With the announcement by Apple Inc. (NASDAQ:AAPL) that it is joining the streaming wars, investors in companies like Netflix, Inc. (NASDAQ:NFLX) believe we have entered a “golden age” for the technology.
But Apple’s decision to put $1 billion into video content, combined with moves into video by Facebook Inc (NASDAQ:FB), and the existing push by Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN) to get paid for streams, tells me something different.
It tells me we’re at a tipping point, that infrastructure is about to swallow content, but that the winners may not be the companies we expected them to be.
I believe those winners will be in the cloud.
AAPL Stock: The Great Game in Entertainment
Two trends are merging with the Apple announcement. First, cloud companies realize they need video, as a consumer product for their services. Second, it’s cloud and not last-mile economics that are going to dominate this new streaming age.
AAPL said it brought in $7.3 billion of revenue from services during the second quarter. This makes services its second-largest business, behind only the iPhone.
CEO Tim Cook saw this coming, and began investing cash into cloud data centers a few years ago. Last year, he put a mind-boggling $16 billion into capital expenditures, most of it in cloud. This puts Apple in the cloud big leagues, alongside Google, Amazon, Microsoft Corporation (NASDAQ:MSFT) and Facebook, companies that can afford to play the “great game” of this decade, which is cloud.
Clouds have both the storage and communications power to profit from services, and the financial muscle to push everyone else out. The companies mentioned in the above paragraph have over $2.5 trillion in market cap.
If entertainment is a game AAPL decides it needs to play, it can buy its way in. Is Netflix worth $80 billion? Apple has the cash to bid $100 billion and take it. Walt Disney Co (NYSE:DIS) is worth almost $160 billion. Apple can buy them, too. So, too, can any of the new cloud players, if it comes to that.
What Comes Next for Apple?
The $1 billion Apple is pushing in to get into the game won’t buy many chips. It may be enough for five shows, or five big movies. But it’s a toe in the water, which will let it learn the business and hire executives who understand the economics.
Spending on what is called “social video” should hit $77 billion this year, and reach $107 billion in 2020. That’s just the ad side. Netflix’ revenue will top $10 billion this year. Disney will bring in $55 billion.
These companies are only marginally profitable, however, because they lack the infrastructure to deliver their product. Those pounding the table for Comcast and AT&T insist that last-mile connectivity, whether wired or wireless, is key to that infrastructure.
They are wrong. It’s cloud.
What the Market Knows
The market knows where value lies. AT&T and Verizon, together, are now worth less than Amazon. Facebook is worth more than Amazon, Google and Microsoft are each worth more than Facebook and Apple is the most valuable company in the world.
AAPL stock critics like to say CEO Tim Cook hasn’t done much besides ride the wave of the iPhone, and in the device sector that is true. But devices aren’t where the big money is. Services, like video, are where the big money is. Cook’s cloud is hungry for content, it’s the big dog here, and it’s going to eat.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN and FB.