Why iTunes' Growth Could Accelerate
Apple has been accused of being short on innovation since Tim Cooke took the leadership reins. Examining a transcript of the company's recent earnings call, the ratio of the word "revenue" to "innovation" shows up in the prepared remarks at a measure of 22:1. This is likely due to a management transition that required innovation be pushed to the individual product silos. This development transition simply took multiple years, and the innovation lag is coming to an end.
Apple's internally built CDN
A few weeks back, Dan Rayburn, independent industry analyst and entrepreneur, published an article discussing how Apple is building its own external Content Delivery Network to provide electronic entertainment to consumers. This is a step away from Apple's traditional modus operandi of using third parties externally. This could have both negative and positive implications for Apple's partners such as Akamai Technologies and Fusion-io , who provide CDN services and data center infrastructure.
Apple appears to be putting effort into both delivering content independently and partnering with the pipe owners who deliver content, attacking the problem from multiple angles. According to AppleInsider, Apple is considering offering on-demand music on other platforms besides iOS in what would be a break from tying its services to its hardware. The company also appears to be in discussions with Comcast to offer a streaming set top box that will have premium Internet access and ensure the seamless distribution of video content for movies. Regardless of how this plays out, this effort shows that Apple is pushing development of the iTunes business, which generates $4.4 billion in revenue and is growing at 19% year-over-year.
Innovation dormancy may be over
The combination of internal infrastructure development, partnerships on multiple fronts, and embracing of third party operating systems could signify that Apple is coming out of its innovation dormancy like a rocket. The problem with having a single person leading all of the great innovations is that the company is limited by that person's abilities, even if the vision is near limitless. As Tim Cook said on the fourth-quarter earnings call, "We have zero issue coming up with things we want to do that we think we can disrupt in a major way. The challenge is always to focus to the very few that deserve all of our energy."
iTunes is a business in itself
Clearly, both consumers and investors can benefit from improved content speeds and better, cheaper content access. At $4.4 billion, iTunes represents 8% of revenue, and it is growing at three times the overall revenue growth rate. However, this is primarily due to App Store sales, as opposed to content such as music or video. If Apple has found a way to make iTunes the go-to place for content streaming, there could be an inflection point coming up in this growth rate.
Partners benefit as well
Fusion-io could be a derivative play on the expansion of iTunes as well. As a supplier of flash caching to improve server performance, and an existing Apple partner in its data centers, the slowdown in equipment purchasing could be reversing. Fusion-io has been called One of the Great Turnarounds of 2014, and Apple's data center expansion would be a key growth driver for the company.
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