Aug 12, 2024

HBO Would Bolster and/or Buoy Apple Services

Apple wants to bolster Apple TV+, but may *need* to buoy Services...

A month ago, I made the case that Apple should buy HBO (and probably all of parent Warner Bros Discovery). At the highest level, Apple needs content, Warner Bros Discovery needs money. Apple has money, WBD has content. Win/win. Peter Kafka agrees and makes the case with some actual numbers:

The money part is also reasonably straightforward. WBD's stock has been steadily getting cheaper since the day Discovery and the company formerly known as Time Warner mergred in April 2022. But now that it's clear that this is a failed merger, it's on sale for more than two-thirds off, with a market cap of $17 billion. Throw in $40 billion in debt, and you're looking at an enterprise value of about $60 billion.

So maybe, after a premium, the whole thing costs Apple $70 billion? That is: What Microsoft paid for Activision a few years ago?

That's very, very doable for a company worth more than $3 trillion that produces annual profits of $100 billion.

That would be Apple's largest purchase, not just by an order of magnitude, but by an order of magnitude times two and then some. Beats was a $3B deal a decade ago. The deal to buy NeXT, bringing both the technology which would underpin OS X (now macOS – and iOS, iPadOS, etc), oh yes, and Steve Jobs, was $427M back in 1997. The deal to buy PA Semi, from which came Apple Silicon? $278M back in 2008. The deal to buy Siri? Something just over $200M back in 2010. Apple has a deal type, and WBD is not it, historically!

But given the struggles of Apple TV+ to breakthrough and given the likely forthcoming hit the Services business is going to take if/when the remedies against Google in their antitrust case state that they can no longer pay Apple upfront to be the default search engine on Apple devices – a $20B+ a year hit – it may be time for Apple to think different here.

And then, boom: Apple's services business — the part of the company Apple needs to keep growing while its hardware business slows — instantly grows by nearly 50%.

After my initial post, some were skeptical that Apple would do such a deal because of what it would mean to their margins. WBD lost $10B last quarter (!), yes, $9B of that was due to a write-down of their television channels, but still, they lost something like $1B last quarter. Apple undoubtedly would not like that, but they also have ways to turn that around fairly quickly if they wanted to, both from "synergies" (read: layoffs of overlapping teams, such as in tech) and from spinning off various assets they feel like they didn't want and/or need. It would be hard to see them keeping CNN, for example.

Also, all of WBD's business in 2023 was $40B (half of it was from the TV networks – direct to consumer streamer about $10B and studio another $10B). iPhone revenue last year was $200B! iPad about $30B. Mac about $30B. Services looks like it's going to come in at just around a $100B business this year (pending the end of the Google Search deal). Adding WBD would take Services to around $140B. This would push Apple closer to no longer being "the iPhone company". And if the Google money goes away, dropping Services to, say $75B, WBD would push it right back over $100B. This solves an actual problem for Apple.

Yes, it would create some of its own – including, potentially, a new regulatory headache for the company. Per Kafka:

Would there be issues with regulators? Absolutely, no matter who wins this fall's election.

It's one thing for a tech company to buy a minor studio and 50% of the James Bond franchise. It's quite another to hoover up a conglomerate that owns CNN, a ton of other TV networks some people still watch, and one of the industry's biggest producers of movies and TV shows. A lot of people would have opinions about Big Tech getting even bigger with this one.

On the other hand: The current owner of those properties is flailing. It's a reasonable bet that someone else is going to own this thing eventually. And if you're worried about antitrust, maybe it's better that it goes to the likes of Apple instead of a competitor like Comcast, which would mean more consolidation.

But pumping up Apple TV+ while bolstering Services should be enough to make this make sense for Apple. If they can get over the sticker shock thanks – no thanks – to all of WBD's debt, dumb deals, and general mismanagement.

There be dragons, yes. But also, there be dragons!