Last week, Netflix indicated that it would be stopping in-app subscriptions on Apple (NASDAQ:AAPL) devices, as it looks to bypass the commission that Apple charges on subscriptions made via iOS apps. Apple typically takes a 30% commission from subscriptions initiated on its platform over the first year, with the number dropping to 15% from the second year onward. Going forward, Netflix will require new subscribers on iOS to sign up via its website, rather than within the Netflix App, thereby allowing it to bypass Apple’s iTunes-based billing system. In this note, we try to size up the potential impact of Netflix’s move on Apple’s subscription business, which counts as one of the iPhone maker’s fastest growing services segments.
We have created an interactive dashboard analysis on Breaking Down Apple’s Services Revenue. You can modify the various drivers to arrive at your own estimates for services revenue.
Netflix Likely The Biggest Subscription Based App On iOS
Apple had a total of about 330 million paid subscriptions on its platform as of the last quarter, and we estimate that the company made a total of over $2 billion in subscription revenues over 2018 from third-party apps. While Apple will continue to garner a cut from existing Netflix subscribers who signed up on an iOS device, it will have to forgo revenues from new sign-ups and this could be meaningful, as Netflix is likely one of the biggest contributors to Apple’s third-party subscription revenue. The company’s subscriber base is likely approaching 150 million globally and it counts as one of the most popular apps on the AppStore. That said, we don’t believe there is a meaningful risk that other digital subscription providers will follow suit and discourage app based sign-ups as the in-app subscription model allows developers (particularly smaller players with less visibility) to offer convenient payment process and a more streamlined experience.
How Much Potential Revenue Could Apple Lose From Netflix’s Move?
If we assume that Netflix adds a total of 21 million users globally in 2019, with 20% of the subscriptions coming from iOS, it could imply that about 4 million users sign up on iOS devices next year. Although iOS accounted for just about 13% of the global smartphone market last quarter, iOS users could be more likely to sign up for Netflix, considering higher purchasing power and spending on apps and services. Assuming an average monthly subscription fee of $11 per user, revenues from new subscribers on iOS for the year would come in at about $550 million. Apple’s share of revenues on these users would have come in at about $160 million for the year, assuming a 30% take rate. The potential loss of incremental revenue could increase to $200 million in 2020 and $250 million by 2021, as the loss of recurring revenue (15% cut for users who signed up in the previous year) is factored in. While this would barely have an impact on Apple’s revenues, which stood at about $265 billion last year, its likely that these commissions are almost pure profit for Apple, meaning that the impact on the company’s bottom line could be slightly more pronounced. See our full calculations in the table below.
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