Apple Should Buy Netflix, Says JPMorgan, But Does it Even Make Sense?

It is believed that Apple has $250 billion in cash lying around to splurge. Blow it on buying something fancy, would be the urge. But that’s exactly what Apple wouldn’t do. Nevertheless, investment bankers JPMorgan believe that chucking around $189 billion in the direction of Netflix would be ideal. Netflix, as per current valuation, is worth $148 billion and $7 billion in net debt—and JPMorgan believes a 20 percent premium would be about right for Apple to acquire the biggest name in the world of streaming services. This comes at a time when there is tremendous speculation about the rumoured streaming service that Apple may launch this year, to rival the likes of Netflix, Amazon Video, Hulu, HBO Now and Disney’s upcoming service called Disney+.

“We think Netflix is best strategic fit on leading position in engagement level as well as original content, differentiating itself from pure aggregators of content. We believe there is value to acquiring the most successful player in this space, which is hard to replicate with a smaller player in this market,” says J.P. Morgan analyst Samik Chatterjee, in a note to investors. J.P. Morgan thinks Apple needs to buy a streaming service, instead of starting one.

There is merit in the argument, all things considered.

First, Netflix which is pretty much the ultimate aggregator of content would be exactly what Apple needs at this stage—to move beyond the iTunes Store model and move to a subscription model where users can consume as much content as they want. Eventually, Apple would also have to spend its resources and energies on signing up various studios for instance, to get their content on the platform. Secondly, Netflix has a simple subscription model that works the same way as most of Apple’s ‘services’ subscriptions, including iCloud and Apple Music. It really won’t be difficult to integrate Netflix into the Apple way of working, and no wholesale changes would be needed at Netflix’s end either. Finally, JPMorgan believes that Netflix would be the easier one to acquire, compared to let’s say Amazon Prime, which has Amazon’s mammoth backing. At the same time, the likes of Hulu and HBO Now are perhaps not enticing enough for Apple, because of the comparatively lesser content as well as the fact that they are available only in very select regions globally. Simply put, plonk money on the table and get instant access to a massive library of content, pre-defined and long term content deals as well as a massive user base globally, in one go.

As per research firm Statista, Netflix has a global user base of 130 million users at the end of the year 2018—and most of its growth is now happening outside the US. Amazon Video, which is a part of the larger Prime subscription that also offers other benefits and the others follow.

For a new player entering the same space that is currently occupied by the likes of Netflix and Amazon Now on a global scale, as well as regional players around the world (such as Hotstar in India), it will be difficult for new players (including Apple’s rumoured streaming service) to break through and offer content that isn’t already available to consumers with their existing streaming service subscriptions.

All this stems from the fact that Apple has recently struggled with iPhone sales, which have been below expectations due to various reasons globally—these include the high price tags of the current line-up of the iPhone XS and iPhone XS Max, slowdown in certain economies globally particularly China and the unwillingness of customers to upgrade their current iPhones to name a few. While the iPhone revenue has fallen, Apple has seen the revenue from its services (such as Apple Music, iCloud, App Store and iTunes) contently increase. The revenue from the services category $10.8 billion in revenue for the December quarter.

Apple also has 1.4 billion active iOS devices by the end of the year 2018, which means it’ll have a ready set of users waiting to latch on with new subscriptions, or even the larger chunk that already has subscribed.

Important to note at this point that the largest acquisition which Apple has done thus far was buying Beats Audio for $3 billion back in the year 2014.

There is also a lot of consolidation happening in Apple’s immediate neighbourhood. In June, to combat the cord-cutting trend, cable company AT&T completed the acquisition of Warner Media. With Warner Media came CNN, CW network, DC Comics and HBO, to name a few. AT&T also has a 10% stake in streaming service Hulu. The acquisition means AT&T now controls streaming services HBO Now and DirecTV Now as well.

J.P. Morgan also says that Apple could benefit from buying game developers Activision. The company produces smart speakers and in-home speakers. There have been reports that Apple is planning a “Netflix for gaming” sort of service, where the game developers library, their subsidiaries and expertise could be invaluable for Apple. The Activision library of games includes the Call of Duty franchise. With the user base of iPhones and iPads ready, mobile gaming could be something Apple could potentially tap into.

Another name that the firm suggests is Sonos. The company is a popular name in the audio hardware space, particularly smart speakers. Apple already has the HomePod smart speaker, but that exactly hasn’t set the sales charts alight globally in the face of competition from Amazon’s Alexa powered Echo speakers and Google’s Assistant based Home speakers. While the HomePod sales haven’t exactly been the brightest spot for Apple, what it has is a very strong foundation with Apple Music. The streaming subscription service now has clocked 50 million users globally, as it continues to make the charge for Spotify’s lead. Sonos with its hardware expertise could help Apple compete better with Amazon and Google, in the next round of smart speaker wars. Sonos is currently valued at $1.31 billion.

Surely, this is a rather elaborate potential shopping list for Apple. Whether the Cupertino based company takes the advice from JPMorgan and goes ahead with any of these suggestions, remains to be seen. But we feel it is quite unlikely, even though they sound like good ideas on the face of it. For starters, Apple may not be able to justify paying upwards of $189 billion for Netflix. Till now Apple has never made expensive acquisitions, and this may be a very unexpected departure from that policy, if it were to happen. Secondly, Apple might look at the total cost of all the potential content acquisitions it needs for its own streaming service, and then weigh that against the $189 billion outlay—would the former cost them lesser money still? Then there is the small matter of the original content, which Apple has already invested in quite significantly.

Last but not the least, has anyone asked Netflix if they are interested in selling at all?