Apple won’t buy Disney, but they should think about Nintendo
Last week’s story in the Apple community was if and how Apple should buy the entertainment company Disney. The discussion was triggered by a speculation from a “veteran Hollywood executive”.
The article goes into the why, citing the “special relationship” between Disney and Apple.
The benefit for Apple seems obvious: More content to boost services revenue and to create nice service bundles.
And of course Apple got $62 billion in cash sitting around. Financially Disney would be a small fish to Apple.
But — and this starts my list of counterarguments to the aqusition — financially speaking Apple could buy almost any company in the world, including the ones in their supply chain.
Apple has spent more money on stock buybacks (buying back shares from the public) in the last 4 years than VISA is worth. In other words, they could have bought VISA without batting an eye and still had 100 billion in cash reserves. Just for perspective, VISA is the 11th biggest company on earth by market cap.
Apple makes acquisitions, but they’re very small in size and they choose companies that aren’t in the headlines (yet).
In terms of supply chain, Apple tends to invest in their suppliers instead— so that the supplier can stem the upfront investment to ramp up to the huge Apple numbers.
Wouldn’t it be easier to own the supply chain outright? Safer, maybe. But it would come with enormous administrative overhead and not easy to answer questions like what should the bought factory produce if for example the displays in need are no longer wanted.
Critically, it isn’t certain that economically it would be of benefit to own the factories. “Commoditize your complement” applies:
the pattern of “commoditizing your complement”, an alternative to vertical integration, where companies seek to secure a chokepoint or quasi-monopoly in products composed of many necessary & sufficient layers by dominating one layer while fostering so much competition in another layer above or below its layer that no competing monopolist can emerge, prices are driven down to marginal costs elsewhere in the stack, total price drops & increases demand, and the majority of the consumer surplus of the final product can be diverted to the quasi-monopolist.
Apple stays out of the operational complexity and still gets the best prices, thanks to cut-throat competition with perhaps a bit of loss leading strategy on the supplier side.
The same can be observed with Apple Card: Of course Apple could have bought its way there, but it chose to partner with Goldman Sachs. Now Apple Card was apparently responsible for at least $1 billion in pre-tax losses at Goldman between 2021 and 2022 — Goldman wants the deal to end.
I think in the longterm Apple wants to be in the same position regarding content for TV+: Suppliers bending over backwards to be on the streaming platform. Why should it own the studios then? To get bad press for being involved in Hollywood?
I see the prestige and marketing factor of getting a big name like Star Wars on Apple TV+, but maybe the way to get there is a license deal with Disney.
The problem with Disney being, that Disney+ is a relatively small and loss producing part of the company. Matthew Ball called it a cog in the Disney machine.
According to the theory, it makes sense for Disney to loose money in Streaming, because the increased brand loyalty will bring back the customers to buy merchandise, go into Disneyland or on Disney cruises.
If you rip out one part, the system can no longer feed on each other and falls apart.
And I don’t see Apple having interest in running theme parks that cannot scale like their other products do.
But let’s disregard the flywheel and say Apple buys only the Streaming part from Disney:
- Disney would be in a lot of trouble explaining to Wall Street how their future looks like. Cable makes money, but like drilling oil, the end of the cash cow is on the horizon.
- Apple would need to find a way to integrate Hulu, TV+ and Disney+. If you abandon the Disney+ or Apple TV+ brand, you leave money on the table, because both brands have their value. If you let the services continue on their own, do you tell your customers they have to switch between three apps to get all the content they own?
The only thing that makes sense in my mind is Disney selling Hulu to Apple, alongside some of the more adult content that is currently on Hulu. This would boost the content library of Apple while giving Disney some much needed cash. But that’s far from the dream weeding Apple pundits think of.
Furthermore, if such a thing made sense, why wasn’t it pursued before launching Disney+? I imagine Iger saying back then, “look folks, we made a new Joint Venture with Apple. They bring the tech and the distribution, we will bring the entertainment and content skills to the table. The result will kill Netflix. The service will be bundled with Apple One.”
But no such thing happened and in the meantime Apple prove to the world that it indeed can build watchable content on its own.
To summarise, the deal would go against
- how Apple deals with M&A and their suppliers
- the business model of Disney
- the timing
If you want to dive deeper on the Disney question, I can recommend the podcasts ATP and Upgrade.
You read the headline, you know what’s coming next: Apple should think about buying Nintendo.
Like with Disney, Apple shares some cultural values with Nintendo:
- Family-friendliness
- striving to be the best experience to the customer (in comparison to a good enough solution)
- strong, founder-like culture that obsesses over quality
- Valuing end user experience over tech specs (although Apple regressed on that point regarding the iPad)
- To my dismay, the ‘I-know-what’s-best-for-you’-attitude
- An ingrained love of simplicity
- Design-led engineering
- Innovation (at least in input methods)
(Doc Ayomide goes into greater detail than I can for this post, please read his article.)
Gaming as an entertainment category is big:
Not only that, it shows the most growth and will create new entertainment formats in the future — some call this vague idea Metaverse. I prefer not to initiate the conversation about ‘Metaverse’ at this time, but it seems obvious to me that Gaming has more future growth in it than watching TV.
The basic logic of the merger would look like this: While in TV, Apple has found its own way and only has to wait till someone like Paramount falls over and licenses out its content to others, Apple has no sound strategy in Gaming.
Apple Arcade has not made cultural splashes like its TV sibling has created. Most gaming enthusiasts are disappointed by Apples lack of engagement in that sector.
Partnerships and Nintendo’s experience in the gaming industry would be immensely helpful for Apple in the gaming area. Nintendo has a very strong brand and good relationships with gaming studios that Apple can leverage. Apple could use Nintendo’s resources to bring exciting gaming experiences to iOS and increase engagement with customers, especially since Nintendo has not utilised the mobile device landscape very well.
Nintendo has only one third of the market value of Disney — yet it has its own iconic IP: characters that are so long with us, we parents hand the love down to our children. The ability to combine nostalgia with innovation is a beautiful recipe for success.
Gaming is the first handheld device most of us owned before getting a smartphone. It makes perfect sense as an entry point for the iPhone lineup. Hence the now discontinued iPod Touch. The iPod Touch was not up to the gaming task, because Apple does not understand Gamers. Nintendo does.
Looking at stationary devices, the Apple TV lost the battle of being the device of choice to the cheaper Fire TV sticks in many homes anyway. Apple had all pieces in place for delivering console grade gaming with the Apple TV. But it never happened.
Apple does not understand Gamers. Nintendo does.
A hardware device that combines gaming aspects with streaming video (let’s call it Nintendo TV) could bring Apple back into the game (no pun intended) with a serious USP. With Nintendo, Apple could enter the gaming console market. It would use its existing supply chain to quickly deploy an ARM-based console. The graphical power of the M1 chip is considerably more powerful than the current Nintendo Switch.
Note, gaming consoles are no small market. In the last 6 years Nintendo sold more Switches than Apple sold Macs.
Plus, the merger would add a new category to Apples services-led product strategy. Nintendo Switch Online lets users play against each other over the internet for a yearly fee. Perfect for monetising the many casual gamers on Apples App Store.
And bringing AAA-titles to iOS would allow Apple and indie gaming studios to break away from the $0.99 price tag. Console games today enjoy very good margins.
Like with the rumored Disney aquisition, of course the Nintendo brand and operations would exist alongside Apple. The brand and the culture of Nintendo are a long-term asset, and Apple should allow it to flourish and keep it pristine in order to develop the next generation of gaming assets. Maybe the geographical divide would be of benefit in this case, letting Nintendo stay true to itself.
The skill overlap between the two companies is much more complimentary than with Disney. All the wile Gaming is closer to the techy homebase of Apple.
Again, the synergies are obvious.
