Yahoo Finance Can Apple Convince Customers to Pay for News?
Apple (NASDAQ: AAPL) plans to launch a premium subscription-based news service in the near future according to Bloomberg. Apple will reportedly integrate Texture, a digital magazine subscription app it recently acquired, into its Apple News app as the foundation of the new service.
Apple previously provided magazines and newspapers via its Newsstand app, which was replaced by Apple News in 2015. However, subscriptions were only offered on an individual basis. Texture, however, lets users subscribe to over 200 magazines for $9.99 per month.
Image source: Getty Images.
If Apple applies Texture's business model to Apple News, it could generate a fresh stream of recurring revenue in a similar manner as Apple Music, which also costs $9.99 per month, for its growing Services unit. However, Macquarie Research analyst Ben Schachter recently suggested that Apple Music, like many of its streaming rivals, probably isn't profitable.
Revenue from the Services unit -- which also includes Apple Pay, AppleCare, iTunes, iCloud, and other services -- rose 18% annually last quarter and accounted for 10% of Apple's top line. Yet some analysts doubt that a subscription-based Apple News platform will ever be as important as Apple Music.
Gene Munster, a former Apple analyst and co-founder of Loup Ventures, told Bloomberg: "People pay for music, they pay for video, and most news services are ad-supported. If Apple launches this as a similar business to Texture, they likely won't have many subscribers." Munster might be right, but if enough people pay for Apple News, it could turn the idea of ad-supported news on its head.
Why people stopped paying for news
The growth of the internet and corresponding shift of people finding most of their news online killed off many print magazines and newspapers, and forced the survivors to rely heavily on ad revenues. Publishers needed higher traffic to generate more ad revenues, so they also shifted toward topics that could attract more visits.
More resilient newspapers like the New York Times (NYSE: NYT) successfully transitioned to a digital subscription model while reducing its dependence on print runs and ads. The NYT's subscription revenues rose 15% annually and accounted for 60% of its top line last year, which offset a 4% drop in its ad revenues and lifted its total sales by 8%. Its operating profit also rose 11% for the year. Unfortunately, many papers failed to pull of the NYT's transition to paid subscriptions.
Meanwhile, Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google has become a massive news aggregator, while Facebook (NASDAQ: FB) enables its users to share news stories with each other. This shift allowed readers filter out stories they didn't want to read and helped to condition them to view news as a "free" service.
A whopping 45% of American adults now get their news from Facebook, according to a recent Pew Research Center survey. Another 18% get their news from Google's YouTube, which is technically the second largest social network in the world after Facebook.
Image source: Getty Images.
Why there's still hope
Despite those challenges, there's still hope for Apple News gaining paid subscribers. Last year, the Media Insight Project -- a collaboration between the American Press Institute and The Associated Press NORC Center for Public Affairs Research -- found that 53% of American adults "subscribe to news in some form" (excluding cable TV bundles), and 54% of that group subscribed to a newspaper in print or digital form.
Twenty-six percent of non-subscribers who use a source for free "might begin to pay for it." Therefore, making Americans pay for a digital version of magazines or newspapers might not be as tough as it seems.
If there's any tech company which can convince customers to pay up for services, it's Apple. Many critics claimed that Apple Music wouldn't attract that many paying users, but the service topped 36 million paid subscribers earlier this year.
How much would Apple News cost?
Prior to Apple's buyout, Texture was co-owned by publishers Condé Nast, Hearst, Meredith, Rogers Media, and KKR. These publishers pooled the digital versions of their magazines together and offered them through Texture for $10 per month.
It could be tougher for Apple to add major newspapers to that bundle and generate a profit, although it could use it as a loss leader like Apple Music to gain market share first. The New York Times currently charges $8 per month for digital access, while The Washington Post's digital subscription costs $10. Therefore, it's doubtful that these publishers will grant Apple News users full access to their digital papers for $10 per month, especially since they already offer their own apps for digital access.
Nonetheless, Apple might try to ink deals with these papers to provide a limited number of stories per month. If those talks fail, Apple could still include them on an a la carte basis in the Apple News app.
Apple doesn't have much room to charge higher monthly fees for news, and the service also probably would not move the needle for Apple as much as Apple Music or iCloud subscriptions. Nonetheless, investors should track this effort to see if Apple -- which excels at promoting new products and services -- can convince people to pay for quality news stories again.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Facebook. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends The New York Times. The Motley Fool has a disclosure policy.
