Apple is using streaming to unlock another growing business

When apple (AAPL 0.18%) launched Apple TV+ nearly three years ago, offering a year of the streaming service as a free add-on to all device buyers. Still priced at $4.99 per month, profits don’t seem to be at the top of Apple’s business priorities.

Despite its massive investment in content, Apple TV+ can take the role of supporting Apple. It has helped sell new devices and Apple One subscription packages. The next supporting role for Apple TV+ may be in the growing advertising business.

Advertising is coming to Apple TV+

Following in the footsteps of virtually every other popular streaming service, Apple is exploring the potential for advertising in Apple TV+. The company has held talks with several media agencies, according to a report from Digiday. An ad-supported tier of Apple TV+ could launch as soon as early 2023.

Apple will likely change the prices of Apple TV+ higher if and when it introduces advertising. It’s one of the few streaming services that hasn’t raised its prices in recent years despite its improved content catalog. It could keep the $4.99 per month price tag for subscribers willing to see ads, and charge a little more for those who want to avoid them.

Advertising will play well with Apple’s interest in sports rights. It currently has deals with Major League Baseball and Major League Soccer, and it is in talks with the NFL. It currently shows ads during MLB games, but those ads are sold by the league, not Apple. But sports come with natural ad breaks and lots of live viewers, making them a great source of ad inventory for media agencies.

Advertising and a price increase would make Apple TV+ more profitable (or less unprofitable), but the infrastructure and relationships it can build to bring advertising to Apple TV+ could support a much larger business.

The goal is 10 billion dollars

Earlier this year, Apple’s VP of advertising, Todd Teresi, said his goal is to generate $10 billion in annual ad revenue for the company. Current estimates put this figure at around $4 billion.

Among the things Teresi and his team are working on is an advertising technology called a demand-side platform, or DSP. A DSP will allow advertisers to automate ad buys across Apple’s inventory, which includes ads in the App Store, News and Stock apps. It may soon expand its advertising product to Maps as well.

Apple reportedly wants to use DSP for Apple TV+ ad sales as well. And it needs to build out a sales team to work with the big brand advertisers who will be most interested in connected TV advertising products. As such, the company can push more advertisers to use DSP, increase overall demand for its ad inventory, and move prices higher for ads across the ecosystem.

Again, Apple TV+ may be able to generate more revenue indirectly than it does directly by proving an important part of Apple’s ecosystem. In this case, it happens to be on the business-to-business side.

Where investors will see the impact of Apple TV+

If Apple builds the ad technology and sales team to start selling ads on Apple TV+, investors will take notice in the company’s services segment. Both turnover and margin should increase.

The increase in revenue comes from higher revenue per subscriber with Apple TV+ in addition to the increase in total advertising sales. Apple will show an improvement in margin because it increases revenue per subscriber without necessarily increasing expenses for Apple TV+. Also, the advertising business probably has a very high gross margin compared to other Apple services.