Apple should buy Netflix

While the focus of Apple's event last Thursday was on the new MacBook Pro (and the lack of updates to the MacBook and MacBook Air), perhaps more interesting from a strategic perspective was the launch of the Apple TV.

Tim Cook clearly articulated Apple's goals:

We hope that everyone can watch all TV programs with Apple TV, providing a one-stop viewing experience. All TV programs and movies are on this machine. You can dig out the latest and best content here. Therefore, today we launched a brand new app, we call it "TV"...

After the app demo, Cook concluded:

Apple TV, iPhone and iPad have become our first choice for watching TV, and now with the "TV" app, people no longer need to use other devices to watch TV.

Unless, of course, you want to watch Netflix.

Apple’s leverage game

There is a reason why Apple can dominate the market. It is based on user loyalty. The best example is the iPhone.

• As early as 2006, Apple tried to release the first iPhone through Verizon, the largest operator in the United States. At that time, Apple asked Verizon to intervene in the tariff package, not to show its brand, not to interfere with the user experience, and not to establish contact with users. The cautious Verizon did not accept this cooperation. Therefore, Apple could only release the first iPhone through the second largest operator in the United States (AT&T née Cingular); AT&T fully accepted Apple's request because they hoped that Apple's famously loyal users would use AT&T's telecommunications services because of the iPhone.

• Then this happened: In the five years after the iPhone was released, AT&T went from trailing Verizon by $400 million in wireless revenue to leading Verizon by $700 million, a $1.1 billion increase driven in large part by the loyalty of Apple customers who were willing to switch carriers for the iPhone. This effect was even more pronounced among smaller carriers, which had no choice but to accept Apple's increasingly demanding terms: not only would the customers ultimately belong to Apple, but the carriers would also have to pay for significant marketing spending and guarantee Apple minimum iPhone sales.

• Apple later replicated this strategy in other markets: In Japan, for example, SoftBank used the iPhone to significantly increase its market share, forcing NTT Docomo to eventually succumb to Apple's terms. Apple's influence also played a role in negotiations with China Mobile, raising the average selling price of China Mobile's 4G contract phones.

The iPhone isn’t Apple’s first experiment with this approach: perhaps the most famous examples are the stories between suppliers and the iPod and iTunes music store, where Apple, with its loyal users, has dictated the terms of cooperation with the music industry.

In some ways, this is an even more remarkable achievement because operators offer almost no differentiated services, while music labels have exclusive rights to different types of music and should have more say in negotiations with Apple.

In fact, Apple's bargaining chips played a greater role in the negotiation process, especially when the iTunes music store was first launched. Music labels were plagued by pirated music, and no matter how harsh Apple's iTunes music store was, it was better than being pirated. Therefore, major labels had to provide genuine music for the iTunes music store.

You know, for many years, Apple has been fighting and failing to protect content copyrights according to the terms, so it is not surprising that Apple will continue to encounter problems in this regard on Apple TV - executives seem to have forgotten the importance of piracy leverage to the success of the iTunes Music Store. Apple's attitude towards paid video content has always been - never allow bargaining. Here is a report from the Wall Street Journal last summer, one of countless cases related to Apple's content copyright:

Eddy Cue, senior vice president of Internet software and services, is also known for his tough negotiating style. A cable industry executive summarized Cue's negotiating strategy as follows: "We are Apple"... This surprised TV station owners. "They looked at this guy from Apple curiously, as if to ask, 'Do you really understand the TV business?' A former Time Warner Cable executive said... Cue once said that the TV industry is too complicated. "But the times are on our side," he told the media.

The times may indeed be on Apple's side, but for Cue and Apple, the entire right to speak on video content does not belong to them, and the latter is more important. The real threat to paid content providers is Netflix. Yes, yes, Netflix is ​​considered a pirate, but unfortunately for Apple, it is a company that can truly enable Apple to have a say in video content.

The rise of Netflix

Just like how Apple did with the music business in the 2000s, Netflix also took the path of becoming a friend of the old industry it wanted to disrupt: selling DVDs was just a rudimentary practice in the pay video industry. When Netflix successfully crossed over to the streaming business through its deal with Starz, the industry foolishly thought that Netflix had a lot of money and Starz made a lot of money.

However, it is important to understand that streaming media has truly revolutionized the user experience : although Starz has a catalog of 11,000 movies, there is only one effective path to access them: users must go through the Starz cable TV channel to access these resources. However, on Netflix, the effective number of catalogs is 11,000: Netflix customers can open these resources on any device.

This unprecedented excellent user experience has driven Netflix's user base to grow exponentially, which further enables Netflix to acquire more content resources.

At the same time, the traditional cable TV industry still regards profitability as its most important goal; when Netflix gradually attracted the old customers of the traditional cable TV industry giants, the latter suddenly realized that Netflix was eating into their market, just like what happened to Apple when it was doing music in the 2000s.

At the same time, Netflix is ​​investing in its own original content and doing business directly with content creators, which further strengthens its value proposition to customers, further weakens the negotiating power of traditional cable TV, and lays the foundation for Netflix to use the Internet to serve nearly every customer.

Netflix's strategy is a textbook example of aggregation theory. It has formed a strong monopoly in the paid video industry, not by controlling the distribution channels (at least not in the early days), but by relying on the virtuous cycle brought about by excellent user experience: the number of subscribers Netflix has allows it to have more say in suppliers, so it can get better content, and high-quality content can attract more users to join. At the same time, the further growth of the user base can make it more influential in suppliers.

It is this virtuous "distribution spiral" that has brought Netflix a high valuation of $54 billion, which means a sky-high price-to-earnings ratio of 340 times. The company has spent billions of dollars on original content, and it is likely to dominate the entire network and even threaten Hollywood's long-standing monopoly on content.

The biggest question is probably whether Netflix has enough financial muscle to keep up the momentum.

Last quarter's financial statements showed that Netflix suffered a cash loss of $5.06 billion as the company was undergoing a transformation from a distributor of licensed content to a sole producer of original content, and original series often require several months or even years of investment. The transformation allowed Netflix to leave behind its traditional rivals and further gain more chips in the field of video content, but all of this required money. It is conceivable that Netflix will have to live on debt before attracting enough paying users.

The media is divided on Netflix’s “absence” from Apple’s new TV app matrix: long before Apple’s press conference, Peter Kafka reported that Netflix would not join, but in an article in Wired, Netflix said the company was “evaluating the opportunity for this partnership.”

However, I personally think that all the reports actually only illustrate one thing: Apple is determined to create a unified entrance for all TV platforms. To it, Netflix is ​​at best a content provider, no different from HBO and those traditional cable TV companies that have no mass base and are on the verge of despair.

But this is obviously not what Netflix wants.

Netflix has long relied on its excellent user experience to strengthen its relationship with users and grow step by step. Apple seems to be planning to adopt the same strategy, but it does not have enough influence in the video field to do so.

Apple TV is not just another black box that connects to the TV (and it's the most expensive one), it also has an open application platform, which is naturally a good thing for Netflix, as users can enjoy Netflix's services more conveniently on it: Netflix can play content on Apple hardware according to its own terms, and Apple can do nothing about it.

Indeed, Apple executives seem to be still stuck in the iPod/iTunes era, when a 70% share of music players was enough to make them king of the music world. However, now that streaming content can be enjoyed on any device at any time, hardware sales are no longer a core competitive point.

If Apple wants to acquire end users in the same volume as usual, it may have to find a way to pay for it. I mean, buy Netflix!

Why Apple Should Buy Netflix

I have always been skeptical of large acquisitions because they are most likely byproducts of management in the process of building a so-called business empire, and are often detrimental to the interests of shareholders. The outcome of such business behavior is often like this: the so-called "adding wings to a tiger" becomes wishful thinking, and the acquirer and the acquired party fall into a dilemma of being unable to do anything, and have a hard time for several years.

I’m even less confident if such an acquisition requires bringing two very different business models under one roof: horizontal and vertical, which Netflix and Apple clearly represent.

In this case, why should I still help these two matchmakers? Isn't this a contradiction?

Of course not. First of all, the benefits to Apple cannot be ignored:

• Earlier this year, I said that the iPhone is a super representative of the product-based business model. Based on its own software advantages, it has long become a highly differentiated hardware device. From the first generation to the present, the iPhone has created an unimaginable sales miracle, and of course it has also earned Apple unimaginable profits. But don’t forget that in order to continue to ensure the sales performance of such high-priced devices in the future, it must be made into a service. (I strongly suspect that Apple’s reset of its car-making plan is based on this consideration.
  

• Some people have dreamed that Apple should continue to grow elegantly with hardware-driven growth, while also significantly improving employee benefits. But in reality, if Apple wants to achieve this double harvest, it must find a growth engine that can replace (or at least have the potential to replace) the iPhone.

• Only by constantly and fully creating new products can Apple remain evergreen. It is a skill that does not rely on its current size or existing exclusive user base, isn't it?

In summary, if Apple acquires Netflix, it will:

• Add another capable person to meet the future business model;

• Get a growth engine that is far more promising than the current hardware business;

• Free yourself and focus on your strengths.

For Netflix, the benefits are obvious.

• As mentioned above, Netflix's valuation has peaked and its stock price is unstable, which forced CEO Reed Hastings to apologize to investors on a conference call. The key here is that Netflix has huge potential, as explained in all the reasons above, but it is important to realize that the realization of this potential will overdraw the revenue Netflix expects to get from subscribers in the future. Therefore, all the surprises now, including old users continuing to pay or new users, will push Netflix's stock on a roller coaster, and with Apple's financial support, Netflix does not have to care so much about the current data.

• Apple's cash will also allow Netflix to accelerate its strategy of making all its own original content. As mentioned earlier, most of Netflix's content is still licensed, rather than produced by itself, which will bring two problems: first, Netflix's content may be restricted, perhaps because the license is time-limited or regionally restricted; second, Netflix has not yet realized how much long-term benefit their original content will bring. Netflix's current model is precise and powerful, and it has always been because the content is valuable. If Apple is behind it, Netflix can continue to promote the strategy it launched this summer with "Stranger Things": no middlemen, harvest all output, and ensure that all links are free and controllable.
  

• In addition, Apple should keep Netflix cross-platform (obviously, limiting Netflix to Apple devices would seriously undermine Netflix's value - Netflix will definitely affect everyone, not just Apple users - and exclusive Netflix will not be a decisive purchase factor for Apple devices, the price of Apple devices is still a greater limitation), because even if Netflix is ​​pre-installed on all Apple devices, it does not mean that there will be potential for future subscription growth. What is useful is that the Apple brand will bring Netflix a stronger international influence.

This would undoubtedly be a massive deal: Apple would likely need to pay at least a 20% premium, which would imply a purchase price of at least $65 billion (I’d bet higher).

However, the biggest reason I doubt this deal will happen is that I don’t think Netflix would be willing to be acquired at this point: after all, the company has done so much long-term strategic and practical work step by step to continuously improve the user experience. If Netflix can guarantee sufficient cash flow, then the right to speak in the field of video content will be in their hands.

It’s true that Amazon Prime Video is a huge threat, especially with the advantages of their orthogonal business model and the deep pockets of a large company, which puts them on par with Netflix in terms of their ability to acquire content, but then again, having done so much, do you think Reed Hastings, who runs Netflix, will let all this effort end in an acquisition?

As for Apple, Cook has been firmly following Steve Jobs' playbook, which would seem to rule out the possibility of them making such a transformative acquisition.

Nevertheless, there are signs that Apple's pressure has begun to show: Apple Watch is already on the market, but the company is raising prices to maintain profit margins and average selling prices, while also seemingly trying to cut costs. Isn't this a sign that Apple is looking for more possibilities in the future rather than squeezing the last drop of blood out of the iPhone?

In the future, the iPhone can continue to play the role of a cash cow, while Netflix can be run as an independent subsidiary - as a new growth driver, it may create a new future for Apple again.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.