Why Apple Should Buy Netflix and Why It Probably Won’t

On balance, Sacconaghi said he believes Apple likely won’t buy Netflix. But what it is planning to do is compete with both Netflix and existing cable and satellite TV companies, by offering its own over-the-top, TV-style service. All the company must do is hammer out a licensing deal with content providers, something it has been trying to do for some time.

Netflix has about 80 million subscribers worldwide, which is impressive. But Apple’s firepower and marketing ability plus the addition of any original content that the company either develops itself or acquires would be able to boost that even farther, the Bernstein analyst says. The result would be a fast-growing, global subscription TV and movie platform. If Apple were successful in moving a large proportion of its iPhone and iPad users to a Netflix subscription model, that could have a large impact on the company’s share price. Despite its size, it is valued now at a low multiple, because of its focus on hardware. If it could build a substantial recurring entertainment business, the stock might be given a higher value. Netflix CEO Reed Hastings would bring a lot of vision and expertise in digital services to Apple if the company was acquired, as would some of the other members of the streaming service’s management. And Apple could make use of those talents in other parts of its business, while adding its cash and muscle to Netflix’s content development aspirations. Historically, the Bernstein analyst notes, Apple has not done large acquisitions, even though it has the financial resources to do so. The largest deal it has ever done was the purchase of the Beats music business in 2014 for $3 billion. In the last 10 years, Apple has spent just $12 billion on acquisitions buying Netflix would be more than four times that amount. The company believes that its core competency is building great products, rather than buying products made by others. That focus has given it end-to-end control over all aspects of product development and design, and that is a large part of the company’s DNA. Buying another full-fledged operating business would be unprecedented. According to Sacconaghi, Apple appears to want to build its own over-the-top, TV-style offering, rather than just acquire the TV shows and movies that Netflix has produced or has the rights to. Apple CEO Tim Cook has repeatedly said that television is an “area of intense interest” for the company, and it wants to provide a full-fledged offering with news and sports as well as movies and TV shows. Although buying Netflix would give Apple a leg up in the subscription services area, the company doesn’t have to acquire the company to get most of those benefits—it could strike a licensing deal with Netflix, while also building its own subscription offering like Amazon’s Prime Video. it could even pay extra to get Netflix to provide exclusive content. Although Apple has a large cash pile, most of that is held offshore, and therefore the company would likely have to issue debt to acquire Netflix for $50 billion. Such a financing would cost the company as much as $2 billion in interest payments per year, and Netflix only spins off about $300 million in net income every year. That means it would dilute Apple’s earnings.

The best merger rumor I came across was Apple and Netflix merger. There are many names that routinely get floated as potential acquirers of Netflix, including Disney, Amazon and Google. But one of the companies that gets mentioned the most often is Apple. In part, that’s because Apple clearly has the financial resources to do such a deal. But it’s also because an acquisition would theoretically fit in well with the moves the company has been making to offer more services, particularly with its focus on TV and video. Horizontal business models, like Netflix’s, entail reaching the maximum number of customers across all devices to better leverage up-front costs; vertical business models, like Apple’s, entail offering exclusive services to increase the differentiation of devices sold at a profit. Apple and Netflix. Merging in this way with something further on in the production process (and thus closer to the final consumer) is known as forward integration. Financially, an acquisition of Netflix would not be a problem for Apple. Even if the company commanded a significant premium to its current market value and went for a price in the range of $50 billion, Apple could afford it easily. The company has about $150 billion in cash on its balance sheet, or about three times what a purchase would cost. If Apple were to buy Netflix, its service revenue would climb to 14% of its overall revenue instead of the 11% it’s at now, Sacconaghi says, and that would be a good thing.

Now, the company’s business is concentrated on selling hardware, which at some point will become mostly a replacement market. Adding a significant subscription-based business would be a plus.