With concerns growing that the product which generates over half its revenue is losing steam, the world’s most valuable company is actively seeking something new to move its dial. Internally, Apple Inc has significantly ratcheted up its investment in R&D. Also, it has a $216bn mountain of cash which brings the ability to acquire pretty much anything Steve Jobs’ creation sets its eyes on. Including global media group Time Warner which owns the kind if exclusive content that is increasingly appealing in the converging Technology Media and Telecoms sectors. Two problems though – it was only 16 years ago that Time Warner almost committed suicide by merging with a tech group (AOL), so its executives will be wary of a repeat. And although in theory Apple could easily afford the $60bn price tag, with 95% of its cash is outside the US, it faces a hefty tax charge to repatriate those funds to do the deal. However, the mere fact Apple has mooted a media purchase is sure to get traders interested in this comparatively neglected sector. Time Warner, for instance, is worth $20bn less than the price at which rival Fox launched an unsuccessful takeover bid in August 2014. The narrative is sure to gather further steam with this morning’s news that Gawker Media has hired investment bankers to consider a possible sale. – Alec Hogg
Apple has had a significant hand in pushing the media industry into the digital age. Now, the technology group is trying to find a way to get far more deeply involved in the business itself.
The revelation that Eddy Cue, a senior executive at the iPhone maker, broached the idea of a possible purchase of Time Warner late last year is the most dramatic sign yet of Apple’s rising interest in media.
It comes at a watershed moment for the world’s most valuable company, as Apple experiences the first revenue decline in the nine-year life of the iPhone. The company relies heavily on the smartphone business, which produced two-thirds of its $126bn in revenues over the past six months. So evidence that the iPhone has entered a more mature phase has left investors groping for signs of where sustained growth will come from in future.
Apple has already supplied one answer: from generating more money from people who already use its devices, particularly in the form of recurring fees.
Thanks in part to the sale of things such as digital music and movies, services have emerged this year as the company’s largest source of revenue after the iPhone. And now that Apple has a foot planted squarely in the media industry’s door, it now seems ready to barge in further.
Tim Cook, chief executive officer, gave a sense of Apple’s growing interest in finding new media-related businesses to supplement its traditional hardware sales when he announced the latest quarterly earnings last month. Apple Music, a subscription service launched at the end of June last year, has more than 13m paying subscribers, nearly half as many as the 30m paying users of Spotify, the leading subscription service.
“We feel really great about the early success of Apple’s first subscription business, and our Music revenue has now hit an inflection point after many quarters of decline,” Mr Cook said. The rebound follows a steady fall-off in music downloads, as the iTunes music store, Apple’s first significant digital media platform, lost momentum.
Generating higher recurring revenues from existing users will come to be an increasingly important component of Apple’s business, according to Horace Dediu, a former Nokia executive and mobile industry analyst.
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Apple has fed this narrative by revealing that more than 1bn of its devices are in active use and playing up the increasing importance of services, including media sales, to its business. Service revenues accounted for 12 per cent of revenue in the latest quarter, service revenue was up from 9 per cent a year before, with the App Store in particular seeing a 35 per cent jump.
The focus on the number of Apple devices in active use has encouraged Wall Street to take a fresh look at the levers in the company’s business model. Since some customers own more than one device, analysts estimate the number of active users at around 800m.
With total company revenue hitting $234bn last year, that represents about $300 per user. Selling an add-on subscription music service – at a full price of $9.99 a month – would offer a substantial increase in income from those customers that buy it. It also demonstrates the power of the Apple ecosystem to grow beyond the hit-driven gadget business that has traditionally dominated its profile among investors.
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Adding a subscription video service to Apple’s media armoury has been a key part of the company’s plans, though so far without success. Negotiations over getting rights to stream content have failed, as media companies have worried that a deal with Apple would undermine their existing revenues from pay TV subscriptions and give the tech group too much power.
The acquisition of a company such as Time Warner, owner of assets including the Warner Brothers movie studio and HBO premium cable channel, could mark a potential turning point. At one fell swoop it would give Apple a seat at the media world’s top table, giving it the bargaining chips to negotiate distribution deals with other media companies.
Other companies from the world of digital media distribution have already moved into producing their own programming, though they have chosen an incremental approach rather than large-scale acquisitions. Chief among them is Netflix, the movie rental service, whose foray into original content production has made it an increasingly serious rival to HBO, the subscription channel that is Time Warner’s crown jewel. Amazon has also started making its own shows to support its subscription Prime service.
But Apple, which has a cash pile of $216bn, appears to have contemplated something far more dramatic. Whether it would seriously try to pursue an all-out bid for Time Warner – or whether the suggestion from Mr Cue was intended mainly as a heavy nudge to prod the company into releasing more of its content – points to one of the most intriguing questions over the future of the consumer technology company.
(c) 2016 The Financial Times Ltd
