It's Time for Apple (AAPL) to Go Big in Content and Launch 'Apple Prime' - Goldman Sachs

October 17, 2016 8:44 AM EDT
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Goldman Sachs analyst Simona Jankowski thinks its time for Apple (NASDAQ: AAPL) to "go big" in content and envisions a $50/month "Apple Prime" subscription offering that includes the iPhone, Apple Music, Apple TV, access to the iTunes library of TV shows and movies (some free), Apple original content, and potentially live sports.

"This strategy would help Apple fend off smartphone commoditization and position it well vs. Amazon and Alphabet as content shifts to streaming," Jankowski said.

The firm's proprietary survey shows that having a subscription (e.g. Netflix) is more important for current consumer preferences than having original content. As such, they think launching the subscription bundle is the first priority, which would buy Apple time while it ramps up its original content.

Jankowski said Apple could turn the razor/blade model upside down. "Unlike companies that rely on selling hardware near cost (e.g. HP printers, Amazon Kindle) to drive follow-on consumable purchases at high margins (e.g., printer ink, e-books), Apple can turn the razor/blade model upside down," she commented. "With the extra revenues generated by selling iPhones every year as part of “Apple Prime” (vs. every 2-3 years currently), Apple can afford to be very aggressive in its content strategy – such as paying a premium for must-have material or pricing services below competitors. As an example, we illustrate how Apple could leverage its subscription bundle economics to license live sports from a network such as ESPN."

The firm said a scenario analysis implies EPS generated by "Apple Prime" customers would be over 10% accretive by 2021E, all else being equal.

The firm maintained a Buy rating and price target of $124 on AAPL.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $117.63 yesterday.

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