The 'clock has struck midnight' for Apple: it needs to buy a major Hollywood studio this year or lose the streaming war to Netflix and Amazon

• Apple needs to buy a video production studio to boost its upcoming streaming video offering and its larger services business, Wedbush analyst Daniel Ives said.
• The decision on whether to do such a deal is a crucial one for the company, he said.
• A successful acquisition could make Apple a significant player in the video streaming and boost its revenue and share price.
• The failure to make such a deal would leave Apple's video effort and its overall business struggling, Ives said.

The impending launch of Apple's streaming video service is going to drive the company to a crucial crossroads, Wedbush analyst Daniel Ives believes.

For the service to catch on with customers - and successfully compete against rival services from Netflix, Disney, Amazon, and others - Apple's going to need to be able to offer subscribers plenty of its own shows and movies, Ives said in a new note.

The iPhone maker has two choices before it:

• Continue to develop content on its own
• Or buy a video production studio that already has a deep catalog of movies and shows

To Ives, the choice is stark, and the right decision obvious.

"Now is the time for Apple to rip off the band-aid and finally do significant content [mergers and acquisitions] with the landscape ripe," Ives said in the note. "Otherwise it will be a major strategic mistake that will haunt the company for years to come, as content is the rocket fuel in the services engine and currently missing in the portfolio."

Ives has been beating this drum for a while now. Last month, he listed some of the companies that Apple could acquire to bulk up its content offerings, naming A24, which was behind "Lady Bird," and Lionsgate, which produced "The Hunger Games" series.

Read this: Apple needs to get serious about video. Here are 3 Hollywood studios it could buy to boost its new streaming service.

For Apple, the stakes are high

But his latest note emphasized what he sees as the stakes of the decision. Apple's iPhone sales are set to decline significantly this year. The company has largely missed out on the smart speaker and broader smart home markets. It hasn't been able to develop Apple Watch into a broad, mainstream success. And it's struggled in other product areas, including artificial intelligence and self-driving cars.

Apple "has either invested too little, made strategic blunders, and/or been late to the game on key consumer technology areas," Ives said.

The big bright hope for the company is in its services business, which includes everything from its Apple Music streaming and iCloud storage offerings to the licensing revenue it gets for making Google the default search engine on the iPhone. Apple's services revenue has been growing at an annual rate of more than 20% for the last two years, and the company has forecast that it will hit $50 billion in revenue by 2020.

But for the business to really take off, Apple needs to convince more customers to sign up for its services, and to do that, it needs a streaming video service, Ives said. If Apple is successful, it's streaming business could have 100 million subscribers in three to five years, he said. That alone would add about $15 a share to Apple's stock price - or about $70 billion to its valuation, he said. Apple's shares closed Thursday at $171.06, giving it a market capitalization of $807 billion.

"A key missing piece in the Apple portfolio was a streaming video content service that we strongly believe will prove to be the 'tip of the spear'" in getting more of its customers to sign up for its services, Ives said. "The services business," he continued, "remains the wild card in driving the valuation higher for Apple"

Apple risks being left behind by rivals

But in order for the company's video offering to be successful and to hit the subscriber numbers Ives is predicting, it's going to need a library that's well-stocked with movies and shows, he said. Although Apple has already been investing in such content, in doesn't yet have much to offer, especially compared with Netflix and its other rivals. And its investment in content - about $1 billion a year - is a fraction of what several of its competitors are spending, much less the industry as a whole, Ives noted.

To catch up, Apple's going to need to do something that it's only done once in the past - make a major acquisition, Ives said. The company's biggest purchase to date was its $3 billion acquisition of Beats in 2014. But it may have to spend significantly more than that to get a sizeable library of movies and shows, he suggested. It has plenty of money to make an acquisition, he noted; Apple ended last year with about $245 billion in cash and marketable securities.

"While acquisitions have not been in Apple's core DNA, the clock has struck midnight for Cupertino," he said. "Building content organically is a slow and arduous path, he continued, "which highlights the clear need for Apple to do larger, strategic M&A around content over the coming year to 'double down' and drive the services flywheel."

The choice is really a no-brainer, Ives said. If Apple makes a smart content acquisition, it's likely to develop a successful video business and continue building its services segment. If it doesn't make such an acquisition, its video business and its larger services effort are imperiled, he said.

Making such an acquisition "is absolutely critical for Apple's growth prospects going forward," Ives said. Failure to do a deal this year, he continued, will leave the company with an Everest-like battle in its quest to become a formidable streaming player."

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