Apple, Inc. May Have a New Subscription Service in the Works

Netflix‘s (NASDAQ: NFLX) stock has soared recently as the company continues to outperform expectations. While a number of factors have made the streaming-TV company the success that it is, two major aspects of its business have undoubtedly served primary roles: its original content, and its subscription-based business model.

Unsurprisingly, tech giants and media companies have stepped up their video subscription services as they aim to capture their share of this fast-growing segment. Amazon (NASDAQ: AMZN) launched Prime Video, Alphabet debuted YouTube Red, and Walt Disney (NYSE: DIS) launched ESPN+ and is working on a Disney-branded streaming service to launch in 2019.

But what about Apple (NASDAQ: AAPL)? Though the world’s most valuable publicly traded company has released some shows and other original content for Apple Music subscribers, Apple hasn’t taken any major steps yet to fully take advantage of this trend.

However, Apple may be stepping up its game soon.

Image source: Apple.

Doubling down on services

In an article in The Wall Street Journal on Friday, about Apple partnering with Oprah Winfrey in a multiyear agreement to create original programs, the WSJ‘s Joe Flint and Tripp Mickle reported on another interesting development at Apple — a rumored video subscription service: “Apple has signed agreements with several major producers and actors to make shows for a direct-to-consumer video service that doesn’t yet have a launch date but is expected to debut next year, according to people familiar with the company’s plans.”

A new video service would potentially bundle “access to the programming with iCloud storage and potentially other services like magazine subscriptions,” said the WSJ, citing unnamed sources.

The move would be a major step for Apple’s services business, which the tech giant has been expanding with the help of App Store sales, iCloud storage subscriptions, third-party subscriptions, new services like Apple Pay, and the 2015 launch of Apple Music.

Apple’s services business has been a key driver for the tech giant’s business. It now represents about 14% of Apple’s revenue, up from 9% of revenue three years ago. Not only has it grown to become Apple’s second-largest business, but it also continues to grow rapidly. Trailing-12-month services revenue is up 26% year over year.

Plans for a streaming video service could build on this momentum.

Still in the early innings

Though investors probably would have liked Apple to launch a streaming video service earlier, there are plenty of signs that this space is still in the early innings.

Consider Netflix’s surging growth in streaming revenue. Streaming revenue jumped 43% year over year in the company’s first quarter — an acceleration from its 35% year-over-year growth in the prior quarter. And Netflix expects streaming revenue growth to accelerate again in Q2.

Then there’s the momentum seen across digital subscriptions in general. Apple’s paid subscriptions across all of its services, including third-party services in its App Store, surged to 270 million in the company’s most recent quarter — up 30 million over 90 days, and more than 100 million from the year-ago period.

Meanwhile, Amazon saw subscription revenue rise 56% year over year in the first quarter of this year — up from 47% growth in the fourth quarter of last year.

Walt Disney’s ESPN+ streaming subscription service. Image source: Walt Disney.

If you’re still not convinced of the big opportunity in streaming-TV services, hear out Disney CEO Bob Iger. As the company overhauls its media distribution over the coming years and transitions to a direct-to-consumer model, Iger says, this will be a significant catalyst for the media giant. “We believe that ultimately — I can’t give you an idea of when or how long — the profitability, the revenue-generating capability of this initiative is substantially greater than the business models that we’re currently being served by,” Iger said during the company’s third-quarter earnings call last year.

The opportunity for Apple to build out its own formidable streaming service is there. Now it just needs to invest aggressively and execute shrewdly.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Sparks owns shares of Apple and Walt Disney. The Motley Fool owns shares of and recommends GOOGL, GOOG, Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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