Apple May Become a Hollywood Player if Interest in Time Warner Turns Into Acquisition

Company Under Pressure to Expand as iPhone Sales Slow

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Even if Apple never made an actual move to buy Time Warner, a tentative approach shows that the iPhone maker is serious about getting into media content.

Eddy Cue, who's in charge of iTunes and Apple Music, brought up the idea of a possible deal with Time Warner corporate strategy head Olaf Olafsson in a meeting late last year, according to a person familiar with the situation. While the two never started negotiations, Time Warner, which owns HBO and the Warner Brothers studio, is on the top of the list of media companies Apple would buy should it eventually commit to the content business, the person said.

As iPhone sales slow, Apple is under pressure to show that it can grow in other areas, particularly in services. Chief Executive Officer Tim Cook has emphasized the expansion of non-hardware businesses such as music, the App Store and iCloud as a way of stabilizing revenue.

After introducing a streaming music service a year ago and revamping the Apple TV set-top box in October, speculation has been rife about the possibility of the company starting a film and television streaming service to rival Amazon's Prime and Netflix. Both have already thrown down a ton of money to procure exclusive content and are now spending heavily to create their own shows and movies.

"For Time Warner -- and essentially HBO -- to become Apple's original content production assets in some form or another, that would very much help it catch up with the likes of Netflix and Amazon in terms of having potentially quality proprietary content on its platform," said James Cordwell, an analyst at Atlantic Securities.

The Financial Times reported the discussions earlier Thursday. The discussions never progressed beyond a preliminary stage and never included the respective companies' chief executives, the newspaper said.

Apple has tried to break into television for years, but has faced a number of roadblocks in the content business. Talks with TV networks such as CBS and 21st Century Fox to license their content for a live television service fell apart last year. Apple was attempting to offer a web package of the most popular channels for $40 a month -- known as a "skinny bundle" -- which would cost about half of the average cable bill in the U.S. Late last year, CBS CEO Les Moonves said Apple put the plans for the service on hold.

In the meantime, Apple has focused on building entertainment content for its set-top box, holding talks with media executives about obtaining exclusive shows for Apple TV. Apple is also starting to create original programming of its own, making a TV series with rapper and producer Dr. Dre.

Owning a content company could provide Apple with some leverage to negotiate with the other networks for licensing rights, Mr. Cordwell said.

Time Warner, with a market capitalization of more than $55 billion, would be a difficult purchase for Apple to make, he said, pointing to Apple's small stash of domestic funds. Most of the company's more than $200 billion cash hoard is stored overseas, and tax laws in the U.S. have made repatriation difficult.

"If there was an international production house with content popular in the U.S., I'd think that would be an ideal fit for Apple," he said.

Time Warner is not the only media company Apple could buy, BTIG analyst Rich Greenfield said. Viacom could also be for sale soon depending on how the fight over Sumner Redstone's estate plays out, Greenfield said. Viacom is already selling a stake in Paramount studios. Netflix is potentially another option, but pursuing the subscription service would represent a different strategy, he said.

"Netflix has a substantially bigger global distribution platform than anybody else in the industry," Mr. Greenfield said. "When you look at Warner Bros. and HBO, those are really content creation engines. It depends on whether Apple wants to own content or own a distribution platform, or both."

Gene Munster, an analyst at Piper Jaffray Cos., is skeptical that buying one content company makes sense for Apple's broader media ambitions. "Apple is intensely interested at fixing the content problem," he said on Bloomberg Radio. Spending a ton of cash on one company wouldn't solve the problem, because Apple "wants a solution that has everything," he said.

-- Bloomberg News