How many ways can analyst Daniel Ives say that Apple is playing catch-up?
From a note to clients that landed in my inbox Monday:
Herein lies the quagmire for Apple; for a company that has a core DNA of organic driven R&D and has historically been against the concept of larger acquisitions (Beats at $3 billion in 2014 is its largest deal to date), now Cook & Co. find themselves with their back against the wall on the content and streaming front, which in our opinion will be the key to monetizing its 1 billion+ active device installed base worldwide. With the company spending $1 billion to $1.5 billion per year on video content Apple is brick by brick trying to build a content library with competitors such as Netflix, Amazon, Disney/ Fox among others (Hulu, etc) spending a combined $20 billion+ on content annually which makes Apple look like a kid in the sandbox while the adults watch from afar.
With inherent challenges coming down the road on iTunes/royalty amounts that Apple charges (e.g. Netflix recently stopped supporting iTunes) and a slowing smartphone market, Apple needs to morph its services/content strategy around a standalone video subscription service in our opinion that could launch by the end of 2019. While this sounds good on paper, Apple significantly lacks the core content to get its loyal customer base to pay $10 per month as Cook, Jony Ive (Chief Design Officer), Eddy Cue (head of Apple's content strategy), and others on the leadership/strategy team continue to drive in the right lane at 55 mph, while competitors from all areas of technology and media are passing the technology stalwart in the left lane driving 100 mph in their new content sports cars.
The clock has struck midnight for Apple; now is clearly the time for content M&A. The M&A frenzy with Disney/Fox and AT&T/Time Warner has stepped up the content game significantly, as now Iger in particular is laser focused on driving content through its long awaited Disney standalone streaming service set to launch this year with a massive content presence now with 21st Century Fox in its back pocket.
Once Judge Leon let the AT&T/Time Warner deal be consummated after the DOJ battle, we believe this was the Fort Sumter moment that will unleash a major cycle of M&A around technology, content, media, and cable assets for the next few years with Apple in a "prime time position" to acquire massive content assets and transform its services business within another major growth vehicle on the video content. To this point, Apple could also decide to go after acquisitions on the consumer front (gaming platforms/content creators make strategic sense) as well to drive the services flywheel from other angles with a host of potential candidates that could be on the docket.
In a nutshell, ultimately with $250 billion+ of potential dry M&A powder now is the time for Apple to rip off the band-aid and finally do significant content M&A with the landscape ripe otherwise it will be a major strategic mistake in our opinion that will haunt the company for years to come, with content being the rocket fuel in the services engine that is currently missing in the portfolio.
Maintains Outperform rating and $200 price target.
My take: Color me unpersuaded. Apple doesn't need to be Disney or Time Warner to keep its customers coming back. It just needs to ship great products.