Apple (AAPL -0.25%) is spending heavily on its Apple TV+ streaming service. While management has kept numbers close to the vest, estimates for its content budget range from $1 billion to $6 billion per year. That puts its spending in line with some of the biggest competitors in the space. 

While Apple's series and films have garnered critical acclaim, it's not clear its strategy is paying off to become a profitable service for the tech giant.

Paying subscribers

While Apple hasn't released details on how many consumers are watching Apple TV+, one analyst estimates it has between 20 million and 40 million paid subscribers. Bernstein analyst Toni Sacconaghi estimates Apple generates between $1 billion and $2 billion per year in subscription revenue, but it's spending $3 billion per year on content.

Apple was very aggressive in offering extended free trials for the service. Customers buying an Apple device in 2019 and 2020 received at least one full year of Apple TV+ with their purchase. Those trials ended last summer, and Apple shortened the standard trial length to three months. As such, Apple saw very high churn rates this year, according to a survey from Whip Media.

That said, subscriber satisfaction is improving. The percentage of subscribers likely to keep their subscription improved to 73% from 54% a year ago.

Apple TV+ has a small library of films and series, with a focus on prestige content. The average IMDb score for its series is higher than any other streaming service, but the total number of hours of content available is also far lower than any other streaming service. The highly curated approach will take time for Apple to build out a substantial library and calendar of releases that keeps subscribers year round.

Still, it's difficult to see Apple TV+, with its heavy focus on prestige programming, reaching the audience levels of its biggest competitors. Its programming is more like HBO (not HBO Max), but Apple charges one-third of the price as Warner Bros. Discovery for its service. That curbs its revenue potential. While raising prices is certainly an option, Apple hasn't indicated any plans to change its pricing for its subscription services.

As the service matures, Apple will learn what draws in and keeps subscribers, and as the company aligns content spending with subscription revenue, Apple TV+ should move toward break-even profitability.

Sweetening the deal

The real value of Apple TV+, Sacconaghi argues, is in the potential for it to be part of a bundle of Apple subscriptions. Apple already bundles Apple TV+ with Apple One, which also includes Apple Music, Arcade, News, and more Apple services. But the streaming video service could be used to get people to subscribe to an iPhone and commit to periodic upgrades on their devices.

Indeed, access to some top critically acclaimed series and films on streaming may be an effective sweetener for customers considering an Apple subscription offering, even if they wouldn't consider the service by itself. That could, in turn, fuel Apple to spend more on content for Apple TV+, creating a virtuous cycle. 

The bundle strategy worked extremely well for Amazon (AMZN 0.36%), which found bundling Prime Video with its Prime shipping program boosted overall sales, allowing it to invest more in video and grow its subscribers. It's unclear if Prime Video would be profitable as a stand-alone service, but it's certainly valuable to Amazon. Management says consumers who engage with digital content are more likely to renew Prime, and Prime members spend more on average than non-Prime customers.

So even if Apple is never able to make Apple TV+ profitable by itself, it could still be an extremely valuable chess piece for Apple in its efforts to keep its customers using its products and services year after year. That won't show up explicitly in any Apple earnings report, but it will make itself clear in Apple's overall bottom line long term.