Why Apple Should Buy Netflix

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.

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

994 thoughts on “Why Apple Should Buy Netflix”

  1. Dan I have to say a big hell no! with your analysis of this. I see a lot of folks are making the same argument for Tesla, which is another hell no. They are a couple reasons you buy a company. 1) They have a technology or assets you need. 2) You want to take out your main competitor. 3) Growth, synergy etc. I do not see buying Netfix as the fix folks think it is. Why would be the primary reason to buy Netflix? Contents, but Netfilx content ownership is very anemic to be kind. They do not even own the rights to their most visible show (House of Cards) producer Media Right owns the rights to house of cards. Same goes for Orange is the new Black, Mad Men, Weeds and we can keep going down the list. Meaning, up to this point, Netfix is basically licensing those shows.

    Just recently Reed Hasting told Bloomberg Business 2016 will be the year where they will start to prioritize ownership of it’s original contents. So, if Netflix have no ownership of most if not all of their original contents, and they are using AWS, what exactly would Apple be paying that kind of premium for Netflix for? Apple already have access to just about every content out there, so that’s not the problem. The only issue that’s holding Apple it seems is their unwillingness to pay market prices to have access to those contents, Netflix can’t help them there either. If Apple must make a play for contents, HBO would make a lot more sense with their vast library of original contents that goes decades, and cheaper too.

    Apple needs to look at content with a bigger view, it should look at it as a way to shore up their ecosystem. Basically what they should be doing with Apple Music. Apple should be looking at operating their contents business (Music, TV) like they operated the App Store the first few years as break even or a lost leader for a few years just to get things establish. Look how great the App Store is doing now, that certainly was not the case early on. The same approach should apply here. Unlike Netflix selling contents is not their main business, so taking the long view is the way to go.

    I don’t see anything unique that Netflix will bring to the table to justify their price tag. So, from my viewpoint, Netflix is not bringing a must have tech, no ownership of original contents or anything else, plus Apple have the deep pockets if they have to bit on contents. Amazon shows us if you have the cash and are willing to pay you can get your original content group up and running in as little as a year. I think Apple’s problem is they don’t want to get into producing contents, so they are not sure what to do there. I can’t blame them either, look at what happened to Sony. And if we take Tim Cook at his words from his talk with Walt Mossberg and Kara S. D10 “Apple does not have a problem getting contents” then I rest my case. Although I have to admit I would rather they buy Netflix than doing their buybacks.

    http://www.digitaltrends.com/movies/netflix-to-own-original-series/

    1. I think Apple should buy as many companies as needed to get a true TV into the market. Content is a part of it, but the real goal is an easier to use TV and independence from AT&T and Cable companies. So you buy one, break it apart, institute the changes so its user interface is easy to use (somewhat like Apple TV), then bundle up some of the assets and sell it, keeping what is needed so Apple can either be in the TV business, or at least make them easier to use by standardizing the separation of functionality. Right now is is a horrible mess with duplication of “features” (I use that term generously) between AppleTV, Netflix, Hulu, etc. TVs themselves, and each cable company doing its own thing. I love competition, but it has evolved into a competition to see who has the worst interface; the most difficult to use! Apple can fix that. But I think it will require them buying some businesses and breaking the current models. That is also something Apple has been very good at in the past.

  2. Why should Apple buy a company that already serves the needs of iPhone and iPad users? Would the movies look better after the acquisition?

    If Apple raises iPhone prices somewhat to recover the cost of its huge Netflix investment, would a household with 5 iDevices pay 5x as much for Netflix service as a household where only 1 device is owned?

    If Apple buys Netflix and closes it to Android users, would Netflix2 be launched the following week by Google or Samsung?

    Unless Netflix has exclusive, perpetual rights to the video libraries of movie studios and TV networks, what is the advantage to Apple of owning the Netflix brand? Couldn’t Apple license the same content on Netflix-like terms from content owners? That would be expensive, but Apple would end up paying those fees if it owned Netflix — after spending billions up-front to own the Netflix name (which is not as well known or respected as Apple’s).

    Paragraph 1 of the article says this is an idea you’ve had for quite a while, but you haven’t had a chance to write about it until now. Question: Do you save your best ideas for last, or your worst ones?

    1. When you no longer generate organic growth, you buy it. Especially downstream or … off-stream (but downstream has synergies, off-stream doesn’t): that’s a direct add to revenues, whereas upstream buys add to margins.

      1. Apple’s revenue and earnings increased more than 30% last year.

        Netflix revenue is less than $10bn: selling 20-30 millions Apple Watch in 2016 would add as much revenue to Apple bottom line.

        I don’t know why you think that Apple no longer generate organic growth.

      2. Apple is not like Amazon or Salesforce or even Netflix. It is a for profit company. Apple is not in the business of adding revenue but no profits. It has some low margin products but they exist for the sole reason of selling more of their high margin products. The reason people even discuss an insane acquisition like this is because of Apple’s profits.

  3. Pricey. Aside from the stink of old media, wouldn’t Time Warner be a better deal at roughly the same market cap?

    This would bring CNN, HBO, Cinemax, TBS, TNT, Turner Sports, Cartoon Network, TCM, Warner Bros/Looney Tunes, Hanna-Barbera, DC Comics, movie catalogs from New Line Cinema and Castle Rock, and various other properties like Rotten Tomatoes, Bleacher Report, assorted gaming studios like TT Games and Rocksteady, regional broadcast affiliates for local news, and so on.

    Add one more acquisition to class up the joint — AMC Networks (AMC, Sundance, IFC, partial stake in BBC America, assorted int’l channels). Maybe add Scripps (HGTV, Food Network, Travel Channel). This is essentially the skinny bundle. Save a front seat on the ark for Netflix, Disney (with ABC, ESPN, A&E) and the sports leagues. The rest had their chance.

    Main negative is Apple’s trying to be Switzerland and create win-wins. This could start an arms race. Or mutually assured destruction could also result in greasing wheels previously stuck.

    1. I’m wondering about the content creation vs content distribution angle. Getting rights to distribute content is a nightmare, actually several nightmares (one per economic area if not per country), so buying pre-made deals and a subscriber base seems nice. But content creation is a very weird industry, it seems very resilient to outsiders’ efforts to get in in general, and to synergize in particular (Hello, Sony).

      For some reason we’re in a stage where content distributors are going into creation again… Maybe their direct connection to users allows them to formulate shows that succeed, maybe they need pressure points vs other content owners, maybe they just don’t know where else to get PR and growth to siphon in more investor money.

      Does that mean that device makers should try and get in again ? Walled gardens are bad enough for apps, the move to platform-exclusive media seems very customer-unfriendly. I’m fairly sure Europe would object on competition grounds.

  4. You do M&As to acquire intellectual property, good will, customer base, and opportunity to cut costs and increase sales as a combined entity.

    I have both Amazon prime and Netflix. I watch Netfix far more than Prime. The content isn’t the draw, it’s that the content I want is at no extra cost, while Prime costs extra, per episode/movie for much of its content.

    The rub with the acquisition idea is iTunes basically sells content. It is Prime with no freebies. Add Netflix and iTunes becomes Prime. In fact, Netflix ends up cannibalizing iTunes because few people will want to pay for shows available for free on Netflix.

    If Apple is willing to change its model, acquisition could be interesting.

    Would you pay $25/mo for all of Netflix plus run of iTunes store for movies and tv shows?

  5. It is easy to see Netflix as being the service that Apple is trying – but has failed so far – to create. In that sense, buying Netflix is a nice shortcut to get there faster.

    Problems I see:
    1) Business model mismatch — Apple is a vertically integrated company (ie. everything serves their own platforms), whereas in buying Netflix you end up with a horizontal approach that runs on every conceivable platform to recover content costs.
    2) Change of control clauses — Many IP owner include “change of control” clauses in their license deals, so that their competitors cannot license their content by way of business combination. I don’t know what the situation is with Netflix, but it would concern me as would-be acquirer.

  6. Even as Netflix continues to evolve, to what extent would buying Netflix actually be going to where the puck is (or has been) rather than where the puck is going, so to speak? Does Netflix represent the future? Or are they simply a reformation of the past?

    Joe

  7. Netflix is already on all the Apple devices. So the device angle doesn’t make sense. Are you saying it is a better ROI than dividend and buyback?