Should Apple Buy Netflix?

Speculation has been rife in recent months that Apple may buy Netflix. But if you have been buying shares of the online movie streaming service with hopes of it being a takeover target for Tim Cook, you may be sorely disappointed.

Netflix got its start in a small office building in Scotts Valley, California in 1997. The location was over the mountain on highway 17 from the hustle and bustle of Silicon Valley giants at the time like Cisco and just a hop, skip and a jump from the blue ocean waters of Santa Cruz, a town best known for its hang-loose, relaxed, hippy culture.

If any company was going to rise up from the ashes of the technology crash of 2001, it certainly wasn’t going to be Netflix. How could a company selling DVDs become an internet giant? Skeptics hardly took notice. But venture capitalists did, eventually. The first rounds of funding for Netflix came from its founder and CEO, Reed Hastings, who invested a couple of million dollars to get the ball rolling.

It was only a year or so later when Institutional Venture Partners rolled the dice and invested $6 million. Over a decade later, Netflix had evolved from DVDs to streaming movies online. It had innovated with original content to break the noose around its neck from expensive deals with content providers. And it had taken on threats from Walmart and Amazon, who both had entered the fray with their own streaming movie services.

In 2011, Technology Crossover Ventures took the plunge by investing a whopping $200 million. Netflix had been anointed. TCV after all had invested in internet giants like LinkedIn and Facebook, as well as Orbitz and TheStreet.com plus a long list of other companies, including: Twilio, Xero, Zillow, WorldRemit, Expedia, and eHarmony.

When it came to Apple, the synergy with Netflix was obvious. Apple had too much cash on the books and needed a streaming movie service to match its music service. But there was a fly in the ointment: valuation.

Netflix had shattered all records. When skeptics argued that HBO had never reached more than 30 million subscribers and Netflix too would hit a ceiling at that level, Reed Hastings proved them wrong. Netflix has since grown to over 100 million subscribers globally.

As Netflix has grown like a mushroom its valuation has become so lofty that Apple, who is traditionally gun-shy when it comes to acquisitions, would find it a near impossible pill to swallow.

It’s not because Apple couldn’t afford to purchase Netflix. The real problem is that the Netflix board would demand a premium over and above an existing valuation that is already hard to stomach.

Whether Netflix would demand a 30% or 100% premium is unknown but you can be assured that Netflix founder and CEO Reed Hastings has bigger ambitions for the company and wouldn’t cut and run for a cheap price.

When you walk into a run-of-the-mill office building in Scotts Valley day after day during the early years growing a fledgling company, invest a few million dollars of your own money, and dedicated your life to ensuring that company blossoms, the attraction of selling the company is less about the price paid than whether the marriage to a new company is a fit, and whether you believe you have taken the company as far as it can go.

For Reed Hastings, it would be surprising to shatter all pre-conceived notions of what could be possible in prior decades only to sign his company over on the dotted line now. More realistically, the premium he and his board would demand would be too much for Apple to stomach. So Netflix buyers should keep in mind the old saying: caveat emptor… buyer beware.

 

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