Apple: Just Buy Netflix And Get It Over With

  • Apple’s streaming video service likely to disappoint shareholders over the long term.
  • Fierce competition in the space will offset any potential benefit Apple could get from its sizable user base.
  • With its huge $285.1 billion cash pile it would be better to acquire Netflix and get a market-leading position immediately.
  • No visible competitive advantage or position it can defend in this space.

 



It’s nothing new that Apple (AAPL) is struggling to find ways to generate new revenue streams as its iconic iPhone sales continue to weaken, so when looking for ways it produce more growth, the company has decided to go incremental and evolutionary with a new streaming video service, rather than introduce any new product that has revolutionary growth potential.

To me it looks like the giant tech company won’t be able to come up with new products that have any chance at all of replacing declining iPhone sales, so is looking to its massive user base to find ways of tapping into subscription services as a means of revenue growth or maintaining stickiness for its other products.

Another thing to consider would be either original content (over the long haul) or a lower price point being used to potentially attract new customers to the iPhone or its other gadgets.

To me, with the large amount of cash the company has on hand, if it’s going to commit to a streaming video offering, it would do much better if it were to acquire Netflix.

Will Apple streaming be used in the same way Amazon Prime is?

There have been a number of reports suggesting Apple could offer its new video streaming service for free; the purpose being to boost its user base and market its iPhone and other gadgets to a new clientele.

That would be similar to how Amazon bundles its video service to Prime members for the purpose of keeping churn low. Prime members spend a lot more than non-Prime members, so it’s possible we could see Apple provide this as a free service to its existing user base, or as a marketing tool to expand the base.

The major issue there is it would go against the grain of the usual practices of the company over the years, which has positioned itself as a premium product provider for its users. The company could offer a basic subscription for free and offer other options for paid services.

A more probable scenario is Apple may decide to compete on price in the beginning until it rolls out a significant portfolio of original content.

If it doesn’t do that, the question has to be asked as to why anyone would want to use ther service in the first place, when there are numerous video streaming services to already choose from.

If Apple doesn’t show how it’s going to differentiate in its upcoming event, I don’t see why the market would march in step with the much-hyped service.

Potential as a standalone service

Oddly, in my opinion, some analysts are significantly raising their price targets on Apple in direct relationship to its video streaming service. For example, Wedbush’s Daniel Ives is extremely bullish about it, saying Apple could attract as many as 100 million subscribers.

That really doesn’t make any sense. We have no idea yet as to the terms of the service, or much of what it’ll entail. To sustainably gain 100 million subscribers there would have to be a significant moat or differentiator to attract that many users. It will be even harder with declining iPhone sales.

I’m not saying there won’t be a upward push in its share price leading up to the announcement and accompanying details, but unless there is something that positively surprises the market, I don’t see it holding in any way. And if the announcement is perceived as weak, it could drive the share price of the company down on failure to meet expectations.

Competition

The major detriment to meaningful success in the streaming video space is the enormous amount of competition from deep-pocketed major players. How Apple thinks it can gain share from them is yet to be determined.

It’s easy enough to point to potential original content that may be compelling to potential subscribers, but it’s very doubtful they will pay for that and maintain other subscriptions that include must-see content already.

This is already a fragmented market that is getting even more Balkanized. Disney, for one, will be soon releasing its own streaming service, with many not sure the level of success it’ll have. If doubts surround Disney and competitor Netflix concerning those issues, the inexperience of Apple in video content generates even more doubt about the potential for the service to take hold.

Will it acquire Netflix?

To me the most obvious thing Apple should do if it’s determined to have a video streaming service would be to acquire Netflix. That would give it instant market leadership and a huge subscription revenue stream.

I think what is likely to happen is Apple will give this a go for a relatively short period of time to see if it gains a significant foothold in the streaming market. If it isn’t able to succeed, I believe its next step will be to make an offer for Netflix. The downside there could be Netflix finding itself bumping up against its own growth ceiling in the not-too-distant future.

At the end of 2018 Netflix had 139.3 million global subscribers, with the U.S. market accounting for 58.5 million of them. International subscribers now make almost 60 percent of its total subscriber base.

There is of course room to grow, but the disposal income of potential overseas subscribers must be taken into account. A lot of the low-lying fruit has already been picked, and growth is sure to slow down over the next two to three years.

Conclusion

I think the streaming video service of Apple is more hype than anything else, and I see no reason to believe it can successfully navigate these waters in light of it being so late to the game and far behind many of its competitors in the space.

There is no anticipation on my part that the company will surprise the market in any way with its upcoming unveiling of the service. Whether it’s offered for free, introduces a free trial period, or attempts to position itself as a premium streaming service, I don’t see any of them being attractive enough to the market to generate a lot of subscribers that move the revenue needle for the company.

We’ll probably hear about some big names connected to existing and upcoming content releases, as we already have, but in regard to substance, this is something I’m very dubious about.

If Apple positions the video service as an ancillary revenue stream, that would be far more believable to me than it being a major sales arm of the company that will produce a lot of growth.

More ominous to me is the fact Apple has chosen to go this route instead of ramping up something with more long-term potential. It suggests to me it’s running out of new ideas and running on momentum from past product releases, or much smaller niches that won’t be able to offset declining iPhone sales.

That doesn’t mean Apple is a bad company, only that its glory days are far behind it and should be considered a reliable income, rather than growth stock.

In the short term we’ll probably see a boost in its share price, but I don’t think anything the company tells us will point to a revolutionary streaming service that will disrupt existing competitors.

I think it would have been better for Apple to focus more on its partnership with Goldman Sachs in regard to the release a co-branded credit card. That could have much more potential than the hyped streaming business.

 

 

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