It’s been a story that we’ve been hearing every other day.. a big tech company looking into buying another one. There have been exceptions to that general rule such as the rumors regarding a takeover of Yahoo (YHOO) by the much smaller AOL (AOL). But in general, the rumored acquirers have been names such as Google (GOOG), Microsoft (MSFT) and Apple (AAPL). In general, the companies that are mentioned as being acquired have mostly been companies that are having trouble such as Yahoo (YHOO), Research in Motion (RIMM), etc. There are valid reasons for these rumors of course because we have bever seen so many big companies have such huge amounts of cash. Apple’s CEO Steve Jobs now has close to $50 billion at his disposal and there is increasing pressure from shareholders to do something more productive with all of this money.
Earlier in the day, I saw a news flash regarding a possible takeover of movie distributor Netflix (NFLX) by Apple. I dismissed it and moved on… but many did not. Netflix’s stock had a great day yesterday gaining over 6%, which certainly seems to indicate that the acquisition is a possibility. A bit surprising on the surface but let’s take a deeper look to see if it would make sense.
Why Apple buying Netflix could happen
Apple is a success by almost any measure that you could look at. It’s the top technology company in the world and is 2nd to Exxon (XOM) at the the top of the most valuable companies in the world. For all of its successes, Apple is still fighting to get to the next step. For Steve Jobs, that means having access to the living rooms of Americans. It’s a huge battle that other companies such as Microsoft, Google and Sony are also waging. Why? Because Apple already dominates the computer, portable music and tablet markets and has significant market share in the mobile phone business. But Apple TV is having a more difficult time breaking through. There’s incredible competition from huge companies and it’s not clear how Apple will be able to take over this market.
Netflix however is already at the center of the living room. It’s stand alone device is used by millions to access movies either through streaming or through delivery. Also, Netflix has positioned itself with alliances in the gaming market with players such as Nintendo’s WII and Microsoft’s XBox among others. Thus, buying Netflix would be a very quick and efficient way of gaining huge market share and a competitive edge over other players….
Apple is also waging another battle with content providers such as tv stations, etc. It regards the distribution and pricing of content over all of Apple’s devices. It is a difficult battle because content producers are fearful that the same thing that happened to music executives could happen to them. What is that exactly? Music used to be sold through CD’s (you might remember what those look like) but as they went digital, their was basically one seller of the music; Apple through its Itunes program. That gave Apple incredible pricing power over music executives who simply cannot afford to not sell music on Itunes.
Because of that, content providers are very reluctant to give a lot of power to Apple as they move their content online. TV networks have tried using a self-made alternative; Hulu. It has worked well but Apple still controls enough market to make it difficult for producers to ignore it. Buying Netflix and its nearly 20 million customers would be a huge step in forcing content producers to live by Apple’s terms and conditions. For Apple, that is critical. To give you an idea, Netflix has rights to 100,000 movies, that is 10 times as much as Apple currently has.
Why Apple might NOT buy Netflix
Not Apple’s type of acquisition
Apple and Google are two competitors that both have huge amounts of cash but both have been focused mostly on smaller acquisitions. Netflix is everything but a small acquisition with a market cap of around $10 billion. Why are they buying smaller companies? You could speculate on many possible reasons but I think that here are the main ones:
-Apple wants to keep most of its cash at its disposal
-Buying a bigger company is much more difficult to integrate
-The risks of losing a part of Apple’s identity and corporate culture when buying bigger companies is significant
-Apple seems to think it can do almost everything on its own so they focus on small targets that have very very specialized skills
The one thing I would say is that Netflix’s culture is not miles away from Apple’s the way that Research in Motion or Yahoo would be. That being said, I still don’t see a big acquisition as probable for Apple….
This is a key point. Just take a look at Netflix’s chart… the company’s stock has gained so much that buying now would come with a very expensive price tag. The P/E ratio of Netflix is also quite high as you can see here, which also screams like an expensive stock.
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