There is a never-ending flow of opinions about how Apple (NASDAQ:AAPL) should approach the issue of its slowing iPhone sales. The company has made no secret of its increasing reliance on services and subscriptions to spur future growth. Apple CEO Tim Cook signaled this in early 2017, when he said the company planned to double its services business over the coming four years.
Analyst Daniel Ives, managing director of equity research at Wedbush Securities, is making the case that Apple missed a big opportunity. "In my opinion, the biggest strategic mistake Apple has made since Cook took over is not buying Netflix (NASDAQ:NFLX)," Ives added. "That was the deal that they needed to do because it comes down to content."
Many have suggested over the past several years that the iPhone maker should buy the streaming giant. Ives peddled the same idea early last year, too, but here's why I think he was wrong then -- and wrong now, too.
Buying Netflix has never really been a cost-effective way for Apple to accomplish its goals. Sure, acquiring Netflix would buy a proven platform and an existing library of content, but at what cost? Netflix currently has a market cap of about $156 billion, and that would merely be the starting point for the negotiations. Even assuming a modest premium of 20% to 30% would push the price to around $200 billion. Since Netflix is still generating impressive growth, a higher premium would probably be required to satisfy shareholders, meaning the cost would likely be significantly higher.
Maybe Ives thinks Apple could have acquired Netflix years earlier for a much more reasonable price. But the streaming giant has consistently evolved, making it hard to pinpoint exactly when an acquisition would have been the right move. Netflix didn't release its first dedicated original content -- House of Cards -- until early 2013, and even then, the series rights were retained by privately held Media Rights Capital.
It wasn't until 2015 that the company announced it would begin to own some of the shows it produced, and those wouldn't be released until 2016. Until then, Netflix only streamed programs that were owned by others, so it had no content of its own. It's only been in the past three years that Netflix has owned any of its programming -- so Apple wouldn't have acquired any content. Going back to early 2016, Netflix had a market cap of about $39 billion, easily pushing the asking price north of $50 billion -- just to buy the platform.
Stocking its own pantry
I think a much better use of Apple's resources is to continue along the path of generating its own original content. Apple reportedly allocated about $1 billion to spend on original content last year, locking down big names like Oprah Winfrey, J.J. Abrams, and M. Night Shyamalan. That's a good start. But how much will the company have to pay to stock a library of its own programming? Using Netflix's content spending habits might provide a good estimate.
Over the past three years, Netflix has spent roughly $31.5 billion on content. Of that total, only about $10.3 billion is content the company owns outright, according to regulatory filings. The rest is a combination of existing programs licensed from other media outlets and programs that Netflix has co-financed and been given control of for a specified period of time.
Were Apple to boost its spending to the same level, it would still be a far less expensive investment than buying Netflix outright.
Bang for its buck
It's easy to second-guess Tim Cook's decisions, but doing so doesn't necessarily make Ives right. It's likely that Apple's management has crunched the numbers and concluded that there were better ways to spend the company's hard-earned cash.
It isn't as if Apple couldn't afford to buy Netflix, given that it has about $245 billion in cash and marketable securities on its balance sheet. That said, Apple can work on its library piecemeal and end up with the same amount of original content -- and spend far less than it would if it acquired Netflix lock, stock, and barrel.
I'm sure there were times when Apple could have swooped in and bought Netflix but, to quote the old adage, "Just because you can do something, doesn't mean you should."