“The wise learn many things from their enemies.” — Aristophanes, Jr. |
There has been endless speculation about which company Apple should buy with its US$51B, and growing, cash hoard. Most involve companies that are either failing by Apple’s standards or wouldn’t be a good cultural fit. However, over time, Apple will be forced to acquire a large and very specific kind of company to insure its survival. It will be expensive.
If one were to describe Apple these days, in startup language, one might say, “Apple, Inc. sells premium consumer products that invoke great hardware and software integration, user interface elegance, and industrial design. The company focuses on the creation and consumption of creative content. It uses the iTunes and App stores to drive demand for this hardware by selling or renting music, TV shows, movies, books and applications.”
The Premise
Million of words have been written about how Apple operates, and I won’t go into more detail except to note that this description of Apple has, within it, a hidden assumption. Namely, if Apple is going to drive hardware sales by selling content, then it will have to, at some point, ponder whether market forces could inhibit the company from delivering that content. That’s just a prudent, due diligence kind of thing.
Today, most of TV, Movie and book content is delivered in channels other than the Internet. However, there are signs that things are changing. The percentage of books sold on Amazon that are digital vs paper has been steadily rising such that eBooks are now the majority (compared only to hardbacks). In the TV side, the concept of “cord cutting,” that is, the act of consumers canceling their cable or satellite TV service in preference to Internet viewing is a hot topic. The data isn’t definitive, and we don’t understand all of it. Some cable companies have denied it exists, and it all depends on how one looks at the data. But it’s being written about a lot, and I believe the effect will become more quantifiable and understood in the next 12 months.
Before I go on, it’s important to understand the current business model for TV and movies. Simply put, studios create video entertainment. TV studios sell that content to the networks who manage distribution to affiliates. They pay for their operations by charging advertisers, and ads accompany the content. Movie studios have a slightly different model, but for the sake of this discussion, I’ll focus on providers of TV and movie content, like Apple, Netflix, Hulu and Amazon who compete against traditional providers, cable and satellite.
These middlemen, providers, depend on the Internet to deliver content, and their business models vary. Hulu includes limited commercials to support their business while, for example, Apple provides commercial free content.
The Complication
Unfortunately, the players in this entertainment business play multiple roles. For example, Time Warner owns both a delivery mechanism (broadband) TV and Internet services as well as owing HBO and other studios. Market forces cause this approach. For example, advertisers are tending to move to the Internet just enough to cause TV Networks a little bit of financial pain. On the other hand, providers of Internet services are thriving. If that weren’t so, NBCU would be buying Comcast, but it’s the other way around. [The acquisition is still under regulatory review.]
What this causes is some concern that as large ISPs like Comcast and Time Warner start to gobble up more content creators, they will provide preferential treatment to their own services. This is the well known Net Neutrality issue, coined by Columbia Law professor Tim Wu.
As we know, big companies generally get bigger and sometimes become monopolists. The larger they get, the more threats to their business worry them. So they gobble up the threats.
Traditional middlemen, providers, have had a great time so far aggregating content, selling it, and delivering it over a mostly open and neutral Internet. However, as companies seek to become more and more vertically integrated, we can expect to see more and more companies become like Time Warner and Comcast: they own the studios, own the content, sell the content, and charge for the delivery mechanism, broadband Internet. That paints a worrisome picture for mid-sized middleman providers like Netflix and Apple who depend on the good graces of national ISPs to deliver their wares. The recent moves by Comcast and DIRECTV to solidify their VOD offerings is just more of that.
Apple’s Challenge
I think you see where I’m going with this. Apple drives hardware sales with its iBookstore, App store, soon the Mac App store, and iTunes. If it can’t reliably obtain the rights to content and deliver the content, then demand for its hardware will come to a halt. Accordingly, Apple has to be thinking about how to secure rights to content and how to deliver that content. I note that Apple just brought a former TRW -> Northrop Grumman ex-CEO and satellite communications expert onto its board of directors. That may just a coincidence, or it could mean something more.
I would bet that Apple is looking to its future, ten years down the road. Based on current trends, in 2020, one can expect that large ISPs will tend to control and dominate delivery even more so. DIRECTV and Dish are in a poor position because their service is designed to be mostly one way. ISPs like Comcast and Time Warner will wait a decade, but when most TV viewing is via broadband, they’ll start charging by the megabyte and unlimited service will be gone. Profits will soar. As Netflix moves away from mail delivery and on-line delivery, they’ll become a ripe target for acquisition by the bis ISPs who lust after their customer base and content rights.
Where does this leave Apple?
I suspect Mr. Jobs and the executive team are saving their pennies not to buy Adobe, Sony, or some other company locked into the old way of doing things, but rather content and content delivery companies. That’s going to take a lot of cash. Boatloads of Cash. Don’t look to Apple to buy anyone on this list.
Choice: Grow or Die
It’s not a matter of culture or what Apple does best. It’s a question of sustaining Apple’s growth and securing its future. Of course, if I were to jump to conclusions, I’d propose that Apple buy Comcast in a few years. They’d acquire a content delivery mechanism, millions of ISP customers and infrastructure, NBC Universal, with all its cable offerings, like USA Network, movie interests, as well as Hulu and network related TV studios. However, I won’t do that because the picture is too fluid and there have already been many antitrust concerns about Comcast buying NBCU.
I’ll simply say that now that Apple has moved from being a lonely little, off-beat UNIX OS and Mac vendor to a giant media distribution company that’s consumer hardware dominated, it’ll be thinking about smart and legal means to secure both content and the system to deliver it. What good is a billion dollar data center in North Carolina if it’s both starved for content and delivery?
Another reason to acquire a large ISP is after market penetration. Right now, large ISPs don’t find it profitable to deliver broadband into rural areas. There’s little ROI. But if the parent company sold consumer hardware, like iPods, iPads, and Apple TVs, (and maybe Internet ready TVs) then the delivery of broadband to remote areas is justified for the sake of related consumer electronics sales. Of course, as I mentioned above, satellite or wide area wireless communications bypass the need for laying cable. That all could chew up Apple’s US$51 billion in a hurry.
As events, relationships, and acquisition unfold over the next few years, we should all be watching for how the major players lock up content and delivery mechanisms and how Apple tries to avoid being squeezed out.