Another year, another analyst proposing a linkup between two of the biggest names in tech: Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX). It seems like at least once a year around this time, some analyst suggests that Apple should jump-start its streaming business by plonking down billions to buy the streaming leader outright. While wondering about the next mega-deal is all well and good, that doesn't necessarily mean it will ever happen.
Early last year, Citi analysts Jim Suva and Asiya Merchant said Apple should leverage the overseas cash returning to its coffers as the result of changes to U.S. tax law to acquire Netflix. The year before, it was Anita Balakrishnan of CNBC that ignited the speculation arguing that spending on entertainment programs was climbing and acquiring the streaming giant would boost Apple's services revenue.
There's an old adage that goes, "Just because you can do something, doesn't mean you should." I think that's probably the case here.
Another year, another analyst
This year, it's JPMorgan Chase analyst Samik Chatterjee making the call. In a note to clients, Chatterjee argues that Apple should buy Netflix, Activision Blizzard (NASDAQ:ATVI), or Sonos (NASDAQ: SONO), though he believes Netflix is the "best strategic fit" for the iPhone maker. "We believe Apple can drive synergies between its leading position in smartphones and the rapid transition of video consumption to mobile to drive stronger services growth," Chatterjee said.
Activision boasts some of the biggest titles among video-game publishers, and its diverse array of content -- like its Candy Crush, World of Warcraft, and Call of Duty franchises -- is played on a variety of platforms including computers, consoles, and smartphones. This would provide another source of recurring revenue and give Apple a way to tap into the fast-growing gaming industry.
Sonos and its sound systems and smart-home speakers would also be a good fit for Apple, given both companies target the same high-income demographic with their premium products.
Finally, the recent market correction has resulted in a number of solid companies selling for bargain-basement prices, allowing Apple to potentially fill holes in its strategic plans on the cheap.
A fix for Apple's biggest problem
It's easy to understand why investors might consider such a colossal merger. For the last couple of years, Apple has been working to expand its services business to help counter the slowing growth for its flagship iPhone. Sales numbers and growth estimates from its most recent quarter enforce that notion.
The company issued a rare warning ahead of its first-quarter earnings -- which includes the important holiday season -- saying iPhone sales would decline 5% year over year. While the bulk of the downfall was the result of slowing growth in China, it illustrates just how reliant the tech giant is on its iPhone sales.
Apple CEO Tim Cook has repeatedly pointed out that the company acquires between 15 and 20 companies in a given year, and while Apple will consider an acquisition of any size, which companies it acquires would depend on the strategic value of the business.
It isn't as good of an idea as it may sound
Apple has been extremely disciplined in the size of its purchases, with the majority of acquisitions going for just a few hundred million dollars each. The buyout of Beats was the largest in Apple's history, at about $3 billion. Since Netflix is the best "strategic fit," let's look at what a deal like that would fetch.
Netflix currently sports a market cap of about $152 billion, but any deal would require a hefty premium to get shareholders on board -- if the company was even open to being purchased. Deals typically go for a 20% to 30% premium, but a deal of this magnitude might require a bigger incentive, meaning the starting price for Netflix could easily be north of $200 billion.
There are other factors that would complicate such a union as well. One of the defining characteristics of Netflix's service is that it has always been platform agnostic -- the polar opposite of Apple's walled garden approach. Additionally, developers of Apple's iOS apps might become concerned that Netflix could get preferential treatment over other streaming options in its App Store, sending them looking for other outlets.
The more likely outcome
Over the course of the past year, Apple has been spending big on movies and television shows that are in various stages of production. The chorus of rumors has been growing louder that Apple will soon be launching its own streaming service as early as this spring. Apple has already been experimenting with the delivery system, launching a few video programs to subscribers of its streaming music service.
While there's always the possibility that Apple might decide to make a mega-acquisition, it's much more likely the company will launch a competing service and grow it organically. That makes much more sense than paying up for an existing company.