Why Apple Should Buy Netflix

on January 7, 2016
Reading Time: 4 minutes

This is a thought I’ve had for some time now – I’ve mentioned it a couple of times in various places, but I haven’t had a chance to write down my reasons for thinking this would be a good idea until now. Given the context of Netflix’s huge international expansion, now seems as good a time as any, especially since CES has been even less newsworthy this year.

Apple has long been reported to be working on a subscription TV service. Though Apple itself has, of course, not commented on these reports, the consensus is Apple is planning a cable replacement service, but likely a “skinny” one, offering a smaller number of channels than the classic pay TV service and with a heavy focus on the on-demand aspects as well as an app-based UI for various Apple devices. However, the negotiations have apparently stalled over Apple’s desire to keep the price under a certain level which, in turn, implies breaking up the traditional bundle and the sorts of channel packages most rights owners have historically negotiated.

Given this present impasse, it makes sense to ask (A) why Apple wants to be in this business in the first place and (B) whether there might not be some other way for them to get into it. The answer to the first question is simple: as I wrote here a few months ago, I believe Apple recognizes the strategic importance of strong content services and is getting back into providing that content. Though it took a few years, Apple has finally accepted and begun to embrace the shift from by-the-drink models to subscription models, as demonstrated by its acquisition of Beats and subsequent launch of Apple Music. However, it doesn’t yet have an equivalent service for video, hence those long-standing (and so far fruitless) negotiations.

If Apple wants to launch a subscription video service, there are really only two options: traditional Pay TV or subscription video on demand as offered by Netflix, Hulu, and Amazon. In addition to the rights challenges associated with pay TV, the other problem is that pay TV at scale is an almost uniquely American phenomenon. Yes, there are other markets where people pay for satellite or cable television, but it’s nowhere near as universal and the prices are nowhere near as high. In addition, the content you’d need to provide such a service is unique in each market and, as such, launching beyond the US would mean repeating those negotiations all over again for each subsequent country. In addition, even within the US Apple would have to either acquire a plethora of local broadcasting rights (or have someone else act as an intermediary), limit local content to a few major cities, or forgo local content altogether, none of which seems appealing (something I’ve also discussed previously).

Enter SVOD as an option. Apple could create its own service – given its long-standing iTunes licensing relationships, it already has many of the pieces in place to be able to create this but an increasingly important aspect of such services is exclusive content. Though Apple is venturing into the content creation and curation business with both Beats 1 and Apple News, creating original video would be a completely new game. At the very least, Apple would have to contract this work out or make an acquisition of an existing content provider and it would be very unfamiliar territory for the company. Even after all this, Apple would be going up against the three major incumbents, with Netflix arguably strongest of all, and would therefore face an uphill battle gaining significant share.

Going back to the second of my two questions, might acquiring Netflix be an alternative route to the same goal, i.e. offering Apple customers a subscription video service? As the market leader and now the first global pay TV service, Netflix is in some ways pioneering what Apple might ultimately try to build itself and has a huge head start over anything Apple might build. Acquiring Netflix would fill the strategic hole around subscription video, while also bringing on a fast-growing and potentially lucrative revenue stream. This year’s international expansion (as I wrote elsewhere yesterday) will dent margins, but it’ll also lay the groundwork for a significant expansion in margins once those markets gain scale. I’m bullish on Netflix and its model and, although the international expansion has dominated news coverage of Netflix’s CES keynote, it also outlined several new pieces of original content and shared metrics around the success of earlier offerings. Netflix would also bring important skills for content delivery and web and cloud services, areas where Apple has consistently struggled to perform.

The main objections to all this are as follows:

  • It would be a very expensive acquisition
  • Netflix likely doesn’t want to be acquired
  • Netflix is not exclusive to Apple devices.

Acquiring Netflix would certainly be Apple’s largest purchase to date. Apple certainly has the cash to acquire Netflix (though there’s the matter of repatriation of that cash from overseas to deal with) and, if the price was high enough, Netflix’s board would be duty bound to accept on behalf of the company’s shareholders, dealing with the second objection. The third objection is tougher to deal with or it would be were it not for the fact Apple Music is an existing high-profile example of a cross-platform content service from Apple, since its recent launch on Android. Netflix wouldn’t have to be an Apple exclusive to add value – as we’ve seen from Apple Music, there are ways to build a content service into the OS through features like Siri which can make it more compelling on owned platforms and there would doubtless be other ways to extend that, too.

Lastly, I think it’s worth noting such an acquisition would make sense even if Apple still wants to pursue its broader ambitions in the TV space. Netflix has a clear focus and has been reluctant to move beyond it but, through its international expansion, it has signed content deals and will generate name recognition in many countries where Apple’s brand currently isn’t strong in the video space. As such, should Apple eventually build a pay TV replacement service, its Netflix assets (including those content delivery capabilities) would be very useful there as well.

Do I think Apple will actually do this deal? In all likelihood, no, though I wouldn’t rule it out. But in a world where services like Netflix are taking over from the traditional pay TV, it would make a lot of sense for Apple to use some of its huge cash pile to bring the market leader in-house and plug a strategic hole at the same time.