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Analysts and industry pundits are once again weighing in on what Apple should do with the pile of money that it’s currently sitting on — $250 billion in cash — and the latest take from J.P. Morgan is that it could use this money by acquiring Netflix, allowing it enter the video content market with a much stronger position.
In a new report from CNBC, J.P. Morgan analyst Samik Chatterjee describes Netflix as the “best strategic fit” for Apple due to its leading position in both engagement and creation of original content, making it stand out from “pure aggregators of content.”
We believe there is value to acquiring the most successful player in this space, which is hard to replicate with a smaller player in this market.Samik Chatterjee, J.P. Morgan analyst
This isn’t the first time we’ve heard analysts speculating on the topic of a Netflix acquisition by Apple. In fact, it seems to come up almost once a year, with either predictions that Apple is actually going to make the acquisition, or simply recommendations that the company should.
This time around, however, analysts seem more focused on Netflix’s role as a creator of original content, suggesting that it would make a good fit due to Apple’s preference of being an “aggregator of content,” rather than a traditional media company like Sony Pictures. However, Chatterjee seems to ignore the fact that Apple has committed $1 billion for producing original video content, and is expected to increase that to $4.2 billion by 2022. However, this is dwarfed by the $8 billion that Netflix budgeted for its own original content last year.
Chatterjee goes on to note that Netflix’s subscription model would be a good fit for Apple’s services revenue model, and that despite its high price tag, Netflix would actually be an easier acquisition for Apple than other competitors like Hulu or Amazon Prime — both of which also spend considerably more than Apple on producing original video content.
Video streaming, including original video content, is a highly competitive market with established traditional media houses as well new entrants fighting aggressively for incremental subscribers, which is likely to make it difficult to scale any new platform to compete effectively.Samik Chatterjee, J.P. Morgan analyst
Chatterjee’s main point seems to be that Apple is better served by purchasing a streaming service rather than starting one of its own, although he also notes that Apple could also buy Activision, Blizzard, or Sonos, with the first two offering a stronger position in the gaming market, while the latter would offer synergy with the HomePod and AirPlay 2.
Purchasing Netflix, however, would make a serious dent in Apple’s sizeable cash reserves, with Chatterjee noting that the purchase would be likely to “command a sizeable premium” of around 20 percent, which could cost Apple $189 billion. Netflix has a current market value of $148 billion and $7 billion in net debt. Chatterjee concedes that although J.P. Morgan considers Netflix “the best strategic fit” it’s not likely due to the high premium that such an acquisition would require.
Meanwhile, Apple is forging ahead with its own plans, with its streaming service expected to launch this spring with a host of its own original content that will likely be offered free of charge to Apple device owners. Regardless of what analysts may be suggesting, Apple doesn’t seem to think it’s going to need Netflix to bolster its services business, regardless of flagging iPhone sales. While Apple acquired Beats to gain a foothold into the streaming market, this ultimately ended up being more about obtaining key industry influencers like Jimmy Iovine rather than any need for Beats’ technology or subscriber base. When it comes to streaming video, Apple has already succeeded in wooing many high-profile media executives to join up for its original content ambitions, and seems interested more in differentiating itself from Netflix than acquiring it.