Apple Poisons Netflix -- Needham & Company

• Who?  AAPL’s well-publicized event at its HQ yesterday resembled annual broadcast Upfronts put on by NBC, CBS, etc.  AAPL called on internal talent to introduce a new credit card, news service, games service and TV service.  AAA stars from film and TV showed up on AAPL’s stage to promote their projects, including Oprah who talked about three.

• Why?  Connecting was the theme.  AAPL connects people (phone calls connect people literally) and great storytellers connect people through highlighting common issues of humanity.

• How?  AAPL’s new TV service is both a storefront and has original content with big name stars coming in fall of 2019 at an unknown price.  AAPL’s name for its TV service is “Netflix Killer.”  We understand why.

• So What?  NFLX has an inferior competitive position to AAPL over time, as we see it, in both a) customer acquisition costs and b) content costs. AAPL has zero consumer acquisition costs since it will first target its captive 900mm global unique users, which are the wealthiest consumers in the world.  Content costs are lowered by the fact that Apple is creating a storefront service and will get a rev share of subscriptions sold to HBO, Showtime, etc.  This will be aided by premium original content with the biggest stars in Hollywood, if today was any indication.

• Valuation?  The most important value driver for an ecosystem company like AAPL is churn, in our view.  The lower the churn, the higher the lifetime value per user.  Old services like Apple Music, Apple Pay, Cloud, etc. lower churn.  New services like news, games and TV potentially drive upside valuation in three ways: a) attract new users to the AAPL ecosystem, b) lower churn (increase stickiness) and c) add revenue and profits per user-higher lifetime value.

• Liked Most?  What we liked most was AAPL’s new Arcade for games service plus its new TV service.  We believe TV, games and music are converging.  Since AAPL will have all three services, we think it will be able to cross-sell and integrate best practices of all three into a new innovative service never done before.

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