Why Apple Won't Disrupt Netflix


Here we go again. Rich Tullo, director of research at Albert Fried & Co., says Apple's iCloud service could disrupt Netflix . Netflix has enough real competitors as it is. Can we please dispense with the fake ones?

We'll know a lot more about how competition is taking a toll (or not) when Netflix reports fourth-quarter earnings tomorrow. In the meantime, it's important to remember that Apple has good reasons to embrace Netflix even as it keeps Amazon.com's Instant Video and YouTube at arm's length.

Tullo doesn't seem to care. Instead, he argues that iCloud could evolve to add streaming.

"If Apple rolls out a next generation TV it is likely [the company] will support the product with iCloud its natural match in our view. We think Apple could disrupt [Netflix] ... and make the current exclusive streaming rights controlled by [Netflix] useless," MarketWatch quotes Tullo as saying.

Tullo's referring to recent deals with Walt Disney and Time Warner for exclusive content that includes feature films from Pixar and Marvel as well as TNT drama Dallas, which becomes available January 2014. Netflix has also struck deals directly with performers, including David Fincher and Kevin Spacey for House of Cards and Ricky Gervais for Derek.

Why iCloud isn't a substitute
Content deals aren't what protect Netflix. Rather, Apple's own strategy provides a deep enough moat: iCloud isn't a streaming service.

Buying or renting a movie or TV episode grants you access via any device connected to your iTunes identity. Thus, if you want to watch The Avengers on your Apple TV and your iPad, you'll have to download the movie twice.

Now compare that to how Netflix operates. Choose a program and start watching it on one device, continue on another, and finish on yet another without downloading even a single byte. Whereas Netflix operates a smart, adaptable network, iCloud is a dumb library accessible via an Internet connection.

Upgrading iCloud could take years and billions of dollars worth of investment, for it would require reimagining and then redesigning the underlying software for streaming -- followed by several rounds of heavy data center upgrades for handling and optimizing traffic delivery without interruption. Experience shows this to be no easy feat.

Um, who are those guys in the sharkskin suits?
Hollywood might also want a say in any changes to iCloud. And why not? Streaming isn't the same thing as downloading. Netflix's own failed negotiations with Starz show that studio executives and creators have come to see streaming rights as a distinct and quite valuable category unto its own.

Apple couldn't simply turn a switch and start streaming. Rights to every title in the iTunes Store would be up for bid, kicking off what could be months or years of contract negotiations that could make the company's lengthy deliberation with the Beatles look easy by comparison.

Why? Cash. Apple has so much of it that Hollywood would feel perfectly comfortable asking for rich terms that CEO Tim Cook would be loath to accept.

There's also the music industry to consider. Ever since the late Steve Jobs convinced artists to back the iTunes Store for distribution, the industry has been searching for a way to improve revenue and profits. Streaming services Pandora Media and Spotify have emerged to fill the gap.

Which, frankly, should tell us something as investors: downloading and streaming aren't at odds. They're supplemental, as important to the movie and TV industry as they are to the music industry.

How downloading and streaming complete the viewing experience
To be fair, Apple plans to compete directly with the likes of Pandora and Spotify. If the Mac maker is willing to try Internet radio, there's no reason to believe it won't also try to offer its own streaming alternative, especially if the delivery mechanism is via an integrated large-screen Apple TV.

If it doesn't happen, it'll be because there's a natural synergy between video downloading and streaming that doesn't exist in the audio side of the business.

Consider my own experience. After watching the 2005 reboot of U.K. science fiction series Doctor Who, and each of the succeeding series available on Netflix, I subscribed to series 7 of the show via iTunes. I'll purchase the back half of the current run when it returns to BBC America in the spring. I'm also subscribed to The Walking Dead and am considering adding a few other favorites.

My experience isn't as uncommon as you might think. Netflix Chief Content Officer Ted Sarandos has said that airing prior-season episodes of AMC Networks favorites Mad Men and Breaking Bad has brought in 1 million or more viewers to its cable programs.

Too bold a claim, you say? Possibly. Either way, we know that Breaking Bad and The Walking Deaddrew in more viewers during a DISH Network blackout. Digital distribution filled the gap DISH left, and then some.

Finally, imagine what happens if Tullo is proven right. Apple's Cook would not only be committing to billions in new capital outlays but also turning several partners into competitors -- namely, the big networks behind Hulu Plus.

I think Cook is smarter than that. But I also want to know what you think. Do you believe Apple will create a distinct streaming service? If so, when? Please weigh in using the comments box below.

Learn more about Netflix
The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.

The article Why Apple Won't Disrupt Netflix originally appeared on Fool.com.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple, Netflix, Time Warner, and Walt Disney at the time of publication. He also had a long-term call options position in Netflix. Check out Tim's web home and portfolio holdings or connect with him on Google+, Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.The Motley Fool owns shares of Netflix, Walt Disney, Apple, and Amazon.com. Motley Fool newsletter services recommend Netflix, AMC Networks, Apple, Walt Disney, and Amazon.com. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Originally published