A PREDICTION OF WHAT APPLE WILL DO WITH THAT $51 BILLION IN CASH IT HAS IN THE BANK

When Steve Jobs was recently asked how he planned on spending any of Apple’s $51 billion in cash via a dividend or stock buyback, he explained that he had something else in mind. 

Concurrent with Apple's recent fourth quarter revenue announcement, Steve Job commented when asked about that $51 billion in cash, “We strongly believe that one or more very strategic opportunities may come along that we’re in unique opportunity to take advantage of because of our cash,” and we want to keep our powder dry “because we feel that there are one or more” opportunities in the future.

So what will Apple do with that $51 billion in cash?  Answer: Whatever Steve Jobs wants.  And Steve has big plans for Apple.

Let's look at Apple's business segments for some kind of hint for the type of acquisition that makes the most sense.

Apple's iTunes is now the market leader in digital music downloads and you may even proclaim it as the digital music download standard.  With all those iPods out there, Jobs can rest assured that Apple loyalists will continue to happily pay $1.00 per music download for years to come.  Steve wants the music content, not the headaches, business risks and unpredictability of music producers.  For these reasons, I do not see Apple acquiring a music label.  Jobs has pretty good deals with all of them and making good money.  

Apple dominates the mobile app market with over 250,000 apps, compared to Android's 150,000.  He makes 30% off of the sale of apps.  That's easy money, and Apple does not have to work very hard.  The iAd advertising network, gives Apple absolute control over all iPhone mobile app advertising.  Apple has it pretty good when it comes to mobile apps.  Apple really doesn't need to acquire a mobile app provider like a Zynga.  They come to Apple if they want to sell their apps and social games.   

The Apple iPhone is quickly becoming the smartphone market leader.  All competing mobile phone makers are coming out with touchscreen phones, now the new standard for smartphones, but Apple has first-mover advantages, thanks to a two-year head start.  The Apple iPhone has already passed No 2 RIM Blackberry and has its sights on Google Android-based phones.   The iPhone 4 set new sales records, selling 14.1 million units in the recent fourth quarter.  Nope. I don't think Steve will be buying another cell phone maker.  

The magical Apple iPad tablet computer is a game-changer that threatens sales of laptops and netbook computers.  Since the second quarter 2010, Apple has sold 7.4 million iPads, and is well on its way to sell a minimum of 10 million units by year end 2010.   Again, competitors are lining up to take on the iPad, from Dell to Samsung.   Several producers are coming out with 7" inch screens, but Jobs believes that the iPad's 10-in screen is better suited for video, graphics and surfing the Net.  And he is right.  The iPad's faster, offers crisper graphics, larger memory, larger screen and lower price, even without a built-in webcam or support for Flash, has catipulted Apple to No 1 in tablet computers.  About his competitors, Jobs could not have said it any better:  "They are dead on arrival".

It was thought that the Apple iPhone and iPad would present a problem for corporate users, but this does not appear to be the case.  Corporations and their employees are buying the iPhone like there is no tomorrow.  In a recent poll, up to 40% of RIM BlackBerry phone owners said they planned on switching to the iPhone.  The iPad is now getting serious attention by the CTO's of 60% of the Fortune 500, and I predict will soon become the industry standard for tablet computers.   

The iMac is still the best desktop computer out there, bar none.  It does not lead the desktop computer market, mind you, the PC clones do, but it is winning over corporate America.  It's market share, once about 7% of PC's is now approaching 15%, and within five years could represent a real threat to Microsoft, which has made its living off the desktop and enterprise.

$51 billion is a lot of cash to have lying around, and investor's will want to know what kind of returns that cash is generating.  Given today's low interest yields, it is going to be next to impossible to generate attractive returns either short or long-term.   Therefore, this begs the question as to what Steve Jobs will do with that cash.   Jobs talks about making one or more strategic acquisitions and he is "keeping his powder dry".   A company on the scale of Apple must make large, very significant acquisitions, that are complimentary, and fit the Apple business model, that can generate large returns.  I know of only two:

• Acquire a Social Network -  Steve Jobs is definitely interested in building his own social network.  This started with PING, a social network for iTunes members.  But, that effort has all but failed.  Something that rarely happens to Steve Jobs.  News about PING have been all but drowned out by the iPhone and iPad.  Apple is now adding Game Center, a social network for gamers.  According to the LCM Online Game Forecast, worldwide online games will hit $18.1 billion in 2010, growing by 33% since 2009, but social games will generate revenues of $1.3 billion and grow by 92% during the same period.  Social games are projected to exceed $5 billion by 2015.   If you believe in TechCrunch's prediction, Facebook will generate $37 billion in revenues within five years, and will nab $3 billion of social games.  
• Acquire a Media Company -  Given Apple's recent difficulties negotiating prices for digital print and video content for the iPad and iTunes from book and magazines publishers, TV networks and film studios, acquiring a large media company might be on the table.   250,000 Apple TV's have been sold since its launch in early October.  Steve Jobs makes no qualms that he wants Apple TV to be a big seller, combining content from Apple iPhone and iPad apps, TV programs and video from the film studios.  If Apple can acquire a large media company, he can use that leverage to dramatically increase sales of Apple TV and create an increasing returns business that will benefit all other Apple digital devices.  Apple TV presents a real threat to the cable TV companies, so acquiring a large cable company might be a distinct possibility.

So what do I believe Steve Jobs will do with that $51 billion in cash?   Drum roll please!!  Steve will acquire a large media company.  He needs that content more than he needs a social network.  He needs to add another spoke to his "digital hub", the core (no pun intended) of Apple's business model that has transformed the company from a pure play computer company centered around the Mac, to a major consumer digital device producer.  

Facebook commands a minimum price tag of $30 billion plus a slight premium.  That's do-able, but a big fish to swallow.  There are cultural differences between a digital media device company like Apple and a pure play social network like Facebook.  Google discovered this cultural gap first hand after launching the failed BUZZ, then finding it necessary to recruit engineers with social networking experience.  So an acquisition of Facebook, the only big fish in the pond, is the only deal that makes some sense (albeit dimly), but this is not going to happen. Facebook recently announced that it will produce a social mobile phone, putting it in direct competition with Apple.  Besides, I don't think Mark Zuckerberg has any inclination to report to Steve Jobs. There can only be one head Chief.  Remember what Zuck's business card says, "I'm CEO, Bitch".  

So which large media company will Apple acquire?  I am betting that Steve Jobs will acquire a cable TV company.  Cable TV companies have a near monopoly, and have control over a huge number of eyeballs.  Besides, they are 100% digital now.  A perfect fit for Steve's "Digital Hub".  Steve needs those eyeballs if he is to make Apple TV the huge success he envisions.  

Let's look at some numbers.  98% of U.S. households now own a television.  Two-thirds of U.S. households now own a HDTV.   The U.S. internet population is now 266 million or a penetration of 77%.  I can definitely see an Apple TV set top box in your living room or den.  So which Cable TV companies will Steve Jobs acquire? Let's look at the Big Five cable TV companies ranked by subscribers.

• 1. Comcast Corporation Subscripers: 23,891,000  - Revenues: $35.75 billion (2009)   Current Market Value: $40.2 billion
• 2. Time Warner Cable, Inc. Subscribers: 13,048,000 - Revenues: $17.9 billion (2009) - Current Market Value: $20 billion
• 3. Cox Communications, Inc.  (Owned by Cox Enterprises, a private company):  Subscribers: 5,316,100 - Revenues:  $9.0 billion (Cable TV only) - Current Market Value:  $10 billion (Estimated)
• 4. Charter Communications, Inc. Subscribers: 4,929,900 - Revenues:  $6.7 billion (2009) - Current Market Value: $4.0 billion 
• 5. Cablevision Systems Corporation  Subscribers: 3,093,000 - Revenues: $7.7 billion - Current Market Value: $7 billion

With the exception of Cox Communications, which is privately-owned by Cox Enterprises, the other four are public companies.   The number of subscribers, revenues and current market values were easily obtained from the stock exchanges, or in the case of Cox Communications, taken right off of the Cox Enterprises website.

Okay, so which one should Steve Jobs acquire?  I am going with either Comcast or Time Warner Cable.  Comcast is the big catch.  The only negative is the $40 billion price tag, not including a premium.  That's a pretty big fish for Apple to swallow, but still do-able.   Let's compare each company by business segment (cable TV, internet and telephone):

• Comcast:  23.8 million cable TV subscribers in 39 states, 15.9 million internet subscribers, and 6.4 million telephone customers.   
• Time Warner Cable:  13 million cable TV subscribers in 27 states, 9.2 million internet subscribers, and 4.3 million telephone customers. 

Comcast is larger in all three business segments and, most importantly, they have a presence in 39 states, versus only 27 for Time Warner Cable.

Steve Jobs' logic tells me that acquiring either company would immediately yield him a captured audience of millions of cable TV viewers and Internet users who could then become Apple TV customers.  

Comcast is the more attractive acquisition target, because of their larger cable TV and internet subscriber numbers. How many of them would be willing to add Apple TV to their services?  I bet you that Steve has already polled his customers and knows how many Apple loyalists are using Comcast or Time Warner Cable.  Apple customers are real brand loyalists and once they become Apple TV customers, remain customers for life.   

Acquiring a cable TV company presents a lot less head ache for Apple, because the cable TV companies already have long standing relationships with the content providers -- namely, the film studios and TV networks.

Although the cable TV industry has grown sluggishly, losing subscribers to the Great Recession, while others have gone online for their information, news and entertainment, let's not forget that they are cash cows.  This is an acquisition that can easily pay for itself in a few years without hurting Apple.  Besides, Apple could be generating $100 billion in cash within two or three years from its existing products.  This does not include potential revenues from new products that Jobs and his product designers and engineers are working on right now.

The acquisition of a cable TV company should not present any FTC or FCC legal hurdles, so an acquisition should be approved rather quickly.

I predicted that South Carolina would upset Alabama, a PAC-10 team could beat Texas (UCLA stomped Texas, 31-7), and that Wisconsin would upset Michigan.   So, maybe I could be right again.     

An original work by Tommy Toy, PBT Consulting

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