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Quiet day on Wall Street, Apple cash dilemma, TiVo also in play?

One “livener” to wake up the markets in the past few days, is the idea that Apple will buy Netflix. It was put forward by Citigroup stock analysts Jim Suva and Asiya Merchant, who rate it at 40% likelihood. We were amazed.

The habits of Apple would insist that Netflix was then limited to Apple devices. It is the way of Apple, its mantra if you like, Apple’s only way of doing business. Such a move would destroy about 50% of Netflix revenue and about 75% of its value. Buying it at $80 odd billion, would be like throwing away $60 billion.

Why can’t stock analyst see that kind of thing. Even if it could be mitigated, for instance by allowing existing Netflix customers to be able to stick with their current platform, and Apple would make future platforms so much better with Netflix there was a slow drift to Apple devices, rather than a hard and fast rule, it would still depress the acquired value.

If Apple management is tough enough to hold out against multiple Presidents, of both parties and insist on a better tax regime with $250 billion at stake, it is not going to enter a deal which would be considered high risk. Better to do a deal like T-Mobile US did just prior to Christmas, and buy someone with good content rights, then fund it into original content. That way fewer dollars are put at risk, and it is all upside to the device business.

There are stories on the US investment networks which are possible and real, and which have implications for bankers and investors, but similarly there are stories which are not meant to be taken seriously by heavyweight investors, but just convince a handful of wannabees to jump ship. This idea falls into the latter. You can never say never, Apple might buy Netflix although it is a terrible idea, but the likelihood must be closer to 1%, not 40%.

Apple is doing fine and so is its stock. It has no need to do anything dramatic and its most important two issues are a) How can it increase or hold its device margins and b) how does it transition to 5G.

Qualcomm has come under stock price pressure because Apple has resorted to bully boy tactics over intellectual property. Qualcomm has few friends here, because it has such a stranglehold on 4G and 5G technologies. It possibly has as much as a 9 month lead on 5G radio chips and the only other companies which are close to keeping up are conglomerates like Samsung, who sell few merchant chips, and which are not really “entrenched” in the component eco-system. Samsung only began using its own ships in devices in anger about 3 years ago. Intel is catching up, but if Apple goes down that route, it must first solve its issue with Qualcomm, or be left losing market share due to delays getting to 5G. It has two ways to solve the Qualcomm issue, let market forces bring Qualcomm to its knees and then use brinkmanship to suggest a compromise deal that allows Qualcomm to remain independent; or it can cut a deal with Broadcom after it has acquired it. Apple would be foolish not to focus entirely on this issue for now.

Qualcomm can hardly wait for 5G, as it should help put Apple back in its box. Except it may already be too late and Broadcom may have knocked down the walls and invaded by then. But Broadcom buying Qualcomm has the same problems as Apple buying Netflix – if it buys Qualcomm and then changes its IPR habits, it will condemn it to earning less, which will keep its value down at where it is today, minus Apple and other IPR payments. That will make its value fall, so it will effectively be giving away money. Also we all know that Broadcom CEO Hock Tan will decimate the company, drive cost cuts through it, eliminate all speculative R&D and change the business into exploiting what it has already built, no longer pioneering.

Apple’s next best plan is to buy chips which do not pay Qualcomm patent licenses, but in the end that is likely to end up as illegal. It can use Intel chips, but the patent infringement then falls to both Intel and Apple. The patents either hold or they don’t. So Apple’s margin improvement will be short-lived.

An alternative strategy for Apple would be to increase the perceived value of its devices by adding exclusive content which is tied to the device. If it does this with Netflix it throws away a whole bunch of money – much better to buy content rights in the open market, invest in original content and get to the same place for less money. It might offer AT&T a safe haven for parts of Time Warner, which would allow the deal to go ahead, and then allow cheap content rights back to AT&T. Outside of AT&T it could insist that the content runs on an Apple device.

Apple will certainly have too much cash and will be inundated with advice on what to do with it ponce it repatriates cash to the US. Tim Cook has often said he needs the money for future acquisitions, and he has always envisaged buying at the multi tens of $ billions level, but to date has never been able to test this theory because of where all the money was, outside the US.

There is evidence that Apple plans to repatriate about half of its cash to the US pay Tax on it, and then give quite a bit back to shareholders or buy back more shares, and then ponder acquisitions. That might give it $40 million to $50 billion of spare cash, which is not enough to land Netflix.

Netflix stock lifted about 6.5% but nothing like the amount it would have if a lot of investors took this seriously.

A rumor that does have legs is the technology rumor for private equity groups to buy out TiVo, reposition it, sell off some assets and then sell it on. This broke in The Street just before Christmas.

We feel that TiVo combined with Rovi is stronger than either one of them was before the merger and that investors are currently simply confused by its offerings and also negative due to the dispute it has with Comcast. The TiVo share prices should be closer to $20 already, so offering to buy it at that level falls well short of the mark, and that’s roughly what competing private equity groups are said to be bidding. Anything below $25 is unlikely to represent real value to the company.

The new combined TiVo has new deals with Altice USA, Discovery Communications and Liberty Global – in some cases multi-year deals.

Faultline was first in the queue to request an interview with new CEO , Enrique Rodriguez who joined in November, and it did not look to us that he was employed as a stop gap to sell the company. So this is down to outsiders looking in at a company they like the look of, not the company being hawked around to the highest bidder. We imagine this will develop rapidly over the coming weeks, while the Apple Netflix idea will evaporate.

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