Apple (NASDAQ:AAPL) unveiled four new services last month, one of which was Apple Arcade, which had been previously rumored. The service will be a sort of "Netflix for mobile games," where users will pay a monthly subscription fee and get access to a large catalog of games, many of which will be exclusive to the service. Much how the dominant video streamer is able to leverage its growing stable of original video content to keep subscribers hooked, Apple hopes to build up a large base of gamers paying a monthly subscription fee as part of its ongoing push to grow its services segment.

The Cupertino tech giant is putting its money where its mouth is.

Apple Arcade on multiple devices

Image source: Apple.

Hey, big spender

The Financial Times recently reported that Apple has allocated $500 million to invest in Apple Arcade, helping to fund the development of high-quality mobile games. These days, high-quality games that carry an up-front price have a hard time competing with lower-quality titles that may be free and are primarily monetized through in-app purchases, Apple noted during its presentation.

The company will give "several million dollars" to each game that is selected to be included in the catalog, according to the report. There will be over 100 new and exclusive games included, with exclusive titles earning other incentives from Apple. That exclusivity period will only have to be a few months before the developer can release the game on other platforms.

Still shot depicting a battle from an upcoming mobile game for Apple Arcade

Image source: Apple.

That's quite a bit of money to invest up front, but the risk will likely pay off.

Apple Arcade could be huge

Gaming is by far the largest and most lucrative category in the App Store, representing an estimated 75% of total spending on the platform, according to App Annie. Sensor Tower also estimates that overall in-app spending in the U.S. is on the rise, jumping to $79 on average in 2018. Of that, $44 was spent in the gaming category. Subscription-based apps are also enjoying considerable growth, so it makes perfect sense for Apple to introduce a subscription-based gaming service.

Perhaps the biggest question will be how much Apple charges for Apple Arcade, which it has not disclosed yet. The service will likely end up costing $10 to $15 per month, which is what most content services cost. In fact, Apple Arcade could have even more potential than more glamorous services like Apple TV+ or Apple News+. HSBC analysts -- who downgraded Apple shares to sell earlier this month -- estimate that Apple Arcade revenue will reach $370 million in 2020 and jump to $4.5 billion by 2024 (assuming around 29 million subscribers paying roughly $13 per month). Those estimates are higher than the bank's model for Apple TV+ or Apple News+ revenue.

It's also worth noting that Apple Arcade could enjoy higher margins than other services. Original video content is notoriously expensive, which will weigh on Apple TV+ profitability. The company is paying hundreds of millions of dollars for Apple News+ content, which likely won't garner as many subscribers. Record labels eat up most of Apple Music's revenue. Apple Arcade could be a blockbuster hit in disguise.