What A Netflix Acquisition By Apple Might Look Like

Apple Inc. AAPL could "easily" acquire Netflix, Inc. NFLX, but that doesn't necessarily mean it should.

Bernstein's Toni Sacconaghi explored what an acquisition of Netflix by Apple would look like.

For starters, buying Netflix so Apple can run its library of content exclusively through Apple TV or the iOS platform isn't a "value-creating thesis." On the other hand, buying Netflix and letting it continue operating as it is today is a scenario in which Apple will generate meaningful revenue accretion or cost reduction through its brand, marketing reach and operational prowess.

Sacconaghi said the "most intriguing" part of any potential deal would be the fact that owning Netflix would add $8 billion to its services revenue and help shift Apple's transactional business model towards a subscription-base model.

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"We believe AAPL could and should look to build a subscription offering of features and services that could be bundled with its hardware offerings, analogous to what Amazon does with Amazon Prime. Netflix (at a discounted price for only iPhone or iPad users who buy Apple hardware as a subscription) could be a key element of an attractive services bundle," the analyst explained.

Nevertheless, the analyst did acknowledge that an acquisition of Netflix is "highly out of character" for Apple because:

• Apple's history is void of conducting large deals.
• Apple doesn't buy and run established business.
• A deal would be 2-3 percent dilutive in a cash transaction and even more so in a stock deal.
• Apple more likely wants to built an over-the-top (OTTP) content offering including live TV instead of just an on-demand content offering.

Finally, Sacconaghi suggested Apple is likely better off partnering with Netflix, which could prove to be mutually beneficial. For instance, Netflix could sell its service for a cheaper monthly price to "Apple Prime" users which would be customers who pay for their iPad or iPhone on a hypothetical subscription basis.

"Overall, we do not see a compelling rationale for Apple to acquire Netflix, and believe Apple will more likely partner or compete with Netflix than acquire it," the analyst concluded. "That said, it is very hard to estimate its likelihood and potential impact on Netflix's fundamentals. As a result, we do not believe the potential for a partnership or acquisition by Apple justifies owning NFLX."