Netflix's Need Is Apple's Opportunity

Reed Hastings wants Netflix (NASDAQ: NFLX  ) investing in more original series. And why not? House of Cards is already a success, and early signs point to a similarly strong showing for the horror series Hemlock Grove.

Trouble is, this sort of content doesn't come cheap. In a manifesto posted to Netflix's investor-relations site recently, Hastings confessed that original program development is "cash-intensive" and that producing more shows is likely to mean raising money from investors or partners:

As we expand Originals, they will consume cash. Since we are otherwise using domestic profits to fund international markets, we will raise capital as needed to fund the growth of Originals.

And that, Fool, is where Apple (NASDAQ: AAPL  ) comes in. The Mac maker should be investing in Netflix original programming.

Source: Netflix.

How about an iPad with that?
It's a rich opportunity. Netflix's bulkier content portfolio led to hefty profits in Q1. Revenue rose 17.7% to $1.02 billion as the company turned an $0.08 per share loss into a $0.31 per share profit, after accounting for charges related to paying off debt. Wall Street was expecting just $0.18 a share. The stock promptly soared 20% on the news.

Why should Apple care? Math. Better TV apps means a better TV experience on the iPad, which means more reasons to buy an iPad, which means more iPad sales.

Or at least that's how the market seems to be trending: iPad unit sales soared 65% and came in almost 1.5 million ahead of consensus estimates in fiscal Q2 versus a 7% year-over-year increase in iPhone sales. IDC is right -- tablets are becoming an everyday item for American consumers, none more so than the iPad.

A natural partner
Apple and Netflix also share competitors. Consider Amazon.com (NASDAQ: AMZN  ) and Google (NASDAQ: GOOGL  ) . Each sells individual tracks as iTunes does. They also offer music, books, and magazines in addition to streaming. Apple mutes their stores on its devices for this very reason.

Hulu isn't a competitor, but management uncertainty makes partnering a risk. Redbox Instant would be an alternative as a development partner if executives had any interest in original programming. So far, they don't.

Which brings us back to Netflix. Hastings needs Apple's cash, and CEO Tim Cook has demonstrated a willingness to invest in ways the late Steve Jobs never would. Listen to how CFO Peter Oppenheimer described the company's cash strategy in announcing fiscal Q2 earnings.

"We continue to generate cash in excess of our needs to operate the business, invest in our future, and maintain flexibility to take advantage of strategic opportunities," Oppenheimer said in a press release. That, Fool, is how an investor talks when he's searching for the next win.

Wait till Ringo hears about this
Starting a studio is probably out of the question given Apple's litigious history with The Beatles. Any move to broaden the "Apple" brand in entertainment could get nasty in a hurry.

Yet Apple needn't go that far. Just hire a team of entertainment specialists, assign them to Braeburn Capital -- the cash-management arm -- and then designate a pool of funds for investing in programming, beginning with Netflix Originals.

Apple's involvement would remain at the Executive Producer level with participation including, say, early distribution rights via iTunes ahead of general release on Netflix. Everyone wins, especially viewers who want more top-notch content.

Nor would the deal need to be limited to TV. Apple could also fund Netflix original films or documentaries. The more creative the project, the better.

After all, we're talking about matchmaking here. There won't be candy or flowers or even a goodnight kiss. But if Apple and Netflix do get together to create programming, you can bet there will at least be a second date. And it'll be a sight to see.

For further analysis of how Netflix is changing entertainment, tune into our newest premium research report, in which we take you inside Netflix's entertainment empire and tell you what the streaming sensation is really worth, and whether the stock deserves a place in your portfolio. Access your report now by clicking here.


Read/Post Comments (5) | Recommend This Article (3)

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 April 27, 2013, at 8:01 PM, MDB86 wrote:

    It's an interesting theory, but I don't see it happening. The Netflix user experience is already good, so apple wouldn't necessarily boost ipad sales as a result of more original Netflix content. Rather, if/when Apple releases their tv, it will probably be integrated with iTunes which I believe will evolve or branch off into a Netflix-like streaming service, thus a partnership could not happen.

  • Report this Comment On April 27, 2013, at 8:12 PM, TMFGemHunter wrote:

    Hi Tim,

    This is an interesting idea. It certainly makes more sense IMHO than Jim Cramer's notion that Apple should buy Netflix. I'm not sure whether Apple would have to use domestic vs. foreign cash for productions. The idea seems a lot less appealing if it would use domestic cash, since that's in short supply based on their cash return plans.

    As an Apple shareholder, I would prefer for the company to do buybacks or raise the dividend over fronting costs for Netflix. There's a benefit to having more streaming video content out there (especially if an iTV ever materializes), but probably not enough to justify putting money into something that Netflix is likely to do anyway.

    Adam

  • Report this Comment On April 27, 2013, at 11:46 PM, mss256 wrote:

    The last game Apple wants to get into is the original content game. In the 1980s, Sony went into the music, movie and television business to stop lawsuits over VCRs and tape players. By 2000, the content people at Sony were quashing any attempt to innovate in MP3 players or DVD and CD copying technologies that consumers wanted -- creating the opening that Apple seized with the iPod.

  • Report this Comment On April 28, 2013, at 7:09 AM, TaoHaus wrote:

    Lol. How ancient are you? The Beatles are a non-issue. First, this isn't 1978; there is zero chance of consumer confusion -- a key aspect of a trademark / Lanham Act case -- between Apple fka Apple Computers Inc., these days. Second, Apple can afford to buy the Beatles' old recording label outright, even paying twice what its worth as a freestanding entity, at least 100x over.

  • Report this Comment On April 28, 2013, at 3:06 PM, sliderw wrote:

    If Apple's funding Netflix originals will benefit iPad sales, it will benefit other tablet sales too, because Netflix runs on so many different tablets.

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