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Apple may push play on bigger online video ambitions

31 May 2016 in Trading Ideas

Key Takeaways

  • Apple has reportedly been considering buying Time Warner to expand its video content goals.
  • News of that possible deal renewed expectations that Apple may ultimately buy Netflix.
  • Motif mentioned: Online Video
  • Stocks mentioned: Apple (NASDAQ:AAPL), Time Warner (NYSE:TWX), Walt Disney (NYSE:DIS ), Netflix (NASDAQ:NFLX)

Investors in Apple (NASDAQ:AAPL) can officially stop complaining that the company has no plan for whether and how it might spend any part of its $153 billion cash stockpile. As it turns out, the company floated an idea last year for a good chunk of it: purchasing Time Warner (NYSE:TWX).

Late last week, it was reported that Eddy Cue, a top Apple executive in charge of the company’s iTunes and Apple Music business, brought up the idea in meetings at the end of last year with Time Warner’s head of corporate strategy.1

The meetings were originally scheduled to discuss other potential ventures between the two companies, such as including Time Warner’s cable channels in a future video streaming service. But at some point, Cue broached the possibility of a merger. Side note: wouldn’t you love the exact wording of the pitch – “Hey, instead of incorporating your channels into our service, what if we just incorporated your entire company into ours?”

Media reports were quick to point out that discussions never went beyond a preliminary stage and never involved the chief executives from either company. On the other hand, it’s not like Cue was totally going rogue here, right?

Behind this potential deal, of course, is the larger-scale strategy by Apple to get further into the video content business at a time when it sits on a pile of cash and sales of its key product, the iPhone, has begun to see slower growth.

Apple looking to beef up its content business?
The company recently commissioned a video series about the app economy and a scripted series produced by Dr. Dre for the Apple Music streaming service. But these inroads are nothing compared to what’s being done by Amazon and Netflix, both of which are spending billions of dollars a year on in-house productions of series and movies.

It appears that now Apple wants to join the act. The company intends to boost its spending on original content to “several hundred million dollars a year” and has not ruled out acquiring a media company, the Financial Times reported.

The focus on Time Warner is understandable. As the FT pointed out, the company and Walt Disney (NYSE:DIS) are the only top media companies without dual-share structures and controlling family shareholders that can often impede a takeover attempt. Plus, Time Warner also has top assets like HBO, which produces Game of ThronesSilicon Valley and Veep; Warner Bros, Hollywood’s largest producer of films and television shows; and Turner, which owns several cable channels and holds rights to NBA basketball.

Apple has wanted to add a subscription video service to its media operations, but has yet to succeed. Negotiations for rights to stream content have failed, as media companies are concerned that a deal with Apple would undermine their own existing revenues from pay TV subscriptions and give Apple too much leverage.2

That’s another reason why investors and industry analysts have also turned their hopes and expectations to a possible merger between Apple and Netflix (NASDAQ:NFLX), an alliance that bankers say would make it easier for Apple’s media service to continue to offer a wide range of content makers.

And true to form, news of Apple’s outsized media ambition has only fanned the spark under shares of Netflix, which have gained nearly 18 percent in just the past 10 days. The recent jump marked an extreme turnaround for the stock, which had been down more than 20 percent so far this year. In late April the company’s disappointing forecast for its international business compounded concerns about slowing U.S. expansion. Netflix said it would add 2 million international subscribers in its current quarter, compared with 2.37 million in the year-ago period.3

Shares of Netflix have a 20 percent weighting in the Online Video motif, which has risen 3.3 percent in the past month. Over that same period, the S&P 500 has gained 1.6 percent.

In the past 12 months, the motif has decreased 15 percent, while the S&P 500 is off 0.4 percent.


1Matthew Garrahan, “Apple executive proposed bid for Time Warner,” ft.com, May 26, 2016.

2Richard Waters, “Apple contemplates a push into media,” ft.com, May 26, 2016.

3Shalini Ramachandran, “Netflix Drops on Weak-Growth Forecast,” wsj.com, April 19, 2016.


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