Tell Me Again, Why Doesn’t Apple Buy…?

With over $70 billion in cash, everyone is staring at Apple’s cash like it’s a birthday piñata after 23 rounds with the kids. Seriously do those things ever break?!  Almost everyone is calling for Apple to crack & start paying a dividend.

I, personally, disagree. I’ve been pretty vocal for Apple to do anything but (even if it means pursuing some of my tongue-in-cheek growth ideas).

As it is, for the last year or so the rumor mill has been in full tilt for Apple TV to become a reality. There’s no question this could be another big product for them and the fanboys (like me) were titillated even more this week by an ex-Apple employee who was in the TV group talking to the press.

From Silicon Alley Insider:

Apple’s lead designer Jony Ive has “a slick 50 (inch) TV” in his locked-down studio at Apple’s headquarters, according to a former Apple employee who spoke with Scott Martin at USA Today. The anonymous employee worked in the Apple TV group. This person says the major problem for Apple is that it can’t secure content for its Apple TV. Apple can’t get its hands on “first-tier TV network programs for an à la carte iTunes TV service,” says Martin, citing sources.

And that’s the thing, iTunes as-is has a great library to rent and purchase but nothing, zero for streaming and they really have no first-run TV to speak of.

The old men running the cable companies have long, safe relationships with the TV studios. They’re kicking and screaming just like the music execs did when it was their time. And Apple, while arguably ultimately saving music from digital demise, will need more than even Steve Jobs could bring to the table at the negotiations. They’ll need leverage, and I think there is a company that could give it to them: Netflix.

This idea of Apple (Or Google, Or Amazon, or even Facebook) buying them isn’t anything new. And at $300 a share, I don’t think anyone in their right mind would want Netflix. But with today’s quote being just around $80 (and a $4 billion market cap)  – now, that’s a different story.

And while it’s true buying Netflix doesn’t really give Apple (or any of the other companies in the wings) instant gratification to circumvent the cable companies strong-arm hold on TV studios, it certainly gives them a lot more klout with the TV studios on the back of Netflix’s close to 22 million streaming subscribers (especially when you combine it with iTunes). It’s also been reported that Apple is pretty far along in talks with movie studios to begin a streaming service via iCloud, no word on TV studios though. Grabbing Netflix would give any acquirer an instant, significant foothold in streaming video, including TV shows.

Assuming anyone would pony up for the company, it would be really smart to burn the boats at Netflix and dump the DVD business altogether. As it is, this last quarter Netflix was streaming 2 billion hours of video, which according in a recent interview at MarketWatch with Peter Kafka of All Things D, makes it now the 15th largest “channel” in the Cable TV market.

The WSJ went even further in 2010:

Apple and Netflix already are playing nicely together. U.S. Netflix subscribers now can stream movies and TV shows directly on their TVs through Apple’s revamped Apple TV device. Likewise, Netflix is becoming intertwined with other Internet-mixed-with-TV gadgets such as Samsung TVs, Sony PS3, TiVo and Apple’s iPad. Closer ties with Apple can help Netflix more quickly transition to a streaming video company, and not a DVD company.

And truth be told, isn’t everyone ready for Netflix CEO Reed Hastings to move aside after last year’s embarrassing “we take it back” apology after trying to seperate the DVD division from streaming in lock-step with price increases. I think the blogosphere’s reaction was actually worse than Bank of America’s $2 fee fiasco.

Now, while Apple likes companies with a certain DNA and have eschewed anything too big, I think what we have here in Netflix is a pretty clean palate to work with. It’s largely digital, making change much easier, and with new (Apple) leadership, especially with the experienced team in place at Apple. I could see even more growth opportunities through deeper content relationships from the combined user base. As it is, last year Netflix still added 20% more subscribers than they had the year before. So, this puppy is clearly growing despite (mis)management’s best effort to derail a huge secular trend.

So, let me get this straight– Apple would be picking up a viable subscription business that is (still) in the early innings of huge growth – offering even more leverage with studios, and would simultaneously be proliferating a growth strategy of content across multiple platforms (Windows, PS3, Xbox, Kindle, TVs, etc.), like iTunes & the iPod did when Apple jumped the chasm to play nice with Microsoft.

I haven’t even touched the cost savings from combining the two.

So, tell me again… why on earth wouldn’t Apple buy Netflix? Sure- as an individual investor, buying shares in a company like Netflix because it’s a potential takeover candidate is the equivalent of a scratch ticket, I know, but I’m just thinking out loud here…

What say ye?

Related:

8 Things I’d Rather See Apple Do With Their Cash

Disclosure: Long Apple, No position in Netflix at this time.

  • Martin_yzh

    Apple doesn’t “share”. Its closed ecosystem, if applied to Netflix, would mean some kind of massive cutoff from other distribution channels Netflix currently has. It probably benefits Apple, Hulu, but hurts non-Apple users. But something has never happened before does not mean it will never ever happen.

  • Anonymous

    Very thoughtful, thanks for sharing, but I do think this would still very much be a walled garden approach.

    As it is, Netflix doesn’t “share” very well either. They offer their platform on other systems (Xbox, PS3, Tivo, etc), but it’s still their development that brings the solution to the consumer — this is very different than allowing others access to the API for a solution, which, I agree, would mean dilution of the consumer experience that Apple fights so hard to protect.  

  • Plexor

    Such a move would mess everything up for Apple in terms of customer perception. People like Apple and like Netflix, but by a mysterious mixture of circumstances they would frown at the sight of them together.
    Then comes the PR and tech publications bashing…Apple thought they had it nailed, but backed down and decided to go the easy way: they solved with money instead of creativity.
    I’m sure they are working their tails off to come up with something they can call their own. Even if it takes them more time. Even if it’s flawed and not so good as what others already have up and running. Customers would still cheer and rush to get it.
    That’s how Apple has been working with it so far and it’s come out pretty well for them. I don’t think they would risk having a drop because consumers felt “disappointed”. MobileMe was a big faux-pas and still they wouldn’t buy. They re-made it. Customers like it. I’m sure there are some more examples of that sort.
    Politics is perception. So are markets (to a certain extent). I believe Apple knows this all too well and won’t risk a fumble in this area. It could be a massive (literally) turning point for them.
    This is me thinking out loud as well…

  • Martin_yzh

    Thank for pointing out the difference between “their development” and “allowing others access to the API”.