Morgan Stanley Says Apple SVOD Service Can Rival Netflix — in Seven Years

Netflix shares took a slight hit after Morgan Stanley Sept. 5 issued a bullish note on Apple’s slowly evolving subscription streaming video service.

In the report — Apple, Inc.: The Emerging Power of Apple Services, Part 3: Video a New Growth Driver in 2019– Morgan Stanley analysts believe Apple’s longstanding success with iTunes and the music industry, Hollywood and its ability to capture consumer demand through the iPhone, iPad and Apple Watch portends great promise in over-the-top video distribution.

“We forecast that an Apple Video streaming service with high-quality but limited breadth could be priced at the low end vs. competitors, or $7.99/month, and reach over 50 million paid subscribers by 2025, compared to 124 million at Netflix subs and Apple’s 650 million-unit iPhone installed base,” wrote the analysts.

Indeed, the note suggests Apple’s SVOD service could grow from a $500 million business in 2019 to $4.4 billion operation by 2025.

Lofty projections considering the late Steve Jobs often considered Apple TV and streaming a video a hobby and not a platform Apple could invest heavily in.

That’s changed as CEO Tim Cook and Eddy Cue, SVP of Internet software and services, have upped Apple’s video profile by hiring a string of entertainment executives, producers and directors to jumpstart original programming.

The biggest announcement occurred last November about an untitled morning show drama starring and executive produced by Reese Witherspoon and Jennifer Aniston.

Other projects include a sketch comedy with Kristen Wiig; renewed seasons of “Carpool Karaoke,” a basketball drama with Golden State Warriors Kevin Durant serving as both the subject and producer; and unnamed series from directors M. Night Shyamalan, J.J. Abrams and Oprah Winfrey, among others.

Morgan Stanley believes the Apple SVOD service could get a boost when bundled with the Apple Music and Texture news and magazine subscription services. A strategy Hulu has employed partnering with Spotify.

The note said such a bundling would diversify content options for consumers, diminish the need for immediate original content hits, increase perceived consumer value and simplify billing, among other features.

“If we incorporate the assumptions from our Apple Media bundle scenario while keeping all other Apple Services forecasts unchanged, then we’d expect Apple Services revenue to grow at a 21% through 2025, ultimately reaching $143 billion by 2025, up from current forecasts of a 19% revenue growth and $124 billion in revenue by 2025.”

Apple Services generated $95 billion in revenue in the most recent fiscal period.

“We believe that Apple Video will become a reality sooner than investors think, and use this report as a way to frame the two most likely methods for video content distribution and potential impact video could have on Apple’s Services business,” wrote the analysts.

Amazon, Google Smart Speaker Market Hold Under Threat by China

Amazon introduced the first voice-activated smart speaker in 2014 with Alexa and Amazon Echo. According to new data from Strategy Analytics, Amazon’s global smart speaker share of shipments fell to 41% in the second quarter (ended June 30) from 44% in Q1 and 76% in Q2 2017.

By contrast, Google increased its share to 28% in Q2, up from 16% during the same period last year. China’s Alibaba finished third with Apple and JD.com rounding out the top five.

David Watkins, director at Strategy Analytics, says Amazon and Google accounted for a 69% share of global smart speaker shipments in Q2, which was down from more than 90% in Q2 2017.

“The drop is not only a reflection of growing competition in the smart speaker market but also Amazon and Google’s inability to break into the fast-growing Chinese market that is dominated by local powerhouse brands such as Alibaba, JD.com and Baidu,” Watkins said in a statement.

Indeed, Strategy Analytics contends China has the potential to become a lucrative market for smart speakers driven by voice-activated software – as underscored by Google’s recent $500 million strategic partnership with Chinese ecommerce giant JD.com.

David Mercer, VP at Strategy Analytics, believes Google and Amazon’s pursuit of volume over margin has made it difficult for third-party entry-level speakers entering the market with similar features.

However, Mercer contends the premium end of the market offers opportunity to vendors such as Roku who can entice consumers with superior build and audio quality.

“Early adopters of low-cost smart speakers such as the Echo Dot or Google Home Mini who are now looking to buy a second device will be a key target demographic for such vendors,” he said. “Apple has established an early lead in the premium smart speaker market, benefiting from a fiercely loyal fan base and strong momentum behind its Apple Music service. However, we expect the higher end smart speaker market to grow and become much more competitive moving forwards as vendors such as Samsung with its Galaxy Home speaker look to capitalize on the growing acceptance of voice as an established control mechanism.”

 

Freedom of Speech or Peddling Hate in an OTT World?

In the current politically toxic culture where “fake news” allegations and “enemies of the people” campaign rally cries by the POTUS against the media (except Fox News) continue to divide the country, bigotry and hate are now rationalized by many as differences of opinion between “good people on both sides.”

While the First Amendment prohibits Congress from making any law abridging the freedom of speech, or the freedom of the press, the Internet and over-the-top video has given those wishing to upend the country’s moral compass an unending bully pulpit.

Take Alex Jones, the radio host and conspiracy theorist loon who makes rightwing propagandists Rush Limbaugh and Sean Hannity seem normal.

Jones, who started website Infowars in 1999 as a platform to pitch irrational thought, is infamous for tearful rants (literally) decrying the 9/11 terrorist attacks as an inside government operation; and claiming the Sandy Hook school shooting – that killed 26 children and adults in Connecticut – was carried out by left-leaning forces aimed at implementing stricter gun control.

Apple Aug. 5 apparently wearied of Jones’ shtick. The tech giant pulled several Infowars podcasts off iTunes, citing the platform’s hate speech guidelines. Facebook and Spotify followed Aug. 6, with Facebook reportedly suspending Jones’ personal account as well.

Twitter, which has become President Trump’s unofficial press platform, chose not to ban Jones, saying he had not violated the company’s use guidelines.

“We know that’s hard for many, but the reason is simple: he hasn’t violated our rules,” CEO Jack Dorsey tweeted Aug. 7. “We’ll enforce if he does. And we’ll continue to promote a healthy conversational environment by ensuring tweets aren’t artificially amplified.”

But a quick look at Twitter’s rules against abusive behavior finds this: “We prohibit behavior that crosses the line into abuse, including behavior that harasses, intimidates, or uses fear.”

But Jones did just that in 2016 during the run up to the presidential election when he promoted the fake story that Democrat Party officials operated a child pornography ring from a pizzeria in Washington, D.C.

A North Carolina man was later arrested after firing shots into the pizzeria due to the hoax.

But real-world incidents like this don’t seem to bother Dorsey, who doubled-down on his Aug. 7 tweet, suggesting it is the responsibility of the media and journalists to “validate” Jones’ claims.

“This is what serves the public conversation best,” he tweeted.

Apparently, the “enemies of the people” – not Twitter – should now be responsible for fact-checking hate peddlers, who you know, are still “good people.”

 

‘The Us Generation: The Making of the 1982 Us Festival’ Coming to Disc Aug. 10 From MVD

The documentary The Us Generation: The Making Of the 1982 Us Festival will come out Aug. 10 on DVD and Blu-ray Disc from MVD Entertainment Group.

An in-depth look at the influential music festival, The Us Generation blends rare concert footage and interviews with both organizers and performers.

The 1982 Us Festival was a three-day event boasting some of the biggest names in music, performing live in front of more than 1 million people at Glen Helen Regional Park in San Bernardino, Calif. It was the brainchild of Apple’s Steve Wozniak, who wanted to create something that was a true celebration of Americana, building a sense of community through the power of technology and music.

Highlights of the film include performances by Tom Petty & The Heartbreakers, The Police, Fleetwood Mac, Santana, The B-52s, and The Cars; as well as archived appearances by Johnny and Joey Ramone, Carlos Santana, Sting, Ric Ocasek, Danny Elfman, and Fred Schneider. The documentary also includes exclusive interviews with Wozniak, Mick Fleetwood, Eddie Money, Marky Ramone, Kate Pierson, Stewart Copeland and Mickey Hart, among others.

Apple Ups Original Content Game with Joe Oppenheimer Hire

Apple is looking to the United Kingdom to jumpstart its original video content aspirations.

The media giant reportedly hired Joe Oppenheimer, long-time executive at BBC Films, to its international content development unit. Oppenheimer’s credits include the 2016 drama I, Daniel Blake; Testament of Youth (2014) and the 2014 comedy Alan Partridge: Alpha Papa, among others.

Oppenheimer reports to Jay Hunt, the former BBC and Channel 4 executive Apple hired last October to head its international TV unit.

Before departing Channel 4, Hunt acquired rights to “The Great British Bake Off,” a reported $99 million reality series that has generated big ratings in the U.K. targeting the coveted 18-34 year-old demo.

Last year, Apple hired former Sony Pictures Television executives Jamie Ehrlicht and Zack Van Amburg to get original streaming video off the ground.

One of their first moves was signing up Jennifer Aniston and Reese Witherspoon for a 20-episode, two-season series about a TV morning show.

Other deals include series from M. Night Shyamalan, Damien Chazelle (La La Land) and Ron Moore (Outsiders).

Apple Inks Content Deal With Oprah Winfrey

Apple June 15 unveiled a multi-year content partnership with Oprah Winfrey, “the esteemed producer, actress, talk show host, philanthropist and CEO of OWN,” the tech giant announced.

Winfrey and Apple will create original programs that “embrace her incomparable ability to connect with audiences around the world,” according to Apple.

Winfrey’s projects will be released as part of a lineup of original content from Apple.

Apple Q2 Services Revenue Increases 31%

Apple May 2 reported second-quarter (ended March 31) “services” revenue of $9.1 billion, which was up 31% from revenue of $7 billion during the previous-year period.

Services includes revenue from digital content and services (i.e. iTunes Store selling/renting movies, TV shows, audiobooks and music); Apple Music subscription service, AppleCare (warranty), Apple Pay, App Store, licensing and other services.

Through six months, revenue is up 24% to $17.6 billion, compared to $14.2 billion last year. Services revenue represented 15% of total revenue in the quarter compared to 13% in the previous-year period. The segment generated 12% of total revenue through six months, compared to 11% last year.

Apple attributed the increase primarily licensing, App Store and iCloud – not digital content sales. Indeed, last summer The Wall Street Journal reported iTunes’ market share selling/renting video content had dropped below 25% from above 50% in 2012.

The decline is due in part to increased SVOD use among consumers, in addition to increased competition from Amazon Instant Video and Comcast – the latter the first pay-TV operator to sell/rent movies and TV shows.

Meanwhile, Apple sold $38 billion worth of iPhones, $4.1 billion in iPads and $5.8 billion in Mac computers, which was up 14% and 6%, respectively, for iPhones and iPads. Mac sales remained flat.

Research: OTT Sub Households to Far Outstrip TV Sub Households in 2020

U.S. OTT subscriber households will far surpass TV subscriber households in 2020, according to new data from Convergence Research.

In five years at the current run-rate Netflix will have in the United States as many subscribers as all the the traditional TV access providers combined, according the Convergence’s Brahm Eiley. Amazon Prime at the current run rate will surpass the traditional U.S. TV access providers in terms of subscribers in three years.

However, the average revenue per unit (ARPU) for U.S. TV subscribers in 2020 will still be four times U.S. OTT subscriber households’ ARPU, down from 6 times in 2017.

Convergence has just released its annual 2018 Couch Potato Reports, “The Battle for the American Couch Potato: OTT, TV, Online” and “The Battle for the American Couch Potato: Bundling, TV, Internet, Telephone, Wireless.”

Convergence estimates that U.S. OTT access revenue (based on 55 OTT providers led by Netflix) grew 41% to $11.9 billion in 2017, forecasts $16.6 billion for 2018 and $27.6 billion for 2020.

The firm estimates 2017 U.S. cable, satellite and telco TV access (not including OTT) revenue grew 1% to $107.6 billion ($94.30 per month ARPU) in 2017, forecasts $107.4 billion ($97.90 per month ARPU) for 2018, and $106.9 billion for 2020.

In 2017, the United States saw a decline of 3.66 million TV subscribers and in 2016 a decline of 2.2 million. Convergence forecasts a decline of 3.72 million TV subs for 2018.

The firm reports that 2010 saw the start of the rise in cord cutter/never households, and as of the end of 2017 estimates 32.13 million U.S. households (or 26.1% of households) did not have a traditional TV subscription with a cable, satellite or telco TV access provider, up from 27.56 million (22.6% of households) at the end of 2016. Convergence forecasts 36.76 million (29.6% of households) will be cord cutter/never households by the end of 2018.

Meanwhile, 2017 saw U.S. residential broadband subs surpass U.S. TV subs, growing to 96.95 million. Convergence estimates 2.33 million U.S. residential broadband subs were added in 2017 (2.66 million in 2016) and revenue grew 7% to $56.8 million; the firm forecasts 2.57 million additions and 6% growth to $60.5 billion for 2018.

“The gloves are off,” commentary in the report reads. “The TV-movie Industry is being reconstructed from the inside and by the outside, as programmers now directly compete against their traditional TV access and independent OTT buyers that rival them in terms of content spend. Amazon, Apple, DAZN, Facebook, Google and Netflix all have the money muscle to finance their own productions or outbid on programming including major sporting franchises.”

Because the OTT services are acting more like studios and vying for top content, traditional content owners may fight back, the commentary reads.

“We expect especially for the U.S. market going forward fewer content deals between programmers and independent OTT providers: 2017 saw Disney choose not to renew with Netflix and embrace OTT, HBO not renew with Amazon in the U.S., Hulu (which is spending more on content on a per U.S. subscriber basis than Amazon or Netflix) continue to bolster its offerings, compete more directly against TV access providers, and A+E, AMC, Discovery, Scripps, and Viacom back supply Philo,” the firm commented. “The traditional TV ecosystem does not show decline ‘yet’ except for TV subscribers. TV access players continue to raise prices (ARPU is growing but we forecast TV access revenue decline going forward), and programmers have kept up increases in programming fees and advertising rates, but this architecture cannot last in the long run.”

Apple: ‘We Don’t Know Anything’ About Making TV Shows

Apple knows the appeal of must-have consumer electronics better than anyone. Its brand singularly created markets for mobile phones, tablets, computers, audio speakers and now watches.

Yet, as tech rivals Google and Facebook jump into the video content business hoping to bridge the considerable gap to Netflix, Amazon Prime Video and even Hulu, Apple has taken baby steps.

While the late Steve Jobs infamously considered Apple TV a “little hobby,” current CEO Tim Cook has been equally slow to jump on the bandwagon – until now. Indeed, Apple considers itself anything but expert on the machinations of Hollywood.

“We don’t know anything about making television,” Eddy Cue, SVP of Internet software and services, told The New York Times at the recent South by Southwest media confab in Austin, Tex.

Despite sitting on reported fiscal largess exceeding $250 billion, Apple’s forays into original programing are all but non-existent – perhaps due to cautionary missteps taken by Microsoft and Yahoo, among others.

Apple is expert at creating apps, but recent original 10-episode reality show, “Planet of the Apps,” where contestants attempted turn their app ideas into careers, was largely unremarkable.

“They know music and they know apps, and I’m sure they’ll begin to explore other genres,” Jake Wayne, a participant on the show, told Mashable.com. “For now, they’re doing what they know best.”

Maybe, but Apple is leaving its tech comfort zone and creating a sizeable beachhead in Hollywood. It is building a 128,000-square foot media complex on the former Metro-Goldwyn-Mayer grounds in Culver City, Calif.

Last summer, Cue hired Sony Pictures Television executives Jamie Erlicht and Zack Van Amburg – 15-year veterans behind programs such as “Breaking Bad,” (AMC Networks) spinoff “Better Call Saul,” (Netflix) “The Crown,” (Netflix) “Damages,” “The Blacklist,” “Sneaky Pete” (Amazon) and “Rescue Me,” among others.

“We have exciting plans in store for customers and can’t wait for [Erlicht and Van Amburg] to bring their expertise to Apple,” Cue said at the time.

Indeed, the executives reportedly oversee a staff of more than 40, charged with operating original content divisions around drama, children, South America and European programing.

Production deals with Reese Witherspoon, Jennifer Aniston, Steven Spielberg, Damien Chazelle, M. Night Shyamalan, Kristen Wiig and Octavia Spencer highlight more than 12 original programs greenlighted for completion.

“We’re all in,” Cue said. “We’re completely all in.”

 

European Union Proposes Tax Hike on Digital Companies

The European Union March 21 announced plans to implement an interim 3% tax hike for digital companies aimed at leveling the playing field between local and multinational companies based outside the region.

With almost half of the top 20 global companies by market capitalization digital operations (compared to 5% a decade ago), the EU says digital companies (i.e. Facebook, Google, Apple, Amazon and Netflix) pay an average tax rate half (9.5%) that of the traditional economy (23.3%) in member countries.

The trade union contends profits made through activities such as selling user-generated data and streaming video content are not captured by current tax rules.

Apple infamously parked more than $120 billion in Ireland to avoid taxes in the U.S. and other countries it operates in. A strategy the company reportedly had to outsource to Bermuda and Grand Cayman after Irish authorities sought to close loopholes.

Tax avoidance strategies used by Apple and other digital multinationals deny governments around the world as much as $240 billion annually in lost revenue, according to a 2015 estimate by the Organization for Economic Cooperation and Development, reported by The New York Times.

Netflix reportedly paid less than £400,000 ($565,000) in 2015 corporate taxes in the U.K. on revenue of £36.5 million.

Netflix told The Guardian it contributed financially in other ways, including wages, value-added taxes (VAT) and funding myriad British-based original content productions.

Maybe, but to USC law professor Edward Kleinbard, U.S. multinational firms are “global grandmasters” of not paying their fair share of taxes.

“[They employ] schemes that deplete not just U.S. tax collection but the tax collection of most every large economy in the world,” Kleinbard told the Times.

New EU rules would deem multinational digital companies having a European presence if they meet at least one of the following criteria: exceed €7 million in annual revenue in a member state, having more than 100,000 users or 3,000 business contracts in a member state in a taxable year.

The new taxes, which the EU believes would generate €5 billion ($6.1 billion) in annual revenue, would apply primarily to online advertising, sale of user-provided data and third-party ecommerce.

Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs at the EU, said the digital economy is a “major” two-way opportunity for Europe and digital firms based outside the region – with legal and fiscal concerns.

“Our pre-Internet rules do not allow our member states to tax digital companies operating in Europe when they have little or no physical presence here,” said Moscovic. “This represents an ever-bigger black hole … because the tax base is being eroded. That’s why we’re bringing forward a new legal standard as well an interim tax for digital activities.”