by Jim Lynch

Should Apple buy Netflix?

Feb 01, 2016
Consumer ElectronicsMergers and Acquisitions

Apple has dragged its feet in releasing its own video subscription service. Should the company simply buy Netflix instead of creating its own?

Apple has done well in jumping into music streaming by releasing Apple Music. But the company is way, way behind its competitors when it comes to video streaming. For some reason Apple has been hung up on a cable TV kind of service focused on channels instead of a Netflix-like video streaming service with original content.

And while Apple has been dragging its feet, bogged down in negotiations over broadcast and cable TV channels, its competitors like Hulu, Netflix and Amazon have been forging ahead and gaining tons of market share at Apple’s expense.

The pros and cons of Apple buying Netflix

So should Apple just buy Netflix? As always there are pros and cons for such a large acquisition. Here are a couple of points of view that will give you an idea of the pluses and minuses of Apple buying Netflix. I’ll share my own thoughts below.

A writer at Forbes recently explored the idea of Apple buying Netflix:

One way to circumvent the tedious and lengthy negotiations process with Hollywood and the networks is for Tim Cook to make an offer to buy out Netflix lock, stock and barrel. Netflix shares are off 31% from its all-time highs made less than two months ago and Apple shares have not exactly set the world on fire in the last year or so. Both companies are in need of a kick-start.

So why not an Apple takeover of Netflix to get things jiggy/jumping for both companies? For about $60-$70 billion, Apple can become an absolute global powerhouse in streaming content.

Apple and Netflix combined would be able to offer unmatched content which would be miles ahead of Hulu, Prime Video, HBO Now and other up and coming competitors like Alibaba.

Netflix is already way ahead of Apple in terms of content deals already signed with Hollywood and the networks for movies, tv shows et al. A takeover of Netflix will save Apple many quarters if not years worth of negotiating time. In addition, Netflix has a ton of winners in its current original programming content library as well.

More at Forbes

On the other hand, buying Netflix might not be a good idea at all, according to a writer at BGR:

With Apple’s plans for a TV subscription service now on hold due to pricing and bundling issues, snatching up Netflix, Dawson all but says, would instantly transform Apple into a major player in a burgeoning space that the company clearly wants to get in on. Just two days ago, for instance, we highlighted a rumor suggesting that Apple may be interested in acquiring Time Warner, a company with well-known media properties like HBO, TNT, CNN and more.

There’s no getting around the fact that multi-billion dollar acquisitions are incredibly intriguing and often create ripple effects that can permeate across entire industries. That notwithstanding, Apple acquiring Netflix, I feel, would in practice be a foolish move on Apple’s part. Put simply, the logistics and business just don’t add up. Dawson briefly touched on a few such examples in his original post, but we’ll go into even more detail here.

1. Netflix is expensive

2. Netflix isn’t exclusive to Apple

3. There’s no foreseeable return on investment with a Netflix acquisition

4. It’d far cheaper for Apple to produce its own content

More at BGR

Apple desperately needs original content for a video streaming service

In terms of what Netflix has to offer, I think the last point I quoted from the Forbes article is the most relevant. Apple needs to dump the idea of “channels” and understand immediately that it needs original content. Netflix has already proven that it can create compelling original content that helps keep its subscribers locked into the service.

Who knows how long it would take Apple to do the same? And can a hardware and software company even create good original content? Amazon has done it to a certain degree, but it’s not something that Apple has ever taken on and I am somewhat skeptical that the company can easily do so.

And let’s not forget that it takes a lot of time to create original programming, it’s not something that can be done quickly or haphazardly. If Apple is going to succeed with a video streaming service than it had better be able to master the programming business or it’s going to fall flat on its face.

I barked about Apple needing its own movies and TV shows a while back, and everything I said then still applies now. Frankly, I’m shocked that Apple is just now realizing that it has to have its own programming to succeed. The company has literally wasted years negotiating with the idiots at the TV networks instead of spending the time forging relationships with the folks who actually write and produce movies and TV shows.

Would buying Netflix achieve this? Well it would certainly be a good start, and Netflix already has some very good original TV shows and films in its content library. Acquiring that library and all subsequent programming would give Apple a quick lift into the video streaming business.

But, as the writer from BGR pointed out, buying Netflix would be very expensive. So I am still undecided from a purely financial perspective as to whether or not Apple should buy Netflix. The final decision for Apple may hinge on what original content Netflix has in its pipeline and if that would be worth spending so much money to acquire the company.

Most Apple redditors don’t think Apple should buy Netflix

The issue of whether or not Apple should buy Netflix also came up on the Apple subreddit, and redditors there were not shy about sharing their opinions:

Smpx: ”People always say they should buy so-and-so, but I think it’d be much better to have more competition out there. I think television quality have gone up exponentially since streaming companies like Netflix, Hulu, and Amazon all started producing their own content, surpassing that of the major networks. The more pressure there is to get “the next big show”, the more these companies would spend producing great original content.

Before Apple Music came out, everyone was saying how Apple should purchase Spotify, but because they didn’t, now you’re seeing all the companies dropping prices and pushing new features and content out, because consumers have the freedom to choose what they prefer, literally on a month-to-month basis.”

Techsupportvictim: ”I really don’t see Apple moving to buy Netflix unless they feel they have to keep it away from Amazon etc. and if they feel they have the clout to get the catalog global and even stop having movies and tv seasons dropping off.

Plus if they could get episodes as they air (as Hulu and iTunes have) then they might be onto something. Folks would potentially pay up to $24.99 a month for an ad free, global system where they don’t have to wait months to get a seasons new episodes. Especially if all the originals stayed and even perhaps increased.

But if Apple couldn’t achieve a massive bump in quality to be that more awesome than everyone else I don’t see them buying it. Maybe a partnership if the issue is cash but not a buyout.”

Bcrew: ”Since apple has a lot of money there is always a lot of talk of acquisition without price consideration. Netflix would be a horrible buy for Apple because the company is so highly valued. Netflix current market cap is about $40B and assuming they would need to pay a good premium to acquire a high growth company let’s say they can buy for roughly $70B. Apple could recreate everything NFLX has done from the ground up for a fraction of that cost.”

DefactoDesmondo: ”There is a very good reason no one, including Apple, has just acquired Netflix. It sounds simple but in fact its a deeply risky and flawed idea. Netflix exists on a knife edge and has so for many years. The negotiations and bargaining that occur between interested parties for content licenses are a game in which the licensor guesses what the licensees are willing and able to pay, hoping to get as close to that number as possible. One of Netflix’s strengths over the years has been their willingness not to overpay for a license and walk away, leaving Amazon or whoever else, with an expensive and risky license.

If someone with deep pockets acquires Netflix, the game will suddenly changes, since the licensors will know that higher prices will be possible. You’d expect prices to rapidly rise, throwing the game into disarray in a way that benefits no one.”

Banankabobbb: ”You’d basically buy Netflix for the contracts and there’s really no guarantee that they would hold up through a sale. Aside from that it’s pointless, Apple could basically do it themselves without the cost.”

Nicetriangle: ”I really don’t want this to happen. I think Apple has really lacked focus lately and this would just make it worse. Also, Netflix is great the way it is now and I really fear some kind of situation where Apple eats it up, tries to morph it into some kind of Apple branded video on demand service, and then totally fails at the execution ala Apple Music. I just don’t see there being much of a chance that it would end up a net positive outcome for Apple fans or Netlfix fans.”

More at Reddit

As you can tell from the posts I included above, most Apple redditors don’t think it’s a good idea for Apple to buy Netflix. The current valuation of Netflix makes it a very expensive purchase indeed, even for a company with very deep pockets like Apple.

Apple is way behind in video streaming and it better do something fast

All other things aside, it’s very clear that Apple is running way behind its competitors when it comes to video streaming. The company cannot afford to sit on its ass any longer and wait for the TV networks and cable companies to sign an agreement.

Apple needs to move beyond its “channels” based thinking and start working hard on its own video subscription service complete with original TV shows and movies. If it can’t create its own service, then it needs to cough up the cash and grab Netflix while it still can.

If it doesn’t then it simply will not be a player, and it will watch from the sidelines as Amazon, Netflix, Hulu and others come to dominate the video streaming market. Those companies will continue to gain millions and millions of subscribers and that will make it even harder for Apple to have a chance to succeed with its own service.

If all of that happens then Apple has no one to blame but itself.

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