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Apple TV+ Could Still Reach 100 Million Subscribers

Apple's (NASDAQ: AAPL) foray into subscription video has been relatively quiet since it launched Apple TV+ in November. Despite offering a free year of service to anyone that buys a new Apple device and pricing the service at just $4.99 per month for everyone else, the tech titan hasn't grabbed the attention of most consumers. Various media reports put Apple TV+ viewers somewhere between 10 million and 33 million.

Despite its slow start, J.P. Morgan analyst Samik Chatterjee sees Apple TV+ reaching 100 million subscribers by 2025. He points to several factors including a growing content library with the quality of new titles improving, a massive content budget supported by Apple's hoards of cash, and underpenetration of its install base.

On top of that, Apple hasn't spent much on marketing the service since its launch, and it's looking to expand beyond its original-content-only strategy.

Apple TV+ original The Morning Show. Image source: Apple.

Improving the library

Apple TV+ launched with just eight titles. It now has 28 titles in the library, Chatterjee points out, and that number continues to grow. While Apple's content library is dwarfed by competitors like Disney (NYSE: DIS) and Netflix (NASDAQ: NFLX), it's quickly expanding. It has 33 more series ordered or in development and nine films slated for the service. Chatterjee points out that newer shows have received better reviews than early series on Apple TV+. So not only is the library getting bigger, it's getting better.

Importantly, Apple's budget for the streaming service is likely far greater than most of its competitors. It's spending as much as $6 billion, which is surpassed only by Netflix. Even Disney is spending just $2.5 billion on Disney+ this year, with the budget growing to around $5 billion by 2024.

Apple made news recently when it agreed to produce Martin Scorsese's next film, Killers of the Flower Moon, which has a whopping $200 million budget. Apple can afford to make big bets like that thanks to the massive cash flow from the rest of its business. It generated $13.3 billion in operating cash flow during the second quarter.

Apple's also looking at ways to broaden the library beyond originals. It licensed the back catalog of Fraggle Rock in a deal to reboot the series. It's also considering licensing other old series to broaden its library of shows and provide content for subscribers to watch while they wait for the next original series release.

Another consideration may be sports rights. Apple recently signed Jim DeLorenzo away from fellow FAANG stock Amazon (NASDAQ: AMZN). DeLorenzo was instrumental in Amazon's sports strategy, which brought two kinds of football -- NFL and English Premier League -- to Amazon Prime, among other sports rights. There are a lot of sports rights contracts coming up for renewal over the next couple years, and Apple may throw its hat (and wallet) into the ring to win streaming rights.

Marketing the service

Beyond its extended free trials for new device purchasers and a big launch campaign in November, Apple doesn't seem to have spent much on marketing Apple TV+. Ads for new Apple TV+ originals have been sparse in recent months despite the boom in streaming. Perhaps it's working to build up the content library first, allowing customers on trials to watch and review shows without requiring a financial commitment, before it makes a big marketing push at the end of the year.

A marketing ramp-up that coincides with the expiration of yearlong trials could help Apple convert existing viewers into paid subscribers while bringing in new ones. With an installed base of over 1 billion devices, Apple has a broad audience who have also shown at least some affinity toward its products that it can easily reach. The company is also looking to leverage its position in podcasting to promote shows on Apple TV+.

A late 2020 marketing push is in line with Chatterjee's expectation for a slow ramp in subscriber growth through the rest of 2020, but strong renewal rates from free trials and increased adoption among Apple-device owners going forward.

Apple will have to ramp up the marketing spend to reach 100 million subscribers, but the payoff could be significant. One hundred million paid subscribers translates into $6 billion in incremental recurring revenue compared to today. While that might only get it to breakeven based on its $6 billion in expenses, Apple's decision to focus on originals means most of its content costs aren't recurring. It can grow its total overall content library without huge increases in its annual content expenses. So growing beyond that number would make the service very profitable, very quickly.

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