the sweet spot remained 2-3 services."
With that in mind, the myriad of options available at present will almost certainly be pared down in coming years. For Apple, its rumored price point places it in line with Amazon, above Disney, but below Netflix and HBO.
As nuclear engineer Anatoly Dyatlov said in HBO's hit series "Chernobyl": "Not great, not terrible."
After courting strong brand loyalty for years that has led to its products sliding into the pockets of millions, Apple may be well positioned in this regard, though nothing is for certain and quality content will likely tell the final tale.
Power of the Pocketbook
As many entrants to the streaming space so far have found, producing quality content doesn't come cheaply.
Netflix's total long-term debt now stands at more than $12.5 billion per FactSet, a level that has grown as the BB-rated company has transitioned away from reliance on larger media entities for content. About $2 billion in high-yield debt was added to the company's debt pile in late October 2018 to further its transition efforts, increasing concern among analysts and prompting some price target cuts since then. NFLX shares have likewise fallen about $80 since that debt raise.
In that context, it appears that cash and content are both kings. A dual monarchy, if you will.
For Apple, it may have 99 problems, but cash ain't one.
According to recent quarterly reports, the company now carries over $225 billion in cash on hand, meaning that even a multi-billion splash means little to its bottom line.
"The Morning Show," a comedy drama starring A-List names such as Jennifer Aniston, Reese Witherspoon, and Steve Carell, is just a taste of what the company will bring to market. With those names and a reported cost of $300 million to produce the program, the company is clearly doing more than dipping its toes in the water, instead allocating billions to the effort.
"Spending $6 billion more suggests that [entertainment content is] a serious hobby instead of just a hobby," D.A. Davison analyst Tom Forte told TheStreet. "We're still trying to gauge for Apple if this is a full-time job."
With over $200 billion in cash on the books, even a "serious hobby" could beget serious spending yet to come, squeezing the space where content is ultimately king.
To be sure, Apple will not have the backlog of beloved content that Disney possesses and is not aided by content production expertise, meaning the starting point is set back a bit for Apple and even serious spending may take time to show results.
Still, its deep pockets put it on par with Amazon as far as production capabilities and make it a more than competent competitor on the small screen. Overall, this should put increasing pressure on Netflix as CBS, Viacom, Comcast's (CMCSA) NBC, and more embark on their own initiatives and draw content away from the platform as it nonetheless pushes prices higher.
At a higher price for subscriptions while losing content rapidly, the dynamics certainly make it difficult to justify Netflix's massive multiple.
That is not to mention the junk-rated debt Netflix is saddled with, a factor that has undoubtedly prompted price increases, which makes it far less attractive than its ever-encroaching streaming competitors.
While Apple's nascent programming slate is still a "show me" story as the overall shift to a services focus has yet to gain full traction and the company is certainly late to the game on streaming overall, the bottom line is that the company can afford to make waves and can indeed produce top-tier entertainment simply by virtue of its pocket book.
For now, the more obvious result is that the game just got more difficult for Netflix and other pure-play content stocks as a price and content war looks as though it will continue for some time, at some cost.
The companies able to sustain these costs as the battle for consumer attention continues will be the ones to watch in coming years.
Stay tuned.
(Apple, Viacom, Disney, Amazon, Alphabet and Comcast are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
