Apple's smart move: Buy Netflix, says analyst

iTunes' TV and movie rental business already one-tenth the size of Netflix, says expert

Apple's TV and movie rental business is already a tenth that of Netflix's, according to estimates by an industry analyst.

But rather than duke it out with Netflix, Apple's smart move would be to pay $12 billion to acquire its partner and rival, said Brian Marshall of Gleacher & Co.

Last week, Apple said sales of the new Apple TV, a $99 device that streams purchased, rented and free content to television sets, had passed the 1 million milestone. Apple launched the revamped Apple TV in early September.

In a note to clients on Wednesday, Marshall pegged Apple iTunes' TV and movie rental business at about 10% the size of Netflix's.

"Despite iTunes' TV/movie availability being only half as old as Netflix's service, it is our belief that iTunes' rental business is already roughly one-tenth the size of Netflix," Marshall said in the note. By his estimates, Apple rents about 475,000 TV shows and movies daily, while Netflix handles 5.1 million rentals each day, split almost evenly between DVD rentals and instant viewing via streaming.

Netflix kicked off its rental service in 1999; Apple launched iTunes rentals in 2005.

Marshall said Apple's TV and movie rental business adds about $60 million in revenue per quarter, with another $50 million coming from electronic purchases. By comparison, Netflix reported $550 million in rental revenues for the quarter that ended Sept. 30.

Analysts have traditionally said that Apple's iTunes business -- including sales of music -- is a bit better than break-even. Marshall didn't dispute that, but thought that as Apple's TV and movie rentals increase, it will reap rewards.

"iTunes is all about getting the hook on the customer base, and selling [Apple TV] hardware," Marshall said in an interview today. "But as Apple's rentals scale up going forward, they will generate significant profit. They will start to become more of a profit center for the company."

Marshall believes Apple could see a dramatic revenue boost from rentals in the next five years. "If Apple can grow its rental business similarly to Netflix's historical profile, it's feasible iTunes' annual rental revenue could exceed $1 billion by 2015," he said.

Netflix has quintupled its subscriber base in the last five years, and more than tripled its revenue in the same period.

But it's unlikely Apple could challenge Netflix as the dominant player in the TV and movie rental market. Not only is Netflix a competitor, but it's also an important partner, with the Netflix streaming service a prominent part of Apple TV's offerings.

"What I'd like to see is Apple buying Netflix," Marshall said. "Netflix has approximately 150,000 titles, while Apple has just 15,000. Apple has a tremendous opportunity [if it bought Netflix]."

Assuming Apple paid a 20% premium over Netflix's current market capitalization, the deal would be worth about $12 billion, easily Apple's largest acquisition ever but well within its reach. "Apple has about $51 billion in cash at the moment," Marshall noted, citing Apple's famously well-funded cash-on-hand account.

Overall, Apple will post record sales for its iPhone , iPad and Mac lines next month, Marshall said. (Apple will announce its official sales and revenue figures Jan. 18 in a conference call with Wall Street analysts.)

Marshall expects that Apple will report it sold 16 million iPhones in 2010's final quarter, as well as 6 million iPads and 4 million Macs. If his numbers are on target, all three would be quarterly sales records.

The iPhone and Mac figures would represent increases of 88% and 27%, respectively, for 2010 over 2009.

"Clearly, Apple products were the gifts of the holidays," Marshall said.

Join the newsletter!

Or

Sign up to gain exclusive access to email subscriptions, event invitations, competitions, giveaways, and much more.

Membership is free, and your security and privacy remain protected. View our privacy policy before signing up.

Error: Please check your email address.

Tags AppleiTunesnetflix

Keep up with the latest tech news, reviews and previews by subscribing to the Good Gear Guide newsletter.
Gregg Keizer

Gregg Keizer

Computerworld
Show Comments

Most Popular Reviews

Latest Articles

Resources

PCW Evaluation Team

Tom Pope

Dynabook Portégé X30L-G

Ultimately this laptop has achieved everything I would hope for in a laptop for work, while fitting that into a form factor and weight that is remarkable.

Tom Sellers

MSI P65

This smart laptop was enjoyable to use and great to work on – creating content was super simple.

Lolita Wang

MSI GT76

It really doesn’t get more “gaming laptop” than this.

Jack Jeffries

MSI GS75

As the Maserati or BMW of laptops, it would fit perfectly in the hands of a professional needing firepower under the hood, sophistication and class on the surface, and gaming prowess (sports mode if you will) in between.

Taylor Carr

MSI PS63

The MSI PS63 is an amazing laptop and I would definitely consider buying one in the future.

Christopher Low

Brother RJ-4230B

This small mobile printer is exactly what I need for invoicing and other jobs such as sending fellow tradesman details or step-by-step instructions that I can easily print off from my phone or the Web.

Featured Content

Product Launch Showcase

Don’t have an account? Sign up here

Don't have an account? Sign up now

Forgot password?