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What Will Apple Buy Next?

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I thought I was going crazy when shares of Sony (NYSE: SNE  ) closed higher in Japan yesterday, after rumors surfaced of an Apple (Nasdaq: AAPL  ) takeover.

Every analyst worth a lick shot the ridiculous chatter down. Sony? Come on! The company that only this week ceased production of the cassette-based Walkman in Japan?

However, just as quickly as the Sony story died, analysts on CNBC began pondering the notion of Apple buying Netflix (Nasdaq: NFLX  ) . Yes, Netflix. This one makes more sense, but do you see what's going on out there? Everybody's becoming Apple's personal shopper.

It's Apple's fault of course.

"We'd like to continue to keep our powder dry because we do feel that there are one or more strategic opportunities in the future," Steve Jobs said when asked last week about the $51 billion resting on its balance sheet.

In other words, Apple is eyeing a meaty acquisition or two.

Let's go over a few of the names being tossed out in recent days, and how likely they are to be Cupertino'd in the future.

Apple owns the digital music market, but it's a different story when it comes to video. It's doing a reasonable job of trying to sell and rent movies and television shows on a piecemeal basis, but Netflix's subscription-based streaming buffet is the real dynamo here.

A recent Sandvine report says that Netflix streams account for 20% of this country's downstream bandwidth during peak primetime hours.

Why would Apple buy Netflix when it can launch its own subscription service? Does Apple want to get into the physical distribution of DVDs -- an ironic move since MacBook Air laptops don't even come with optical disc drives?

Well, let's address Apple rolling out its own Netflixesque streaming service. Apple certainly has the money and connections to broker the content-licensing deals to get off the ground, but why reinvent the wheel? Netflix has 16.9 million subscribers, and more than 11 million of them are taking advantage of Netflix's unlimited streams through their computers and Web-tethered home theater devices. If Apple buys Netflix, it becomes the undisputed champ in this space. If not, it will take years for it to pry Netflix's 16.9 million -- and growing -- couch potatoes away, and that seems unlikely given the market's love for Netflix.

As for Netflix's network of regional distribution centers in the United States, even Netflix admits that it's now a streaming company with a DVD component. Apple already has a physical presence around the country with its stores, so it's not as if there are any state sales tax implications behind Netflix's lean and cost-effective distribution centers. If anything, Apple can relish the opportunity to promote its wares through ads on the Netflix mailers.

Akamai (Nasdaq: AKAM  )
The leading content-delivery network is another name that has come up as an acquisition target for Apple.

I'm not feeling this one. Akamai services Apple as well as many of its rivals by speeding up the delivery of website pages, media files, and software updates. Under Apple's wing, Akamai would likely lose a lot of that business to smaller rivals.

This is also a cutthroat business, as anyone with excess server capacity can try to jump in with subsidized pricing to land new accounts. Akamai's the class act in this niche, but it's not an imperative purchase if Apple wants to build out a server farm as many tech giants have been doing lately.

Sirius XM Radio (Nasdaq: SIRI  )
I'm a fan of Sirius XM, but this one is just not happening.

Apple acquired Siri -- a small maker of voice-activated mobile apps -- earlier this year, and this may have created confusion given Sirius XM's ticker symbol.

If you think Apple will run into resistance buying Netflix's fleet of distribution centers, imagine the cumbersome purchase and upkeep of satellites for a venture locked into North America. There is value in Sirius XM's content and streaming acumen, but Apple doesn't need to shell out 11 figures to nab that. It bought -- for a song -- less than a year ago.

Buying Sirius XM would be bad for both Apple and Sirius XM. Apple shareholders would take a hit, given the dilutive impact of Sirius XM's slower growth and weaker margins. Sirius XM, on the other hand, would lose the value of its billions in tax loss carryforwards. Sirius XM is the one that needs to go buying profitable companies to cash in on that meaty tax break -- and not the other way around.

Disney (NYSE: DIS  )
Steve Jobs is Disney's largest shareholder after the sale of Pixar, but there's little reason beyond that to see Apple and Disney joining forces.

Apple can't play favorites when it comes to media moguls. It has no business sniffing around Sony because of its film and music properties, and the same applies to Disney's movie, music, and cable juggernauts.

If Apple wants to man the marketplace of choice for digital music and video, it can't be seen as a competitor to rival media giants.

Sure, we can have a lot of fun refashioning Disneyland in Apple's image. The Matterhorn coaster can become Mac-erhorn. We can hop on the "It's an iPod nano World" boat ride. At the end of the day, Disney and Apple have a good working relationship. There's no reason to put a ring on it -- especially when that ring may be seen by others as an anchor.

This one makes a lot of sense. Apple has never been much of a force in cyberspace, and it only makes sense to grow its portfolio with pages to monetize as it ramps up its mobile advertising platform.

Unfortunately, Facebook doesn't have much of a reason to cash out. It's growing. It's a darling. It should go public in a year or two, as long as its user count doesn't peak.

Apple may find it cheaper to buy Yahoo! (Nasdaq: YHOO  ) , a move that would be poorly received initially by Apple shareowners but would play into Apple's display advertising sweet spot while giving it one of the Internet's giants of page views.

In the end, there probably won't be any substantial buyout that would make Apple shareholders happy. However, now that it's teasing analysts with a strategic play or two up its sleeve, the clock is ticking.

Who should Apple buy next? Share your thoughts in the comment box below.

Walt Disney is a Motley Fool Inside Value recommendation. Akamai Technologies is a Motley Fool Rule Breakers pick. Apple, Walt Disney, and Netflix are Motley Fool Stock Advisor selections. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz isn't on Apple's list of buy candidates. He does not own shares in any of the stocks in this story, except for Netflix and Disney. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy, and it knows that roaming charges weren't billed in one day.

Read/Post Comments (7) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 27, 2010, at 1:01 PM, EquityBull wrote:

    Yahoo is interesting because you have to consider what Yahoo would become under the command of Steve Jobs. Just as Jobs performed miracles at Pixar and Apple he could fire Bartz and do miracles at Yahoo. It might be a good buy but only at the right price.

    I think other candidates should be Adobe. Apple can put some pain on the windows platform by purchasing adobe and only supporting Creative Suite on the mac for future versions. Another reason for people to have to buy mac's and to NOT buy a PC. He can then fix flash to his liking and roll that out too.

  • Report this Comment On October 27, 2010, at 1:58 PM, JPDemers wrote:

    I thought NFLX was an obvious target back when it was $17/share, and AAPL could have bought it lock, stock, and barrel with just the cash on hand. I don't think it's a very good use of AAPL's cash at today's prices.

    They might want to buy a maker of flash memory, just to have a captive supply of a critical component -- one that's going to be in short supply, and expensive, as demand for tablets and thin notebooks takes off. I can see AAPL doing away with hard drives entirely, in all but the Mac Pro line.

  • Report this Comment On October 27, 2010, at 2:46 PM, Milligram46 wrote:

    Costa Rica. Just buy the whole darn country (see my gag post on the AAPL board)

  • Report this Comment On October 27, 2010, at 2:47 PM, licurgo66 wrote:

    Yahoo é uma empresa com excelente imagem no mercado que vale bilioes e bilioes. Os investidores estao desolados com a gestao da Yahoo. Bartz nao tem sido capaz de rentabilizar a empresa como prometeu no passado. AOL nao tera capacidade para comprar Yahoo, mas Apple ou Microsoft necessitam desta empresa como do pao para a agua. Sera a MSFT a ganhar a guerra que estara para começar. Preco alvo $28 - $30.

    Licurgo Sa - Portugal

  • Report this Comment On October 31, 2010, at 11:27 AM, bernddude wrote:

    Its much more likely for Apple to buy a storage vendor, for example HitachiGST which is going public right now. the synergy seems very sensible since Apple consumer devices will continue to have customer contend storage as one of their key features

  • Report this Comment On November 02, 2010, at 8:18 PM, aethernet wrote:

    I think Apple will buy Nuance software for voice recognition. They've got a monopoly on voice recognition software and lots of patents. Voice-recognition will be huge in the mobile market. It's a much easier and more efficient way to interact with mobile Internet devices.

    Sending e-mails, mapping driving directions, playing songs and movies all can be scripted using simple voice commands.

    That's my $0.02

  • Report this Comment On November 24, 2010, at 6:24 PM, BiffBarfBag wrote:

    Apple should buy some enterprise level support software like Good Technologies. This way it can kill Blackberry once and for all.

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