Why Apple Should Buy Sony
Access to superior image sensors, a giant entertainment library and the PlayStation ecosystem… By any measure, Apple acquiring Sony makes a lot of sense.
Every three months, Apple’s quarterly earnings release triggers speculation about what Apple could or should do with its giant cash hoard. At last count (Q3 2017), “Apple’s cash position”, according to its SEC filings, amounted to $262B.
To put things in perspective, with that amount of money, Apple could acquire General Electric, Samsung or Royal Dutch Shell. Or easily gulping the two largest market capitalizations of the French stock market, LVMH, and Total.
Note that 94 percent of this cash is held outside the United States. If repatriated today, it would be submitted to a punishing 35 percent corporate tax. Apple, but also Microsoft, Cisco, Google, and Oracle have more than half a trillion dollars stashed overseas. All are waiting for a goodwill gesture from the Trump administration to lower the re-entry tax. They might even seek a better deal than reducing the corporate tax rate to 20 percent as currently touted by the White House.
I leave it up to the reader to assess the moral grounds of such gift to tech giants that already don’t pay their fair share to national economies:
Let’s go back to the topic of this column: For Apple, why would acquiring Sony make sense?
#1 Cornering the imaging sensor supply
The image sensor is a critical component of the iPhone. The smartphone industry as a whole captures about 30 percent of the CIS (CMOS Image Sensor) industry based on units and 69 percent in revenue. The chart below is lifted from a report by French tech research firm Yole Developpement:
This makes Apple, with its 212 million iPhones sold last year, one of the largest buyers in the world for such kind of chip.
As for Sony, it clearly dominates the image sensor market. Yole’s chart shows Sony’s 42 percent market share, well ahead of Samsung’s 18 percent. (A sample of the report is available here)
iPhone’s critical parts supply (screens, glass, CMOS sensor…) is Apple’s Achilles’ heel. Apple's 10K (pdf) makes very instructive reading on the supply chain's importance and complexity:
“Future operating results depend upon the Company’s ability to obtain components in sufficient quantities on commercially reasonable terms.”
On these issues, read Jean-Louis’ recent Monday Note:
More recently, an illustration of the fragility of Apple’s supply chain was given by reported iPhone X production issues with the OLED screen and the TrueDepth camera used in the face recognition feature.
Apple is addressing these questions in two ways: agreeing to large prepayments to its most important suppliers ($6.6B committed for long-term supply agreements in 2016) and by designing and contract-manufacturing a growing number of important components.
For instance, by making its own ISP (Image Signal Processing), Apple kills two birds with one (expensive) stone: it tailors an essential chip to its software specifications and it guarantees an uninterrupted flow for its supply chain. This strategy might not work for image sensors that are more complicated to manufacture than an ISP or a DSP (the specialized chip for audio processing).
Acquiring Sony would give Apple a huge competitive advantage: access to the most advanced chips of the industry, ahead of its smartphone competitors. Given the camera's importance to the iPhone, this is a strong competitive argument against Samsung’s Galaxy or Google’s Pixel.
In passing, Apple could also attack the juicy market of high-end cameras like the Sony Alpha 7 & 9 series which is about to dethrone Canon or Nikon DSLRs. In addition to exceptional low light capabilities, these cameras could embark iOS, and benefit from the thousands of photo applications in the AppStore. In doing so, by creating its own category, Apple could completely reinvent the high-end camera market.
For more on merging smartphone and camera, read this previous Monday Note.
#2 Access to Sony’s film, TV shows, and music catalog
Acquiring Sony, Apple would also get its hands on Sony Pictures Entertainment Inc. (SPE) properties, films and TV shows production and distribution. This includes scores of blockbusters (including Spiderman, whose four iterations grossed $1.4B!) and TV shows like Seinfeld. SPE is making about $8B a year in revenue.
A brand new Apple Pictures Entertainment built on SPE would make Apple one of the Big Six Hollywood studios, with a market share nearly at par with 20th Century Fox (both stood in the 10 percent range over the recent years). No doubt that, with the iTunes store, Apple TV, iPad and iPhone, an Apple-Sony Studios would thrive. (Expect a slight issue with Disney’s CEO Bob Iger who sits on Apple’s Board.)
At a time when original production is a key differentiator for Amazon or Netflix, an Apple creative pipe of films, TV shows and music (with Sony Music and its 22 percent market share) would make obvious sense.
#3 Connecting the PlayStation ecosystem to the iPhone
Sony’s Playstation dominates the game console sector with a market share of 57 percent and about $20B in sales. PS4’s sales are twice that of Microsoft’s Xbox and four times Nintendo’s Wii.
Getting unrestricted access to the PlayStation ecosystem — millions of players, thousands of game creators — would allow iPhones and iPads to take full advantage of their computational and graphics capabilities.
#4 Miscellaneous
There are scores of components in the Sony empire that could benefit the Apple product line. To name but a few: Sony TV sets, which could be a great fit to the Apple TV box; Sony’s VR gear to be integrated with the iPhone; or a lineup of monitors based on Sony products.
The cost of this operation? Well… Sony’s current market cap is about $47B, Apple’s $796B. Even assuming a significant premium, the deal wouldn’t even rank in history's top mergers.
