The rumor mill periodically spins out buzz surrounding Apple Inc. (NASDAQ:AAPL) acquiring Netflix, Inc. (NASDAQ:NFLX). This speculation normally begins around the popular question of what AAPL should do with its copious stores of cash salted away offshore if repatriation becomes more favorable.
As the year has gone on, and NFLX has squeezed the bears something good, topping 100 million in subscribers and sustaining subscriber growth, the merits of a marriage between Apple and Netflix have become more apparent.
AAPL has been dipping its toe into original video content most recently with the poaching of two Sony Corp (ADR) (NYSE:SNE) executives. Earlier this year, Apple Music launched documentary series Up Next. So, there is clearly interest to get into the original content space.
But AAPL is still in the thinking stage, and instead of spinning their wheels, they should just tap into the indisputable mover and shaker that NFLX is.
NFLX Needs Cash for Content
With its foray into original programming and commitment to high quality shows, production values are high. Netflix has started this cycle whereby its increase in content investment forces competitors to up the ante as well, which then in turn it must continue to match. It’s not like a couple years down the line, NFLX can just stop creating edgy content and expect that subscriber growth will continue or that churn won’t be negatively affected.
With AAPL’s huge cash store, they could piggyback on the success that Netflix has had. Not every show has been a hit, but Netflix is not in the tiptoe stage that Apple professes to be in. They’re executing. And the results have been nothing short of spectacular. Accolades have been showered upon them, making traditional studios sweat something fierce.
Apple CEO, Tim Cook, told analysts in a January conference call, “With our toe in the water we are learning a lot about the original content business, and thinking about ways that we could play in that.”
Why bother creating/buying a few shows here and there, when AAPL can absorb NFLX and turbo charge its operations? A few shows or even a couple billion won’t make a meaningful mark on the Apple empire.
Netflix is already spending around $7 billion and Amazon.com, Inc. (NASDAQ:AMZN) is at $4-5 billion. I don’t know that a few hits does anything significant for AAPL economics.
It’s hard to say if there are risks of other companies that are interested and have the purchasing power, but I wouldn’t rule out Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). Though it may not be immediate, that risk exists.
Taking the plunge would be a more effective tactic.
What AAPL Gets From a Merger
Global scale, recurring subscription revenue, IP and all the viewing data that Netflix has accumulated thus far are valuable to Apple and not easily replicated.
The combination would create a truly disrupting force for traditional linear television. People are paying 8-10x the NFLX subscription price for cable bundles. I would argue, NFLX subscriber satisfaction isn’t materially lower than cable, leaving room to flex on pricing. With AAPL’s platform and branding power, I can see the combo taking market share from cable in a big way while also increasing revenues beyond what NFLX currently charges.
Apple is very keen to make Apple TV a household widget, and maybe even work Siri in there, and having NFLX’s content and backend takes them a lot closer to that goal. And a lot faster. The overall value proposition from a product and price standpoint will be exponentially more compelling than as separate entities. With Apple’s hardware distribution and retail prowess, there exists a powerful platform to leverage Netflix’s content and data analytics. Ultimately, this creates an even stickier user for AAPL.
I have mulled over the analogy between GOOG and Youtube, where the former bought the latter over ten years ago for not even $2 billion. The acquisition did wonders to diversify GOOG’s business, and GOOG’s advertising knowledge has been instrumental in growing revenues at Youtube. It has also given GOOG a toehold in content creation and distribution. Not an exact similarity, I admit, but I do think that there’s fundamental similarity to its value creation for the buyer. Don’t forget that these are still the early days of video streaming.
Bottom Line
Reed Hastings is a visionary. Integration and potential culture clashes are valid concerns from a logistical standpoint. But from a purely business standpoint, this transaction makes a lot of sense for Apple, which seems to be at a loss when it comes to groundbreaking ideas. AAPL is great at iterating, but there hasn’t been anything earth shattering since the golden days of Steve Jobs.
Apple has the resources to scale NFLX quickly to the point of having near-monopolistic distribution capabilities with a merging of top-of-the-line software and hardware in consumer entertainment. This is how AAPL gets to a trillion dollar market cap.
As of this writing, Luce Emerson was long AAPL.
