Apple (NASDAQ:AAPL) plans to launch its own subscription video on demand service this fall, going head-to-head with Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS). At an event earlier this year, the company highlighted some of the top talent and series consumers can expect from the service, dubbed Apple TV+. Previous reports indicated Apple was spending about $1 billion on that content.
After news that Apple was dropping in excess of $15 million per episode on some series, it became clear it was spending more than $1 billion. Indeed, Apple has committed to spending $6 billion on content, according to Financial Times. To put that in perspective, Netflix is expected to deploy about $15 billion in cash this year, and Disney expects its cash investment in exclusive Disney+ original content to be a little over $1 billion in fiscal 2020.
Apple's $6 billion content budget is extremely aggressive. Will it pay off for investors?
Making big bets
In an interview with The Sunday Times earlier this year, Apple's head of services and programming, Eddy Cue, said he's more interested in making the best content for consumers, not necessarily offering the most. The company wants Apple+ to be more like HBO than Netflix, so to speak.
That said, the most expensive content isn't necessarily the best content. Netflix has had its share of big-budget flops, which led head of content Ted Sarandos to refocus the company's content spending priorities. Disney has been practically bulletproof at the box office this year with its string on big-budget titles, but it has a library of intellectual property that's fueled its success. Apple's originals are completely original.
It's certainly more likely that big-budget originals with lots of star power will attract an audience. And getting those first viewers to sign up and watch something could be key to getting Apple's originals to a broader audience.
Content is just part of the spending
Apple plans to release its slate of originals slowly, with at least one new high-profile production coming to users' iPhones and Apple TVs (as well as select non-Apple devices) every month. Spacing out releases will allow the company to focus its marketing budget on specific titles more efficiently to see what's driving users to sign up. Netflix notably stepped up its marketing budget over the last two years to focus more on its original titles because its data showed that "this is wise."
Disney is also a marketing machine, and it said it'll focus on marketing its original titles ahead of the Disney+ launch. Overall operating expenses, which include marketing expenses, for Disney+ will be around $1 billion for fiscal 2020. Netflix spent over $4 billion on operating expenses in 2018, with $2.4 billion on marketing. A similar ratio puts Disney's marketing budget for Disney+ over $600 million.
Even $600 million is a considerable amount of ad spend for Apple. It last disclosed its ad spend in 2015, when it was $1.8 billion. Selling, general, and administrative expenses have climbed by about $2.4 billion since then, but Apple also has a lot more products now as well, so it's likely not spending that much more on advertising.
Apple also benefits from its presence in "a billion pockets, y'all," as Oprah Winfrey exclaimed in March. It can use its installed base to market its services more efficiently. That's one reason why it's had much more success with Apple Music among consumers that own an Apple product. But Netflix benefits from pushing its original series within its app and Disney will benefit from dozens of consumer touchpoints to promote Disney+. Overall, investors shouldn't expect Apple to have any advantages in marketing efficiency over the competition.
Apple's massive bet on content will need to coincide with a huge increase in marketing spend. Even then, it's unclear whether such a big bet will pay off for the company, as the competition in the streaming video space is fierce.
But if it does, Apple has a lot more to gain than just a monthly subscription fee. Apple TV+ customers will be more likely to buy Apple hardware and stick with its ecosystem. So Apple is in a better position to make outsize bets on programming and marketing than Netflix or Disney, which are primarily relying on subscriptions to generate revenue.