The rollout of the Apple Inc (ticker: AAPL) 10th anniversary iPhone is just months away, but a growing number of Wall Street analysts are shifting their attention to Apple’s Services segment instead. Apple’s Services include products such as Apple Pay, Apple Music, iCloud, iTunes and the App Store, but the approach Apple takes with its video business could be critical for investors.
In a new report, Credit Suisse analyst Kulbinder Garcha takes an in-depth look at Apple’s Services business and speculates on the company’s next move in the video space. According to Garcha, Apple will likely double its Services revenue by 2020 if it takes the right approach to video.
“We estimate that with the existing state of services, Services revenues could rise to $52 billion long-term from $26 billion today, although we believe this will need a more direct video offering, driven by a high-quality, affluent, digitally transacting user base of 1.1 billion devices and around 650 million users,” Garcha says.
Apple Services currently delivers growth margins in the 70 percent range, and Garcha says Services growth will eventually push Apple’s overall gross margins above 40 percent.
Credit Suisse’s bullish outlook for Apple Services hinges in part on the direction the company chooses to go with its video business. Garcha says Apple’s electronic sell-through approach limits the company’s potential market. Electronic sell-through involves charging customers to download video content.
Instead, Apple could choose to become a virtual multiple systems operator, or MSO, and stream third-party broadcast and cable content. Garcha says this approach would likely lead to difficulties, particularly when it comes to negotiating local sports deals.
Apple could also choose to follow in Netflix (NFLX) and HBO’s footsteps and create its own original content, an approach that is both risky and expensive.
Finally, Apple could use its massive $246 billion cash hoard to simply buy one of the leading companies in the video business and make an immediate splash.
Garcha says Apple could acquire Netflix or opt to buy a major content producer such as Time Warner (TWX) or Walt Disney Co. (DIS).
“In conjunction with our media team, we have assessed…
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