Netflix shares surged this week after a report that Apple was said to be considering making a bid for it. If this sounds like old news, it’s not; it’s merely a renewal of a rumor we heard in May. Indeed, the iPhone maker could afford to buy the massive video streaming company, but does it really need to?
The debate about what’s next for Apple Inc. (NASDAQ:AAPL) rages on, with many analysts looking to the iPhone 8 next year for the answer and others envisioning something entirely new and having nothing to do with Netflix, Inc. (NASDAQ:NFLX)
An “Ambient Paradigm” for Apple (AAPL)?
In a report dated October 5, UBS analyst Steven Milunovich emphasized that Apple Inc. (AAPL) hasn’t reached the end of the line with the iPhone and highlighted what he refers to as the “Ambient Paradigm.” What he envisions is a world where everyone is connected to Apple products and services at every moment of the day, no matter what they’re doing. He describes such a future as holding “unobtrusive, ubiquitous connectivity.”
He noted that in the days of the Mac, no one predicted that the iPhone was coming down the line. Neither the Mac nor the iPod indicated where Apple would be going, but one gave way to another, with Apple Inc. (AAPL) moving from computers to mobile devices. He called the iPod a “transition offering” and believes the Apple Watch and AirPods are also transition offerings as the company moves toward the “Ambient Paradigm” he sees in the future. This is Milunovich’s way of explaining the phrase CEO Tim Cook has used: “iOS everywhere.”
Siri will direct traffic
The UBS analyst note that ambience requires not only hardware and software but also orchestration of them both. He notes that the iPhone will still be important in new and upcoming uses like augmented reality, but he believes the Apple Watch, AirPods and other wearable devices will move the company beyond its current functionality and help it break into healthcare, education and other industries that are difficult to disrupt.
He sees Siri as being a sort of “traffic cop” for all the virtual traffic he expects to develop in the future as he looks for the iPhone maker to “provide a seamless user experience across devices whether the consumer is sitting, walking, shopping, or driving.”
What about Netflix (NFLX)?
What Milunovich envisions for Apple Inc. (AAPL) goes beyond product and services such as Netflix, although many analysts feel that the iPhone maker would greatly benefit from having a streaming video product. This week Baird analyst William Power stated that Netflix, Inc. (NFLX) was being targeted for a possible buyout by Walt Disney, although he also mentioned Apple Inc. (AAPL) as a possible suitor in the same note.
Naturally, that triggered a slew of reports about whether Apple Inc. (AAPL) could or should buy the streaming giant. Bernstein analyst Toni Sacconaghi noted that the iPhone maker does certainly have the resources to buy Netflix, Inc. (NFLX) and could do so to run exclusively on iOS and its set-top box. However, he doesn’t think buying Netflix would create value or justify shelling out $50 billion for it.
What could an AAPL – NFLX marriage look like?
He sees it as being more plausible for Apple Inc. (AAPL) to buy the streaming firm and run it just as it’s run today for the purpose of revenue. In such a scenario, he estimates that Netflix, Inc. (NFLX) could add $8 billion to Apple’s services revenue, which still is only 3% to 4% of the company’s total revenues. However, he also notes that this would help shift the company’s transactional model toward a subscription-based one, and he feels that this is something that it should do, possibly to bundle it in with its hardware like what Amazon does with Amazon Prime.
However, Sacconaghi notes that it would be very out of character for Apple Inc. (AAPL) to buy Netflix, Inc. (NFLX) because it would be a much larger deal than what the company has done in the past. Also rumors have pointed to the iPhone maker wanting to build an over-the-top streaming TV service which includes live sports and news and would replace cable TV rather than a video streaming service like Netflix, Inc. (NFLX).
He also believes Apple Inc. (AAPL) could get many of the benefits of a services model with less risk by simply partnering with the company instead of acquiring it.