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Evaluating the performance of Apple products and its decision to enter the video streaming business


  • Tim Cook’s announcement to launch new services
  • Performance of Apple at a glance
  • The current and the future outlook of global video streaming business

 

On March 25, 2019, Tim Cook took the audience by surprise once again at the highly anticipated event at Steve Jobs theatre by announcing the series of new plans hatched by the company. He began the speech by defining the word service and announced the launch of video streaming, news subscriptions and also a credit card. The technology behemoth, Apple made a strategic decision to enter the video streaming business. Apple is known as the innovator and producer for user-friendly and fascinating next-generation consumer electronic products. The decision to foray into the video streaming business is a slight deviation from its mainstream business, which in a way earned brand recognition for the company. In this blog, Televisory explored the reasons that led Apple to take this decision.

iPhone which is a prominent symbol of Apple accounted for 63% of the total revenue in 2018. The other electronic goods such as iPad, Mac and the Apple Watch accounted for a relatively much lesser proportion of the revenue for the company. The second highest contributor to the revenue (2018) was its services segment, which included the wallet; Apple Pay, iTunes and Cloud. In the last four years, the services segment has witnessed the highest growth at a CAGR of 19.8%. The iPhones revenue grew at CAGR of 13.1%, but the iPad revenue recorded a decline of 11.2% and the Mac revenue witnessed a very sluggish growth of 1.4% in the same period. The market has not responded very positively to the iPad and the Mac of late. The company has been reducing the selling price of its iPad over the last four years, yet the sales volume witnessed a decline of 10.5%. The sales volume of Mac also declined though by a very small number in the same time period. iPhone has always been the most promising product of the company, which witnessed an increase in sales volume at CAGR of 6.5% even when its average selling price increased at a CAGR of 6.2% in the last five years. However, even for the iPhone, the YoY revenue growth was very unstable. It was 52% in 2015, but minus 11.8% in 2016.

The company has a very high brand value and strong customer loyalty. Its customers have associated the company with innovations for the creation of products that are valuable, rare and inimitable. However, with time as the value of the company has increased so has the expectations of its customers. The company is forced to innovate in order to maintain its position in the market and any failure to meet rising expectations of its customers that can result in a slow down or negative growth for the company. Another area of concern for the iPhone is the saturation in the global smartphone purchases. The volume of smartphone purchases went on increasing steeply from 2009 when it was launched, up to 2013. Thereafter (2014), the global smartphone purchases have remained more or less stagnant as almost all users by then switched to smartphones. It is forecasted that global smartphone purchases will remain stagnant in the near future. The company has over the period of time launched new services such as mobile wallet and cloud storage and these are showing good signs of growth. The services segment accounted for revenue of USD 18.06 billion in 2014, which more than doubled to USD 37.19 billion in 2018.

Furthermore, as Apple is now trying to expand its horizons in the services segment, the launch of video streaming service seems to be an opportunistic move as there is a lot of untapped growth potential in this market. According to Grand View Research, the global market for video streaming services is worth USD 36.64 billion and is expected to grow at a CAGR of 19.6% to reach USD 124.57 billion in 2025. This is a new medium of entertainment and people are gradually switching to this medium for entertainment. The online video streaming can be regarded as a substitute for television. In the United States, video streaming services have already overtaken television in terms of the number of households as 69% of the households have video streaming service, whereas 65% have television. One of the major advantages for subscribing to video streaming services is that the consumers can choose a movie or show from a large pool of available options, whereas on the television the consumers are restricted to what is available on a given channel. The below chart shows the video streaming users across all continents as a percentage of the total population. Televisory expect the video streaming subscribers to increase in Europe and Asia and reach at par with America in the coming years.

Currently, the market for video streaming has few players with the major names being Netflix, Amazon Prime and YouTube. The other players include Hulu, Sling and HBO. Netflix has undergone phenomenal growth in the last five years with its member count and revenue growing more than three-fold from 2012 to 2017. The video streaming companies have to make concrete efforts to continuously acquire new content in order to keep the customers engaged. Companies benefit hugely when they gain exclusive streaming rights for coveted content. This industry requires a high capital expenditure in terms of technology investment and huge efforts for content acquisition. Overall, we can characterize this industry as a competitive industry with high entry barriers, wherein the companies have to continuously differentiate themselves. The technology infrastructure of a company has to be sophisticated to allow seamless streaming without any hindrances even in the case of a relatively low internet strength. The content has to be vast and should also have some good quality shows that are unavailable with competitors. The revenue streams for these companies can be a subscription fee, advertisements or a combination of both. Apple has been following a differentiation strategy to compete in the market and the same strategy can be used to gain a competitive advantage in this industry.

Moreover, Apple is a technology company and also has cloud services. It has economies of scope to venture at relative ease in this business. It has strong customer loyalty and it may acquire customers more easily owing to its loyal customer base. Further, with the help of its existing products, it may be easy for the company to bring in its existing customers on video streaming service seamlessly. Netflix and Amazon Prime have started creating their own content to attract and engage subscribers. YouTube has also announced similar plans. What lies to be seen is whether Apple will also follow the suit and start creating its own content. Apple has always created differentiated products and sold them at a premium. Another thing that is awaited to be seen is what differentiated features will be offered by Apple and will it sell this service at a premium. Amazon could attain profitability owing to its prime memberships after facing loss in the retail segment for a prolonged period. Similarly, the services business can be a good hedge for the company against any threat to the growth of its core revenue streams. Amazon competes with Apple directly in many businesses and this decision also serves a strategic purpose to keep the growth of Amazon in check. Another valuable asset gained from this business is, of course, the data. The video streaming industry is growing and Apple is on a rising tide by entering into this business and it is expected to benefit from the foray.

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