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19 March 2020

Finance guys flip coin over who Apple should acquire out of boredom

As stocks tumble, most technology companies are keeping their check books tightly sealed until the dust settles from Covid-19, despite the spare cash from global event closures. Here at Faultline, our normally brimming stack of travel expenses has never looked so empty.

However, the behemoths among us with boundless cash reserves are looking to take advantage of the stock market situation through opportune acquisitions.

Of all the M&A rumors in recent weeks, the suggestion that Apple is considering buying Disney while the chips are down is the most significant and sensationalist.

We have lost count of the number of times our coverage has advised – even implored at times – Apple to buy an established OTT video platform and content studio rather than forking out $billions on in-house developments. So why would Apple decide to pounce now, when the firm’s Apple TV+ streaming service is guaranteed a subscriber surge triggered by stay at home advice?

Because, of course, Apple needs a long-term game plan – as its streaming video subs are guaranteed to tail off almost as quickly as they arrived. Apple TV + has still generated a massive early flush of active users in the US, up to over 30 million within weeks of launch. But the number that will then convert to paid subs will be much smaller and given its lag behind others like Disney+, Netflix and HBO Max in original content, figures from our research arm Rethink TV anticipate it being a second string provider after the initial surge has subsided, heading for 6.2 million paid subs by 2025.

Other outlets have been even more aggressive. Digital TV Research for example recently projected 5.5 million Apple TV+ come 2025. At any rate, it looks like Apple TV+ will be lucky to have 20% as many paying subscribers in 2025 as it does free ones today.

Apple earmarking Disney as a takeover target was an idea suggested by Rosenblatt Securities analyst Bernine McTernan this week. Like us, his logic is about a long-term game plan. “We believe those with long-time horizons, like mega-cap companies with large cash balances and whose equity outperformed Disney over the last three weeks, like Apple, could take advantage of the volatility. The upside from acquiring Disney would be securing content/streaming strategy and potential synergies from adding the emerging Disney ecosystem to the iOS platform,” he commented in a research note from the agency brokerage.

Ironically, it was only January when Rosenblatt Securities terminated its coverage of Apple due to a departure of their dedicated Apple analyst. It appears McTernan has stepped into the bearish shoes of Jun Zhang and in doing so has made one of the most obvious and predictable projections possible. It would not be shocking to hear he flipped a coin on whether to write that Apple should acquire Disney or Netflix, just to pick up some press coverage. It worked.

So, as of writing, Disney’s market cap sits at $171.5 billion – plummeting by more than $100 billion from the house of mouse’s end of November 2019 peak. Apple, meanwhile, has a market valuation of $1.06 trillion, falling even harder from its February peak of $1.4 trillion.

Apple TV+ is free to users of its iOS devices for the first year, otherwise $4.99 a month, while Disney+ costs $6.99 a month. That said, Disney is also offering a bundle comprising Disney+, the streaming sports ESPN+ service and Hulu for $12.99 a month, which looks more competitive than Hulu alone.

What is undeniable is that if these new streaming services gain anywhere near the numbers of subscribers predicted in all the forecasts including the one from Rethink TV, average subscription prices will come down substantially, even without taking account of the rise that we anticipate in the proportion of ad-supported viewing in the US.

It’s worth noting that Apple has also just taken a hit of $1.2 billion in France for price-fixing. Although that is tuppence in Apple terms, it will do nothing to persuade Tim Cook to dip into Apple’s cash mountain in such uncertain times.