When Apple (AAPL 1.27%) launched Apple TV+ nearly three years ago, it offered a year of the streaming service as a free add-on for any device purchasers. Still priced at $4.99 per month, profits don't appear to be at the top of Apple's priorities for the business.
Despite its massive investments in content, Apple TV+ might take the role of supporting actor for Apple. It's helped sell new devices and Apple One subscription bundles. The next supporting role for Apple TV+ may be in its growing advertising business.
Advertising coming to Apple TV+
Following in the footsteps of practically every other popular streaming service, Apple is exploring the potential for advertising within Apple TV+. The company has held talks with several media agencies, according to a report from Digiday. An ad-supported tier of Apple TV+ could launch as soon as early 2023.
Apple would likely shift the pricing of Apple TV+ higher if and when it introduces advertising. It's one of the few streaming services that hasn't raised prices in recent years despite its improving content catalog. It could keep its $4.99 per month price tag for subscribers willing to watch ads, and charge slightly more for those that want to avoid them.
Advertising would play well with Apple's interest in sports rights. It currently has deals with Major League Baseball and Major League Soccer, and it's in talks with the NFL. It presently shows ads during MLB games, but those ads are sold by the league, not Apple. But sports come with natural ad breaks and lots of live viewers, making them a great source of ad inventory for media agencies.
Advertising and a price hike would make Apple TV+ more profitable (or less unprofitable), but the infrastructure and relationships it could build to bring advertising to Apple TV+ could support a much larger business.
The goal is $10 billion
Earlier this year, Apple's VP of advertising, Todd Teresi, said his goal is to generate $10 billion in annual ad revenue for the company. Current estimates put that number at about $4 billion.
Among the things Teresi and his team are working on is an advertising technology called a demand-side platform, or DSP. A DSP would allow advertisers to automate their ad purchases across Apple's inventory, which includes advertisements in the App Store, News, and Stock apps. It may soon expand its advertising product to Maps, too.
Apple reportedly wants to use the DSP for Apple TV+ ad sales as well. And it'll need to build out a sales team to work with the big branded advertisers that would be most interested in connected-TV ad products. As such, the company could push more advertisers to use the DSP, increasing overall demand for its ad inventory, and move pricing higher for its ads across the ecosystem.
Again, Apple TV+ may be able to drive more revenue indirectly than it does directly by proving an essential part of Apple's ecosystem. In this case, it just so happens to be on the business-to-business-facing side.
Where investors will see the impact of Apple TV+
If Apple builds the ad technology and sales team to start selling ads in Apple TV+, investors will notice it in the company's services segment. Both revenue and margin ought to increase.
The rise in revenue stems from higher revenue per subscriber at Apple TV+ on top of the increase in overall ad sales. Apple will show an improvement in margin because it's growing revenue per subscriber without necessarily increasing its expenses for Apple TV+. Moreover, the advertising business likely carries very high gross margin relative to other Apple services.
