​Is Apple (AAPL) Going to Buy HBO?

Joel Anderson |

Articles that regurgitate rumors about what Apple (AAPL) may use its enormous pile of cash to purchase pretty much represent their own sub-genre of business journalism at this point. But can you blame us financial journalists? After all, it’s fun. Here you have a company that’s most notable over time for its incredible innovation, holding enough cash to purchase a small nation, let alone an emerging company, and a relative lack of new direction since the release of the iPad (no, I’m not forgetting the Apple Watch).

So, the idea that Apple has been biding its time waiting for an opportunity to snatch up a smaller company creating all sorts of wild new synergies that will change everyone’s life forever? That’s the stuff that gets the juices flowing for the world of finance and Apple fans alike.

Except that normally, these rumors are mostly just idle speculation. Rumors have included Apple purchasing Tesla (TSLA) or GoPro (GPRO) or even Blackberry (BBRY). Because that’s how business works: you annihilate a company’s market share by releasing a vastly superior product and then…purchase the company you’ve destroyed.

However, the most recent rumors set in motion by a New York Post article, that Apple is seriously considering the purchase of Time Warner, Inc. (TWX), may actually have some legitimacy to them.

So What Makes the Time Warner Rumors Different?

What gives the Time Warner rumor legitimacy is a combination of factors. For starters, market conditions are pretty good. Time Warner rejected a buyout offer from 21st Century Fox (FOXA) about a year and a half ago at $85 a share, only to see shares plummet under $71 of late. Even with a 30% mark-up over today’s price, which would be about $93 a share, Time Warner would run about $75 billion in the sale, a price tag Apple can actually swing.

There’s also the fact that Time Warner lacks the sort of dual class shareholder structure that might normally allow a smaller cadre of dedicated investors to beat back an offer like this. Anyone who stood pat at $85 18 months ago is likely to have a lot of trouble at this point if Apple or another buyer comes to the table with an offer over $90.

And finally, Apple could do a lot with Time Warner.

Of course, every one of these rumors involves a lot of talk about what Apple could potentially build with a new piece - that’s never the issue. Dreams of electric Apple cars that would sync with your iPhone and the rest of your Apple universe were great, but that didn’t get Apple any closer to actually purchasing Tesla.

However, here, the assets really do seem to line up with Apple’s current footprint remarkably well.

The march towards a nation of cord cutters continues, but it’s very slow if steady progress. Apple, though, can already boast an impressive level of cultural saturation. Millions of people are using their devices and services throughout their day, making them members of an immersive Apple universe.

By purchasing its own source of content, it could step boldly into the arena with Netflix (NFLX) and Amazon (AMZN) as a standalone streaming service. The various cable channels included in Time Warner would be more than enough to enter this segment, allowing Apple to offer a slimmer cable bundle with robust options but at a much lower price than cable packages laden with hundreds of unwatched channels.

This further folds in perfectly with Apple TV. If cord cutting is everyone’s future, and we’re headed for a world where content is streamed directly from the internet to one’s television, securing a position as the best device for doing that could reap huge rewards as more and more Americans make the leap and drop their cable packages. Positioning itself on the content side of things would help Apple potentially seize a dominant piece of this growing market just as it’s becoming much more lucrative.

This is particularly true if Apple owns the best content of its day, which it would get when it purchases Time Warner because of one company: HBO.

It’s Not Apple TV, it’s Apple HBO

HBO is really the gem in the Time Warner crown. Don’t get me wrong, there’s a lot of varying levels of value there, but HBO is the one that’s truly built for this new generation of television viewers. HBO continues to produce appointment television at a time when that’s no longer the norm, producing shows that drive conversation.

Apple has long been defined by a commitment to quality and excellence above all else, and HBO seems to fit that model perfectly. HBO has several shows that are arguably popular enough to drive subscription numbers on their own. Already, Netflix has proven with House of Cards that even just one critically acclaimed show can act as a driver for new subscriptions that continue to pay dividends months later. HBO is a network that can frequently claim two or three titles that are among the most-discussed inthe broader culture.

With Game of Thrones in its corner, Apple would arguably have the ammunition it needed to seriously shake things up in the streaming content field. And seriously shaking things up is something Apple has not done in some time.

Apple Needs to Get Back in the Innovation Game

Since the passing of Steve Jobs, Apple appears to have accepted a new identity. Rather than a bold and daring tech company constantly reinventing the very landscape of consumerism, Apple has become a wildly successful purveyor of luxury goods, content to sit back and collect its money with an occasional update to its existing portfolio of products.

However, simply resting on your laurels is very rarely a fruitful business strategy in the long term. Tim Cook is no doubt aware that, after building such a stupefying market cap, he’s going to have to start protecting it at some point.

As such, securing a role for Apple TV as the video device of the future by acquiring a content arm and catering to cord cutters could be a smart move. It’s hardly an iPhone-level shift in consumer culture, but it is forward-looking in nature, identifying a clear trend, positioning the biggest company in the world in a place where it can dominate this new market.

Obviously, nothing is decided at this point. This could all boil down to more Apple rumors that never materialize, as per usual. There are other buyers interested in Time Warner, and as with any purchase, the matter of price will likely be one that could scupper the proceedings at any point in time. However, this certainly feels like a move that’s more possible than previous Apple speculation. Amazon has certainly proved that complimenting other services with a streaming service and original programming is a model that can work.

For Apple, they’re already selling the devices that a lot of people are watching HBO on. Buying up the content producer could present the sort of opportunity for vertical integration that could keep this empire humming along into the future.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
GPRO GoPro Inc. 9.68 -0.02 -0.23 2,155,102
TSLA Tesla Motors Inc. 187.33 5.86 3.23 2,991,626
AAPL Apple Inc. 109.12 -0.78 -0.71 21,143,848
TWX Time Warner Inc. New 93.70 -0.10 -0.11 2,288,984
AMZN Amazon.com Inc. 758.39 18.05 2.44 2,760,293
NFLX Netflix Inc. 118.57 -2.24 -1.85 5,404,946
BBRY BlackBerry Limited 7.64 0.05 0.66 2,120,445
FOXA Twenty-First Century Fox Inc. 27.52 0.12 0.42 7,077,162

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