Apple will have to stomach big losses for a long time in order to succeed with its Hollywood push (AAPL)

tim cook

Apple must be prepared to shoulder huge losses to succeed in the TV business.
On Monday, the tech giant announced Apple TV Plus, its entry into the streaming TV market.
The company is used to enjoying huge profits on the sales of the iPhone, its star product — but entertainment is very different.
Apple needs to have the appetite to spend enormous sums for years — without generating much revenue in return — to make a dent in showbiz.

It's official: Apple is going to Hollywood. But if it's going to survive, it needs to realise that Tinseltown is nothing like Silicon Valley.

On Tuesday, the Cupertino technology giant held a glitzy event to formally announce its long-awaited video-streaming service, Apple TV Plus. When it launches, it will offer subscribers original content, including TV shows, movies and documentaries — and it has some of the biggest names in showbiz on board, from Steven Spielberg to Oprah Winfrey and JJ Abrams.

But it's also going up against long-established players like HBO and Netflix, and will need to adopt a totally new approach to doing business if it wants to make Apple TV Plus a long-term success.

Apple's business, at present, is heavily dependent on the ongoing success of the iPhone. It's the world's most popular smartphone, and is a money-printing machine of staggering proportions. Apple enjoys quarterly profits of $20 billion, largely off the back of the ongoing success of iPhone. Every device sold means hundreds of dollars in profit for Apple, which stands in stark contrast to the razor-thin margins in much of the rest of the smartphone business.

The media business is not going to be the same immediate cash-generating success for Apple. It is facing the necessity of enormous outlays to procure top tier talent and produce new video content from scratch, with no guarantee of success. Apple TV Plus may be in the red for years before it hits a critical mass of users to make it sustainable on its own merits.

Such profligate spending is necessary because without the content there in the first place, users simply won't pay to sign up. You wouldn't sign up for a paid streaming service with only three shows and a dozen movies — there needs to be a key level of content before the entire enterprise even becomes viable. That means burning cash lots of cash.

Apple has some key strengths going into this: Hundreds of millions of users, and bucketloads of moolah.

Morgan Stanley weighs in

As Morgan Stanley analysts wrote in a research note to clients on Tuesday: "Apple enters the content publishing business with two distinct strengths — a global user base and a massive checkbook. In our view, these two factors alone mean investors and competitors should take it seriously."

As such, the determining factor in Apple's success may not be whether it can afford to persevere, but rather whether it has the stomach to do so — if that means subsidizing unprecedented losses in an uncertain new business vertical until it builds the "content tonnage needed" to achieve scale," wrote the analysts.

Morgan Stanley points to the volume of cash Netflix had to go through to reach its position of strength: "From 2012 to 2021, when we estimated Netflix turns [free cash flow] positive, we estimate it will have burned nearly $13bn of [free cash flow to achieve this feat ... Netflix has benefited from a long bull market and fairly easy access to capital. Does Apple have the appetite to spend its way to success?"

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