Telecom giant AT&T is seeking to purchase content giant Time Warner (which is no longer affiliated with Time Warner Cable, see “AT&T Aims to Buy Time Warner for $84.5 Billion,” 24 October 2016). However, the deal could run into regulatory obstacles, with politicians on both sides of the aisle questioning the merger. It also doesn’t help that the Department of Justice is suing AT&T subsidiary DirecTV.
There might be an opportunity for Apple to swoop in and outbid AT&T, which is something I’ve been shouting from the social media rooftops since it became clear that Apple’s new TV app wouldn’t support Netflix or Amazon Prime Video (see “Apple’s TV App Seeks to Unify the Apple TV Experience,” 27 October 2016).
I’m not alone: Goldman Sachs is reportedly pushing Apple to make a competing bid for Time Warner, but Apple is resisting. However, I think Apple should consider the possibility. Here are four reasons why:
Content Is a Unique Form of Currency — If Apple wants to play in the content arena, and it does, the company has to own content that it can use as a negotiating chip with other content providers to expand its library.
You’d be right to ask: “Apple has nearly $238 billion in cash. Can’t it afford to license or create any content it wants?” Yes… in theory, but it’s not that simple.
Let’s say Apple wants to sell new episodes of Amazon’s award-winning show “Transparent” in iTunes. You can buy the first season there, but the second season is still exclusive to Amazon Prime Video.
If Apple really wanted to get access to those new episodes as they drop, it might be able to pay Amazon for that privilege, but not necessarily, because “Transparent” is more to Amazon than merely a popular, award-winning TV show. “Transparent” sells Amazon Prime memberships, Fire TV boxes, and helps reward partners who fit into Amazon’s overall strategy, like Sony, whose video players usually offer an Amazon Prime Video app. It doesn’t matter how much money you have if the other party doesn’t want to sell.
With most goods, negotiations come down to money, but content is special, because it’s impossible to predict. For instance, the recent movie “Inferno” was a flop, despite being directed by Ron Howard, starring Tom Hanks, and being based on a Dan Brown story — on paper, “Inferno” should have been a huge hit. Meanwhile, one of the biggest hits of the year has been “Deadpool,” a low-budget superhero movie helmed by an inexperienced director and starring Ryan Reynolds, who, despite good looks, charisma, and talent, spent years starring in flops. Content is unique.
Because you can’t just buy good content, content has become a form of currency. Since no company can make all the content it wants to provide to customers, the best way to get content can be to trade.
An example: Right now, one of Amazon Prime Video’s biggest selling points is that it streams HBO shows for free. Time Warner owns HBO, and if Apple bought Time Warner, Apple would own HBO, which might encourage Amazon to create an Amazon Prime Video app for the Apple TV. Likewise, Time Warner owns “Arrow” and “The Flash,” which are popular Netflix exclusives (Time Warner owns DC Comics, which originated the characters and Time Warner owns half of the CW network that airs those shows). If Netflix wanted to keep those exclusives, it might be more inclined to support Apple’s new TV app.
So why shouldn’t Apple buy Netflix, as analyst Ben Thompson recommends?
Buying Netflix Would Be Dangerous — Thompson correctly points out that owning content would give Apple a seat at the table it wouldn’t otherwise have, but I fear that owning Netflix would only make the problem worse.
Netflix’s catalog has shrunk by half in the past four years, for the simple reason that Netflix scares the hell out of Hollywood. The studios don’t want to be beholden to Netflix, so they’re seeking deals with Netflix competitors like Hulu to make their content available to streamers, which limits piracy while reducing Netflix’s power.
Apple engenders the same sort of fear in Hollywood, which still holds Apple responsible for ruining the music business. That’s nonsense — if anything, Apple saved the music industry — but TV and movie studios are desperate to avoid becoming dependent on Apple. Companies like Amazon and Sony can cut deals that Apple can’t because Apple frightens content owners. Apple disrupts existing business models, and the last thing these companies want is disruption.
Hollywood’s nightmare is that Netflix becomes the next Apple, and if Apple buys Netflix, that fear comes true in spades.
“But Netflix makes its own content,” you might counter, and that’s true. Netflix makes a lot of great content, but you only ever see it on Netflix. Netflix hasn’t been willing or able to share its content as a negotiating chip. Instead, it’s a way to make sure Netflix is relevant even if some content owners abandon it entirely. Apple could potentially turn Netflix’s content into bargaining chips, but there hasn’t been much precedence for that, and Time Warner offers better chips anyway.
Despite owning some tasty Marvel franchises like “Daredevil” and “Jessica Jones,” Netflix has nothing to compare with Time Warner’s catalog, which includes the likes of Batman, Superman, Harry Potter, and Game of Thrones. Time Warner is a much, much bigger player than Netflix, owning Adult Swim, CNN, Cartoon Network, DC Comics, HBO, 10 percent of Hulu (more leverage), Looney Tunes, NBA TV, TBS, the CW, and TNT. Again, I’m just scratching the surface. The full list of stuff owned by Time Warner is staggering.
Time Warner has a lot to offer, and Apple is in a position where it can afford it.
It’s Time to Spend that Money, Apple — AT&T is offering $84.5 billion in cash and stock for Time Warner. Apple has $238 billion in cash. Apple could easily outbid AT&T with plenty of money to spare.
But is that a good deal? On paper, maybe not. Time Warner’s market cap is only about $68 billion, less than even AT&T’s bid. But, since content is a form of currency, measuring in terms of cash value is tricky.
However, Apple may not be able to spend its money freely, given that much of it is held offshore. But even those opposed to the deal, such as Mashable’s Kerry Flynn, agree that money isn’t the problem.
Many have speculated over the years that Apple clings to its cash out of a sort of survivor’s trauma after it nearly closed its doors in the 1990s. But content is going to be key to Apple’s long-term prospects.
Time Warner is a profitable business with a wealth of content to offer Apple, but most importantly…
Time Warner Can Take Care of Itself — One of the more compelling arguments against Apple acquiring Time Warner is that there would be a culture clash between the companies.
But here’s the thing: Time Warner can take care of itself. It’s a profitable, growing business that doesn’t need a babysitter. Tim Cook wouldn’t have to run that show — Time Warner CEO Jeff Bewkes seems to be doing a fine job — nor would he have to be on the set of “Game of Thrones” every day (though that might be tempting for other Apple executives, who shall remain nameless).
Another counter argument is that owning a movie studio and a record label doesn’t seem to be doing Sony any favors. It’s true: the hardware and content divisions of Sony are notoriously hostile. One of the reasons Sony lost the music player market is because Sony Music objected to the adoption of MP3 for Sony’s music players.
However, Apple isn’t Sony, and more importantly, Apple and Sony are from countries with very different corporate cultures.
Japan’s business culture places a heavy emphasis on consensus — that is, not making a decision until all parties are in agreement. This is often smart, but it backfired in Sony’s case because some of Sony’s units had conflicting goals.
When Sony got into the music and movie businesses in the late 1980s, it did so to feed its core hardware business. But at some point, the company lost sight of that goal, so content became the tail wagging the dog.
I can’t see Apple suffering a similar fate. Apple has never been a consensus-based company, but rather a benevolent dictatorship. Cook might rely more on his lieutenants than Jobs did, but there’s no question about who’s in charge.
The key to success in an Apple/Time Warner merger would be maintaining a firewall between the two businesses, with Apple leaving Time Warner alone unless it needed a content deal.
However, that’s not to say there wouldn’t be risks involved with Apple purchasing Time Warner…
Potential Dangers — The biggest risk for Apple would be competing with and thus alienating long-time ally Disney. That would be a tricky relationship to maintain.
Some have asked why Apple just doesn’t buy Disney. I think that would be an ideal scenario, but who’s to say that Disney is even for sale?
Bidding on Time Warner might also tick off AT&T, which hopes to have Time Warner for itself. AT&T might respond by trying to find ways to undercut the iPhone. But AT&T isn’t the only cellular carrier, and Apple now offers its own iPhone installment program, so it’s unclear how much leverage AT&T would have.
But here’s the bottom line: Apple wants to be in the content business. Apple needs to be in the content business if it hopes to grow its increasingly important Services category. And there are only two ways to achieve that goal:
- Create content, such as Apple is doing with its upcoming “Planet of the Apps” and “Carpool Karaoke” shows. But this is a difficult, risky business with no guarantee of success, and it won’t make Apple any friends either.
- Buy existing content that is known to have an audience.
Apple is currently just dabbling in the content-creation business, but the major content companies are watching it with an eagle eye. If Apple appears to be encroaching on their turf, they’ll be quick to put pressure on Apple to back off. Apple’s best hope for content is a quick move that would make it a major player overnight, and buying Time Warner is currently the best path toward that. Or at least the most dramatic.