2 Reasons Apple Will Make a $12 Billion Bid For Netflix
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I wake up every day waiting for the headline above to become reality – nothing yet. But the time is now. Without question, Apple’s (NASDAQ: AAPL) TV ambitions are real. If you want more evidence, the CES event in Las Vegas had plenty.
Rivals of Apple have begun to line up to tout their own smart TV strategies. Apple nemesis Samsung, along with Sony and Panasonic claim to know what’s in store for the future of television, or in particular Smart TVs – except, they aren't that smart at all.
All of these manufactures, including Google, are offering the same thing – how can we cram smartphone features into the TV? However, bringing mobile device functionally to TV does not upgrade any competitor’s status as relevant. Too, everyone is forgetting the most important aspect of TV – the content.
Regardless of TV sizes, 3D/4D capabilities, the shows are ultimately what people sit on their couches for. As it stands, there is no other company better positioned to fulfill this need than Netflix (NASDAQ: NFLX). And because of this, Netflix should be on Apple’s radar as an acquisition target for two reasons.
First, it’s getting to the point where consumers will no longer need their cable and satellite boxes. For instance, the other day I sat down, turned on my smart TV – which comes equipped with Netflix, Hulu and Amazon Prime – and after just one press of a button, season 4 of “The Office” appeared on my screen. The cable box was never touched.
I’ve begun to imagine how many people are doing this. At what point will consumers ask, Do I really need this expensive cable bill? After all, it didn’t take long for people to question the need for a landline home phone since everyone calls their cell phones.
While this poses a huge threat to the likes of Time Warner Cable and DirecTV, it makes Netflix all the more desirable. At some point the smart TV market will become saturated. Some might argue that saturation has already arrived.
Consumers will be forced to choose wisely – or “smartly” – between brands. An Apple-Netflix union will make the decision easy. What’s more, for Apple, it’s already an easy decision. The second reason it needs Netflix is because of Netflix’s growth momentum.
A popular bear argument against Netflix continues to be competition from the likes of Amazon, YouTube, Hulu etc. However, competition is nothing new for Netflix. The company has proven that it can grow – and grow impressively despite these threats. For instance, in the most recent quarter, 2 million new subscribers were signed. This has now brought its worldwide total to 29 million.
This is in addition to having grown U.S. subscribers to over 25 million, up more than 20% year-over-year. And Netflix grew international subscribers by an addition 700,000, bringing its total international subscribers to 4.3 million.
Now let’s do the math: Netflix has 29 million paying subscribers. And according to a recent survey of 1,568 heads of U.S. households, these people said they are willing to pay 20% premium for an Apple TV, or an average of $1,060 per unit. This means that Netflix’s current base of 29 million subscribers can potentially become iTV owners.
29 million times $1,060 equates to over $30 billion in smart TV revenue. And even if we were to use Netflix’s 25 million base of subscribers in the U.S., this would still amount to over $26 billion. Now, with an average lifespan of 4 to 5 years, TVs are not as easily replaceable as phones. So it's not as if people are dropping them and waiting in line for new ones.
How much Would Netflix Cost?
Too, Apple has to consider its iTV refresh cycle, which will not fall within the six-month update as we have seen with the iPhone. Apple needs to hit a home run in its first plate appearance and Netflix will help it do that. The question is, how much would Netflix cost? Considering the company’s current market cap of $5.4 billion, an offer for twice that amount plus 10% would close the deal.
Essentially, it would cost Apple $12 billion to secure a saturated smart TV market that can potentially rake in (at minimum) $20 billion while putting all other rivals out of business. Also, Netflix has begun to dabble in original content. The company wants to be like HBO, Showtime and Starz.
If Netflix can score a hit like The Sopranos or Homeland, this will give Apple an extra advantage that Google and Samsung won’t have. Furthermore, this will become another way for Apple to leverage iTunes’s momentum. Even though iTunes remains popular, it does not have the breadth of content that Netflix provides.
Also, that consumers have insisted iTunes’s a la carte model is expensive will give Apple another ways to effectively monetize subscription interest in both movies and music, while also becoming dominant in TV hardware. Oh, and did I mention that Netflix just signed an exclusive deal with Disney? Just imagine the creative magic that Apple and Disney can produce together. And all of this would only cost Apple 12% of its current cash. Does that not sound like a great deal?
Regardless of what HBO says, TV will always be TV. But as the smart TV battle takes shape, content will prove king and Netflix has the infrastructure and the subscribers. If Apple truly wants to compete in the TV space, which the company has described as an “intense area of interest,” this is a deal it has to make.
rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Amazon.com, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!