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  • KPB & Co Research

As Apple Inc (NASDAQ: AAPL) continues to develop original content, onlookers in the media industry ponder whether it has the pull to get the talent that such tech companies as Amazon, and Netflix have. The assets that Apple has at their disposal puts them in a position compete in any foreign market it desire, albeit in some markets that would have learning curve to mount. Apple undoubtedly has the cash, the brand recognition, and ready distribution channel.

Apple has roughly US$267Bn in liquid assets to use at their will, and so affordability is a non-issue. Many top talent in the industry question whether the senior management has the conviction that the other tech companies have, given that the primary driver of revenues for Apple is iPhones. There are also concerns about the capabilities of the company as a media provider. In our view, the recent spate of deals done in the original content space speak volumes. Apple recently struck a US$1Bn deal with Oprah Winfrey that according to Apple, will "embrace her incomparable ability to connect with audiences around the world." The company also finalized a deal to revive Steven Spielberg's 1980s science fiction anthology series "Amazing Stories". Finally, the company also has a morning show drama arrangement with Reese WitherSpoon, and Jennifer Aniston where the company will pay US$1.2Mn per episode to both actors. Apple has one of the most valuable brands in the world, which uniquely positions them to quickly get eye balls on their content. Nevertheless, the most impressive asset that Apple has, is its install base of iPhones, iPads, Macs, and Apple TV devices. This installed base gives them a huge competitive advantage. Amazon Prime has roughly 100Mn members, and NetFlix has 125Mn. Apple Music alone has 40 million subscribers, and the company's install base of iPhone alone is at 650Mn. There are estimates that puts the company's total install base at over 1 billion.

At Apple's most recent WWDC they focused on beefing up the software that powers its four platforms: iOS, tvOS, watchOS, and macOS. A key part of the software improvements was focused on security, privacy, and integration with Apple services. Judging by apple's recent acquisitions and business decisions, we cannot help but wonder whether this is a precursor for an all-out war for subscription revenues. Apple's services business is now a US$29Bn business, and though it pales in comparison to its iPhone business (US$141Bn), it is now the second largest business segment. Apple's recent acquisition of Texture - a magazine subscription business, Shazam - a music and image recognition business, and Beats - a music streaming business underscores the focus on content. Apple music now has over 60 Mn paying subscribers, already on the heels of Spotify, which is the market leader.

As apple seeks to grow its service business aggressively and sales growth of the flagship product slows, we could see management devoting more time to implement revenue diversification. The company has an enormous eco-system that allows to scale any new services launched pretty quickly. Furthermore, the having control of the eco-system puts them in an advantageous position to implement a better quality user experience that many of the company's standalone competitors.

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