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Apple Looking to Take on Netflix?

With the iPhone and iPad both bonafide successes, some folks are already speculating where Apple might be headed next. One potential play for Apple is to infiltrate the living room via an Apple branded HDTV, a rumor that has been picking up momentum in recent months. Taking things further, Jefferies analyst Peter Misek recently opined that with Apple's massive data center in North Carolina set to become operational, Apple's living room plans will extend far beyond hardware and will involve a streaming video service to rival Netflix.

There has of course been a lot of talk surrounding Apple's North Carolina data center and what exactly its going to be used for. Many theorize that it will play an integral role in Apple's cloud strategy where users will be able to permanently back up their purchased content from iTunes. That's all well and good, but Apple often tends to dream big and has made a lot of coin using attractive software to push their high margin software.

So where might that lead us?

In a recent report to investors, Misek laid out a few reasons why a video subscription service akin to Netflix might be in the cards for Apple. For starters, not only is Apple's data center in North Carolina the biggest of its kind, easily dwarfing similar data centers from companies like Google and Microsoft, but Apple is reportedly building a second data center next to the original and may be eying other locations in the US as well. Misek envisions that these data centers will help pump out video for an Apple video service, pointing out: "We find it notable that the content companies, citing a lack of domain license, asked Cablevision to remove channels from its iPad app. We believe these same companies are negotiating some sort of deal with Apple."

Theorizing how it might work, Misek writes that "Apple has learned much from having Netflix on the Apple TV" and that it's only natural for Apple to want to get in on that market:

"So how does Apple convince Hollywood and other content creators to license it? In our view, the best way to do that would be the model they use for App developers: let them take the vast majority of the revenue while you use the content to drive device sales and monetize it that way. We are huge fans of iTunes, but that cannot be it from Apple. There is another level coming here and we see this as one of the most fruitful potential uses of Apple's enormous cash hoard."

Obviously, the underlying benefit to a video service from Apple is that it would help drive sales of iPads, iPod Touches, iPhones, and perhaps later down the line, an Apple HDTV. Remember, Apple has never made that much money with the iTunes Music Store but rather leveraged it to help sell hardware. A similar strategy for video where the content makers get the bulk of the revenue while Apple gets fat on hardware sales is certainly plausible.

As it stands now, Netflix has approximately 20.1 million subscribers and is the reigning king of streaming and video downloads. Data compiled by the NPD group in Jan. and Feb of 2011 revealed that more than 60% of all downloaded and streamed videos in the US are via Netflix. Apple meanwhile has a low share of 4%, putting it in a three way tie with DirecTV and Time Warner. Further, it's been estimated that Apple has about 475,000 daily rentals on iTunes compared to 2.6 million daily rentals via Netflix.

That's a lot of rentals and it would only make sense for Apple to want to get in on that action. If users are already on their computers downloading and watching video content, why wouldn't Apple want to supply that video as a means to push its own hardware?

With millions upon millions of credit cards on file, Apple is in a unique position to roll out a video subscription service to a user base already familiar with using iTunes and Apple products. Netflix is wildly popular, and a competing service via iTunes would certainly present an intriguing opportunity for Apple.

Also remember that last week a report emerged that Apple had purchased 12 petabytes of storage with the purported purpose to support downloadable video content. Clearly, Apple has something bubbling up beneath the surface.

Lastly, Misek also believes Apple will deliver an HDTV sometime in 2012 or 2013, echoing similar reports that have come up in the past couple of months.

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