Netflix's Need Is Apple's Opportunity

Reed Hastings wants Netflix investing in more original series. And why not? House of Cards is already a success, and early signs point to a similarly strong showing for the horror series Hemlock Grove.

Trouble is, this sort of content doesn't come cheap. In a manifesto posted to Netflix's investor-relations site recently, Hastings confessed that original program development is "cash-intensive" and that producing more shows is likely to mean raising money from investors or partners:

As we expand Originals, they will consume cash. Since we are otherwise using domestic profits to fund international markets, we will raise capital as needed to fund the growth of Originals.

And that, Fool, is where Apple comes in. The Mac maker should be investing in Netflix original programming.

Source: Netflix.

How about an iPad with that?
It's a rich opportunity. Netflix's bulkier content portfolio led to hefty profits in Q1. Revenue rose 17.7% to $1.02 billion as the company turned an $0.08 per share loss into a $0.31 per share profit, after accounting for charges related to paying off debt. Wall Street was expecting just $0.18 a share. The stock promptly soared 20% on the news.

Why should Apple care? Math. Better TV apps means a better TV experience on the iPad, which means more reasons to buy an iPad, which means more iPad sales.

Or at least that's how the market seems to be trending: iPad unit sales soared 65% and came in almost 1.5 million ahead of consensus estimates in fiscal Q2 versus a 7% year-over-year increase in iPhone sales. IDC is right -- tablets are becoming an everyday item for American consumers, none more so than the iPad.

A natural partner
Apple and Netflix also share competitors. Consider and Google . Each sells individual tracks as iTunes does. They also offer music, books, and magazines in addition to streaming. Apple mutes their stores on its devices for this very reason.

Hulu isn't a competitor, but management uncertainty makes partnering a risk. Redbox Instant would be an alternative as a development partner if executives had any interest in original programming. So far, they don't.

Which brings us back to Netflix. Hastings needs Apple's cash, and CEO Tim Cook has demonstrated a willingness to invest in ways the late Steve Jobs never would. Listen to how CFO Peter Oppenheimer described the company's cash strategy in announcing fiscal Q2 earnings.

"We continue to generate cash in excess of our needs to operate the business, invest in our future, and maintain flexibility to take advantage of strategic opportunities," Oppenheimer said in a press release. That, Fool, is how an investor talks when he's searching for the next win.

Wait till Ringo hears about this
Starting a studio is probably out of the question given Apple's litigious history with The Beatles. Any move to broaden the "Apple" brand in entertainment could get nasty in a hurry.

Yet Apple needn't go that far. Just hire a team of entertainment specialists, assign them to Braeburn Capital -- the cash-management arm -- and then designate a pool of funds for investing in programming, beginning with Netflix Originals.

Apple's involvement would remain at the Executive Producer level with participation including, say, early distribution rights via iTunes ahead of general release on Netflix. Everyone wins, especially viewers who want more top-notch content.

Nor would the deal need to be limited to TV. Apple could also fund Netflix original films or documentaries. The more creative the project, the better.

After all, we're talking about matchmaking here. There won't be candy or flowers or even a goodnight kiss. But if Apple and Netflix do get together to create programming, you can bet there will at least be a second date. And it'll be a sight to see.

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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, Google, and Netflix at the time of publication. He was also long Jan. 2014 $50 Calls on 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 recommends and owns shares of, Apple, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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