Someone outside of Cupertino is trying to tell Apple (NASDAQ:AAPL) what to do again. Goldman Sachs put out an ambitious analyst note earlier this week, suggesting that the consumer tech giant follow Amazon.com (NASDAQ:AMZN) into the digital bundle market.
Dreaming out loud, Goldman Sachs analyst Simona Jankowski feels that Apple could bundle an iPhone, Apple Music, Apple TV, and access to select iTunes content for a flat $50 a month. Apple Prime -- as she is christening it -- would also include access to original Apple content, and possibly even live sports if the contracts line up just right.
At first, it's easy to fall in love with her idea. Bundling a phone with a sticky assortment of entertainment services could make people more loyal to iOS. She feels that Apple Prime could generate nearly $19 billion in annual revenue in five years, and even for a company of Apple's girth, that's not chump change. There's also the name of the fabled platform, ringing near to Amazon's flagship digital bundle where tens of millions of subscribers pledge allegiance to the mother of all e-tailers.
However, give it a little more thought, and you'll soon realize that Apple Prime won't work. If it does work, shareholders aren't likely to be happy.
The rise and fall of Apple's digital bundle
The cornerstone of Apple Prime would obviously be the included iPhone. A purchase of an iPhone 7 starts at $27 a month for two years of payments. The plan where you can upgrade your smartphone every year starts at a little more than $32 a month. That would find the handset accounting for more than half of the $50 monthly subscription rate.
That's a good thing, because the other elements of the bundle may not justify the stiff monthly ransom. Apple Music is $9.99 a month. Most video streaming services are $9.99 a month or less. It would have to take a lot of exclusive content -- something that Amazon and Netflix (NASDAQ:NFLX) already have in hearty supply -- to justify matching Netflix at $9.99 a month.
It would mean that the sum of the product is more expensive than its parts, unless we're talking about including some elements of Apple's long-rumored but yet-to-be-seen over-the-top streaming television service. If Apple's inevitable streaming TV service is included in the suggested $50 price, it's too cheap, but to be fair, there will never be a fair price point. Apple Prime is either going to be a bad value for consumers, or a bad one for Apple's margins given the cutthroat ways of digital offerings.
Then we get to the catalyst for signups. The iPhone is a neat hook, but it's not Amazon Prime. Offering free two-day shipping of Amazon-warehoused goods is something that folks gladly pay $99 a year for -- or less than $10 a month. All of the digital offerings that Amazon throws on top is gravy. In other words, Apple Prime would be a hit only if it's priced for little more than the iPhone monthly payment -- and we know that's not going to happen.
Apple is on a roll. It obviously doesn't need Apple Prime to boost its service revenue, which is already growing nicely as a result of iCloud, Apple Music, and other offerings. It has the means to follow Netflix into more than $14 billion in streaming content obligations, but does it really want to go down that margin-shearing rabbit hole?
Amazon's pricing its new streaming music service at $7.99 a month for Amazon Prime members. Does Apple want to put a price war item in a bundle?
Apple Prime is great in theory, but it would be horrible in application.
Rick Munarriz owns shares of Apple and Netflix. The Motley Fool owns shares of and recommends Amazon.com, Apple, and Netflix. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.