Don’t expect Apple to buy Netflix this year with the billions of dollars it repatriates–despite that widely shared analyst report this morning that offered almost even odds of such a deal. (Even in the unlikely event it happens, it won’t be due to the sudden influx of cash available to the company as a result of the new tax law.)
The new GOP tax bill, signed by the president in 2017’s final days, gives Apple the option to bring its huge $250 billion of cash held offshore back to the U.S. at a far lower tax rate (15.5% versus the 35% in the old law). A couple of Citi analysts, Jim Suva and Asiya Merchant, believe Apple may use a big chunk of that repatriated money to buy Netflix. They give the deal a 40% chance.
“The firm has too much cash–nearly $250 billion–growing at $50 billion a year,” the analysts wrote in their research note.
I suspect Apple took a serious look at Netflix a couple of years ago, and may have kept the possibility on the table. Buying the streaming giant is within the realm of possibility, but its likelihood probably has little or nothing to do with the repatriated money for these reasons:
1. Suva and Asiya base their prediction on the assumption that Apple will bring its entire $252 billion war chest of overseas cash back to the U.S. They speculate that, after taxes, Apple will be able to keep about $220 billion of the money, roughly a third of which would be needed to buy Netflix.
But Apple won’t bring its entire cash hoard back to the U.S., a source with knowledge of the matter tells Fast Company. It will bring back only about half in 2018.
2. Apple’s acquisition strategy doesn’t seem to be governed by its cash position. The company’s acquisitions appear to relate more to technology and engineering needs in the development of Apple products that will appear in the next few years.
According to Crunchbase numbers, Apple’s biggest acquisition by far in the past five years was Beats Audio, which it bought for $3 billion in 2014. Apple has been in a better cash position in the years since, and yet we know of no acquisitions that rival Beats in size. The biggest one since Beats was music recognition company Shazam, which Apple snatched up in a fire sale for $400 million. Apple just doesn’t do many large acquisitions.
3. The time of Apple’s greatest strategic need for Netflix may already have passed.
“While Apple could use a boost in content, their services offerings is already a profitable segment of their business and the need for something like Netflix is not as critical as it would have been two years ago,” writes Creative Strategies president (and long-time Apple analyst) Tim Bajarin in an email to Fast Company.
Apple’s services business (of which iTunes video content is a part) is considered to be the key to Apple’s prosperity in the post-iPhone-boom era. And the business has been growing rapidly. In the third quarter of 2017, the business brought in $8.5 billion in revenue, a 34% growth over the same quarter in 2016. That’s bigger than Apple’s iPad business. Bigger than the combined sales of AirPods, Apple TV, Apple Watch, iPod touch, and Beats gear.
Apple And Video
Speculation over an Apple/Netflix deal has been building for the past couple of years. Apple was one of the first out of the gate with video streaming via iTunes, in which users pay for individual movies and shows. But iTunes has been overshadowed by Netflix and Hulu, where users pay a monthly fee for unlimited access to large libraries of video.
Apple has signaled, then acted on, an interest in moving deeper into original video content. So far, Apple has moved cautiously. It started with a couple of modest (very modest) efforts in Carpool Karaoke and Planet of the Apps, and now has teamed up with Steven Spielberg to revive the 1980s sci-fi series Amazing Stories.
A Netflix acquisition would, with one fell swoop, make Apple a much bigger player in both subscription video and original content.
My hunch is that Apple will continue using its largesse in Hollywood to buy or create new video content. Because the company’s services business is already doing so well, and growing as hoped, Apple will feel no pressure to leap to the top of the subscription video market with an acquisition of Netflix.
It’s much more likely that Apple will use its newly repatriated money to buy back stock and reward shareholders with dividends.