Calls for Apple to buy Netflix are getting louder. Instead of evaluating whether Apple should buy Netflix, a more valuable question is whether or not Apple actually needs to buy Netflix to accomplish its goals. Upon closer examination, it becomes clear that calls to buy Netflix are misplaced as Apple is chasing after something entirely different in the video streaming space.

Music Streaming Lessons

One way to judge Apple's approach to video streaming is to look at how the company approached music streaming. In 2014, Apple had a growing problem on its hands. A music streaming startup called Spotify had amassed 40 million subscribers by positioning free music as a carrot for signing up to paid music streaming, for which there were 10 million paying subscribers. While Apple was still seeing increasing revenues from its paid music download empire, the company lacked a viable music streaming alternative. iTunes Radio wasn't an answer as it was chained to the paid download model.

With $147 billion of cash on the balance sheet at the end of 2013, Apple could have bought Spotify for $15 billion in 2014. Apple would have not only acquired an entirely new business model for content, but also solved its music streaming service problem overnight. Spotify would have had a difficult time turning down Apple's offer since $15 billion would be overvaluing the firm.

Instead of buying Spotify, Apple bought Beats for $3 billion in 2014. Three years later, many are still not sure what to make of the acquisition. Beats was a headphones company with a questionable balance sheet. The company also had a fledgling music streaming business via its MOG acquisition two years earlier. These items didn't position Beats as a traditional Apple acquisition target. If management wanted quick access to a successful music streaming service, the obvious path forward ran through Spotify, not Beats.

However, Apple wasn't looking to buy just a music streaming service. Instead, Tim Cook and Eddy Cue, Apple SVP of Internet Software and Services, were looking for a long-term vision as to how Apple should approach music content. Beats co-founder Jimmy Iovine was selling that vision. In fact, Iovine had tried to sell that vision to Apple more than a decade earlier as co-founder of Interscope Records. With Spotify gaining power and cracks beginning to appear at the edges of the iTunes empire, Apple decided it was time to buy into Iovine's vision in 2014. Instead of buying Spotify, Apple bought Jimmy Iovine.

Music M&A

Apple relies on a very particular M&A strategy. Management acquires companies in order to fill holes in product strategy. As a result, Apple uses M&A primarily to buy technology and teams of people behind a certain technology. In such a scenario, the product is placed above all else. In recent years, Apple has been an active acquirer, buying 15 to 20 smaller companies every year.

Apple looked at its music strategy and concluded that the product hole involved more than just streaming technology. If that were the case, Spotify would have done a great job at plugging up that hole for Apple. Instead, management saw weakness when it came to talent, ideas, and a broader vision for content. Apple wanted fresh connections and relationships with the music industry - items Spotify lacked. Management was searching for a vision as to how it could strengthen its relationship with Hollywood, push the music industry forward, and strengthen the iOS ecosystem. Jimmy Iovine and the Beats team, including former music industry executives such as Larry Jackson, had the relationships Apple was chasing.

Streaming Results

By acquiring Beats, has Apple's streaming music plans worked out? Would Apple have done better by acquiring Spotify? As seen in the following chart, Apple Music has done well when looking at the number of paid subscribers. While some thought the product had little chance of gaining adoption out of the gate, Apple now has more than 20 million paying subscribers after just 17 months in the market. Apple management is likely pleased with that total. The service has obviously benefited from Apple's extensive marketing campaign as well as prominent placement within the iOS platform. The company has unofficially positioned its goal as surpassing 100 million paying subscribers.