Kelly Evans’s afternoon commentary & top market stories


MON, MAR 25, 2019

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Apple makes product announcements all the time. What makes today different? It has major service announcements that will kick off at 1 p.m. Eastern time. 


The two main services that are expected to be announced are (1), a streaming service, and (2), a news aggregator. In other words, Apple is launching both a Netflix and a "Netflix for news," as it's been nicknamed. 


The company has actually debuted several updated products over the past week or so, including new iPad and Air Pod offerings. It did these quietly, without any of the typical fanfare. Indeed, Apple is saving and directing all the fanfare to today's service debuts. 


Why the change in emphasis? Apple's service revenue is expected to grow 16% for this fiscal year (ending September), according to the WSJ, while revenue for the iPhone, iPad, and Mac, is expected to drop 12%. Its gross profit margin for services is running around 63%, compared with 34% for hardware. 


The trouble for Apple is that much of its service revenue comes from App Store commissions (which are under fire from regulators, politicians like Elizabeth Warren, and competitors such as Spotify), and licensing fees.


Even if their streaming service hit 20 million subscribers, according to Goldman, that would only boost earnings per share by 1% next fiscal year. Services are still only about 15% of Apple's total revenue. As for the news app, Apple is reportedly pricing it at $9.99 a month. That could open a whole new revenue stream as lucrative as Apple Music; or, consumers may balk.


On the streaming side, Apple is up against Netflix, which is expected to spend $15 billion this year alone on content, while Apple is reportedly planning to spend around $1 billion a year. Apple actually used to be more of a video content player: its "share of movie sales and rentals was more than 50% in 2012," according to the WSJ. "By 2017 it had fallen to between 20% and 35%." 


Many, including tech investor Paul Meeks on our air, have said Apple should simply buy Netflix. Apple has a $900 billion market cap and more than $200 billion cash on hand, more than the entire market cap of Netflix at $158 billion. If Apple includes more "existing" TV content in its bundles, however, it may be competing less against Netflix and more looking to build a new pay-TV offering for shows, news, and sports. As for whether that succeeds, it will come down to offerings, and price. 


We'll be covering the announcements live, starting at 1 p.m. on "The Exchange." See you then!






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