Apple TV+ has gone way over budget

Report: To compete with Disney and Netflix, Apple’s initial $1 billion investment in original programming has swelled to $6 billion.

From the Financial Times’ “Apple splashes $6bn on new shows in streaming wars” ($):

The company has spent hundreds of millions of dollars alone on a star-studded series featuring Jennifer Aniston, Reese Witherspoon and Steve Carell called The Morning Show. According to people familiar with the matter, that amounts to a higher price per episode than Game of Thrones, which reportedly cost $15m for each episode of its final season.

The Morning Show ranks alongside science fiction drama See, which features Aquaman star Jason Momoa and is written by Peaky Blinders creator Steven Knight, as one of the most expensive shows on Apple’s slate.

Apple is looking to build a library of original programming to take on more established competitors such as Netflix. While Apple’s budget remains well below Netflix’s expected cash content spending of $15bn this year, its more generous payment terms are helping it to win deals in Hollywood.

Unlike Netflix, which often pays content creators over several years, Apple pays earlier in the production process, once certain milestones are hit, according to people familiar with its approach.

My take: Good scoop. I speculated that the budget had grown significantly, but I never guessed it had grown sixfold.

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23 Comments

  1. Gregg Thurman said:

    “Let’s see: At $120/year, Apple would need 50 M users to break even in 1 year. After that….”

    If you look at the totality of Apple’s “subscription” services you find:

    iCloud
    Apple News+
    Apple Music
    Apple TV+
    Apple Arcade

    Excepting iCloud I think each of the above will be priced at $9.99/month. That totals $39.96 per month, $479.52 per year. Only Apple TV+ is wholly owned by Apple. Apple News+, Apple Music and Apple Arcade are dependent on others for content, necessitating revenue share.

    Within that price structure I see great potential for bundling that lowers the effective annual rate per user, but dramatically increases the number of users subscribing. The limiting factor in the degree of bundling possible is actual revenue Apple derives from each service.

    None of the above includes iTunes Movie rental revenue, which has its own non-recurring structure, yet represents tremendous revenue potential. I average about $20 on ~2 rentals per month plus 5 movie purchases since the beginning of the year.

    Bottom line is that I think Apple’s ARPU could be as high as $280 (net of 3rd party content expense) before any bundling plans are initiated.

    Each one million subscribers would yield about $280 Million in revenue. There are about 900 million iPhone users currently, and growing (albeit more slowly today than in the past).

    4
    August 20, 2019
  2. Ralph McDarmont said:

    I know this is a banal and worn out saying, but it takes money to make money. I support Apple’s decision to throw big bucks at a big opportunity. Buy popcorn!

    1
    August 20, 2019
  3. Kirk Burgess said:

    The $6 Billion number isn’t for one year UNLESS Apple is licensing a large back catalogue of movies/shows from other studios. Otherwise the simple fact is that Apple doesn’t have anywhere near $6 Billion worth of shows airing in year one.

    The article itself says that the morning show is the most expensive show (ever) and is costing $300 million for 2 years ($150 million per year). Even if every other show Apple releases is the same cost (which it isn’t) then to get to $6 Billion in year one would require 40 different series at $150 million average per series.

    Since the average budget is likely closer to $50 million a series, Apple would need to have 120 different original content series in the first year to hit $6 Billion in spending which is 4-5x the reported number of shows in development.

    So it’s either $6 billion over multiple years (including massive multi year deal with Oprah), or it includes Apple spending billions on a back catalogue of shows and movies from other providers (which hasn’t been indicated yet, but could happen)

    5
    August 20, 2019
    • Gregg Thurman said:

      Kirk, following up on your excellent review I see the following:

      Apple releases one series on par with “The Morning Show” and 17 (I can find 20 announced projects so far) “average” series per year.

      Using your annual cost per series Apple will spend approximately $1.00 Billion per year for content. That stacks up quite well with Apple’s original $1 Billion statement of commitment to streaming.

      Recapturing $1 Billion investment annually requires ~8,300,000 subscribers at $9.99 per month against an iPhone installed base of 900,000,000+ (~9% penetration rate).

      How many paid Apple Music subscribers does Apple have (in the US alone)?

      Ooooh, I just got shivers down my spine thinking about Apple’s net income and free cash flow.

      3
      August 20, 2019
      • Kirk Burgess said:

        Greg – just responding regarding your 9% penetration rate required to cover $1 Billion in content costs.

        You are actually off by an order of magnitude – but this is good, as it is actually only a 0.9% penetration rate required , rather than 9%!

        If you thought the economics were good before, look at them now!

        2
        August 21, 2019
        • Gregg Thurman said:

          “Greg – just responding regarding your 9% penetration rate required to cover $1 Billion in content costs.“

          Normally mistakes like this upset the hell out of me, but this is one I’m very happy with. Thanks for picking up on it Kirk.

          At the Apple Store this evening with my sister (she was turning her iPhone 6S in for credit). The Store was fairly empty but when asked the sales rep shared that “The Morning Show” trailer had been played so many times (by interested customers) that he thought he could recite the dialog from memory.

          Did I mention that I think Apple TV+ is gonna be huge? And how come (if we can) WS hasn’t figured out the economics yet? Are they ALL from Missouri?

          0
          August 21, 2019
  4. Millard Wright said:

    Am I the only one who thinks it very odd that we are investing billions of dollars to compete with Disney while Bob Iger, Disney’s. CEO, sits on the APPLE BOD and apparently is privy to APPLE’s strategic plans. Strange.

    0
    August 20, 2019
    • Gregg Thurman said:

      The function of the BOD is governance, ensuring that the Company is being managed properly. Strategy is the responsibility of management.

      1
      August 20, 2019
    • Kirk Burgess said:

      I recall it being the case that Bob Iger has to step out of the room when the board meeting discusses video related subjects. But also it wouldn’t be the worst thing in the world for Disney & Apple to be friends in this arena.

      0
      August 21, 2019
  5. Fred Stein said:

    Thanks Gregg and Kirk for the insights and the number crunching to back it up. Adding in support, Apple wisely invests heavily up front to launch Apple TV+ and make a positive first impression.. Also target customers for TV+ will buy more than one streaming video subscription. Streaming video is not a zero sum game.

    0
    August 20, 2019
  6. Gregg Thurman said:

    At $5.99 per month, Disney’s streaming service will be at the very low end of the pricing schedule adopted by others. But is it really that cheap?

    Disney has long ago amortized the cost of its media library. Whatever it charges from here will be nearly 100% gross margin. So what impact will a $60 annual subscription have on Disney’s annual revenue?

    I looked up Disney’s latest 10-K and discovered that revenue from the Media segment was just shy of $22 Billion per year (~37% of Company gross revenue). Each ten million subscribers will add $600,000,000 to gross revenue, adding ~3% to Media segment revenue.

    Do you really think Disney’s streaming service will attract just 10 Million subscribers? I believe that in the course of the next 2 years Disney’s service will attract 10X that number. That number of subscribers will increase the Company’s gross revenue (with very little incremental costs) by ~10% all by itself.

    Then, due to the renewed interest in past Disney franchises, there will be a resurgence in sales of toys and such.

    Television, as we grew up with and know it today, is a dead man walking.

    1
    August 20, 2019
    • Turley Muller said:

      Didn’t I see DIS plans on bundling Disney+, ESPN, and Hulu for $13 bucks or something ? Lights out NFLX.

      I saw data where the Office and a season of Stranger Things costs NFLX about the same. In the last 12 month period the Office had something like 46B viewing minutes and Stranger Things had 27B minutes.The kicker– 70% of viewership in the 12 month period for ST was in single month, and 90% in 3 months. The office was a steady 3-5M per month over the entire year. You’ll see people sign up for a month… watch the NFLX original content that just dropped then quit. The original content attracts users… the licensed content like the Office and Friends etc retains users year-round. NFLX spends all this money on production and they might only get a month or two of from some users.

      NFLX pulled subscription management from App Store because it was way to easy for users to sign up and quit and sign back up again. I mean you can disable auto renew at the time you subscribe. I bet they had a number of people jumping in and out. They lost subscribers in the US last quarter. It’s just going to get worse when the Disney and NBC etc content gets teen away, HBO can get 3-4 months out of you because they only release one episode per week. NFLX releases entire seasons at once. I don’t like the business. At least in Apple’s case it’s just part of a larger strategy as is true for AMZN, And these guys can subsidize losses, but for NFLX that’s all they have.

      0
      August 20, 2019
  7. Norman Lotz said:

    Apple is a deep pocketed amateur newbee at content creation. They have no idea what they’re doing, and hiring people like Oprah doesn’t change that. As such, I expect inefficient and wasted investment in content creation.

    0
    August 20, 2019
    • Dan Scropos said:

      This comment doesn’t hold water. Apple spends money more efficiently than any other company in history. That’s *why* they are “deep pocketed.”

      2
      August 20, 2019
    • Gregg Thurman said:

      Norman, I would agree with you about Apple’s expertise, had it not been for the hiring Apple went on before they announced its first project. I suspect that Apple’s “expertise” is, at minimum, on par with any Hollywood producer.

      Tim Cook isn’t producing these projects, he’s the bank behind it all, smart enough to hire an impressive A-List of producers, giving them clear direction and the authority to execute.

      One thing about Hollywood types that a lot of people misunderstand is this, yes they want the money, but that’s just a sidebar to the recognition their oversized egos crave. They money goes into the bank sight unseen, the Oscars, Emmys and such are the bragging rights and are on the mantle for all the world to see.

      Given the budget, the best in Hollywood will produce Oscar/Emmy material all the time. It’s that level of production that the iOS demographic will subscribe to, and at a higher cost (if necessary). HBO has proven this over and over again.

      I have no problem with the amount Apple spends on its own content, or the “waste” there may be in that budget.

      1
      August 21, 2019
    • David Drinkwater said:

      Hello, Norman. I believe you left off the sarcasm mark, no?

      I say this because the “Apple is not gonna just walk in here and disrupt the cell phone [or insert other] industry” story has been told before by many companies that don’t exist anymore.

      Just saying.

      0
      August 22, 2019
  8. Doug Montgomery said:

    Reports say that Sony is de-prioritizing PS VUE. Apple could grab it for a song and instantly have a million streaming customers and deals in place with networks.

    0
    August 20, 2019
    • Gregg Thurman said:

      “Apple could grab it for a song…”

      If that’s true it would be because that’s all its worth, and declining. Apple could, and will, just go about its business and pick up all those subscribers without having to buy the company.

      Sony doesn’t have anything worth buying.

      2
      August 20, 2019
      • David Drinkwater said:

        I still like Sony’s A/V gear. De gustibus and all that.

        0
        August 22, 2019

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