Thursday, 23 February 2017

Netflix Needs Apple, The Reverse Isn't Necessarily True


Talk of Apple buying Netflix is in vogue once more. The general consensus being Apple desperately needs to turn Apple TV into something that boosts both its hardware and services income.

I believe Apple will make significant moves in the media / entertainment arena this year but not necessarily mean by acquisition and probably not by purchasing Netflix.

Netflix has a bigger problem right now and as a result the company needs the backing of a company of the scale and integration of Apple. 

Apple has made big money applications in the past, most obviously Beats.  The acquisition of Netflix would be a whole magnitude larger and not obviously better than growing Apple Music into film and TV.

So why do I think Netflix has a problem that can only be resolved by selling out to a big player? Amazon. Amazon Prime in particular.

Amazon is playing a really long game with its Prime service. The ultimate goal is to get customers signed up to the service to gain the benefit of free delivery. Free delivery removes a significant friction point for buying products from Amazon that are easily acquired on the High Street, or from other online retailers.

Amazon's goal is to be the single point of purchase  for its customers. Everything that it does is predicated on the idea that buying from Amazon should be a zero effort, zero thought, automatic action for Prime customers.

Dash buttons are a perfect example of this process in action. Their utility is enabled by, and adds value to, the Prime service.

The Prime Video service serves exactly the same function. Ease the decision on signing up for Prime membership and ease customers into an Amazon only mindset. Videos doesn't inherently  generate any income for Amazon.

Look at the value propositions of Netflix and Prime. The former will run you $8.99 per month and includes film and TV. Netflix subscriber growth has been booming outside of the US, but in the local market where it has to compete with Amazon growth has been flattening - and for the first three quarters of 2016 there was almost non-existent.

For $99 a year Amazon Prime gets you access to film and TV. You also get music streaming and access to the Kindle lending library. Just in terms of content that's already looking like a winning deal.

Prime's benefits don't stop there though. Unlimited photo backup with Amazon Cloud Drive and early or exclusive access to certain content.

That's before we talk about free delivery - one hour service in some regions, one day in most of the US and two day everywhere else.

Amazon stomps all over Netflix. Which means that right now Netflix is only really growing outside of the US. When Amazon starts to move its services into new territories its almost a given that Netflix will suffer.

Which is where Apple comes in. With deep integration into Apple's ecosystem, investment available to take the content war to Amazon and the strength of Apple's brand loyalty Netflix could have a future.

I'm just not convinced at its current $60bn market cap, Netflix makes any sense at all for Apple. Although given the war chest that Apple has amassed over the last decade this would not be a purchase to trouble Apple's accountants if it did go ahead. And it would be interesting to see how a Netflix purchase would stack up against other big buyouts.

Ultimately Apple's decsion will be based around whether it makes more sense to buy or build. Having failed to deliver on promises to shake up the media consumption industry, now is the time to make that decision.

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