Why Apple Still May Need to Do a Big Media Deal

But to keep pushing the stock price higher, Apple is trying to convince investors it has a few more tricks up its sleeve than just a super cool 10th anniversary edition of the iconic smartphone. As part of the effort, Apple executives last month pledged to double the size of their $24 billion-a-year services business in four years.

That has puzzled some analysts because growth in services revenue—which includes Apple’s cut on everything from songs and movies bought at the iTunes Store to apps and Apple Music subscriptions—has slowed. For the holiday quarter last year, services revenue increased 18%, down from a 26% increase at the end of 2015. And analysts were expecting about 14% annual growth over the next few years, according to at Simona Jankowski at Goldman Sachs (GS).

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Toni Sacconaghi, a longtime Apple analyst, last week tried to estimate how Apple could find the additional $24 billion of annual services revenue in just four years—almost triple the sales of Netflix or about equal to the sales of Qualcomm (QCOM), Halliburton (HAL), or McDonald’s (MCD).

Is Apple so gargantuan now that it can generate new business exceeding the Big Mac in just four years? Assuming even a healthy 27% increase Apple’s installed base—the total number of people using iPhones and iPads—and projecting that each customer will also increase their individual spending by 20% over the four years, Apple would be $13 billion short, the Bernstein analyst calculated. UBS analyst Steve Milunovich was more generous to Apple, but pegged the shortfall at $5 billion to $8 billion.

To Sacconaghi, Milunovich, and many others on Wall Street, the gap is a strong sign that Apple is planning for what investors call “inorganic” growth, or in simpler terms, a major acquisition to meet the goal.

Mixed Messages

Since revealing the target, Apple CEO Tim Cook and other top executives have been all over the map in discussing their strategy. The company never reveals future products, and it would be foolish to name M&A targets before negotiating a deal. But even with those limits, the message has been a bit messy.

It could be that Apple had mapped out multiple paths, with acquisitions needed only if optimistic hopes for in-house growth fall short. That sounded like the takeaway from CFO Luca Maestri, as he offered some new hints on Tuesday speaking at a Goldman Sachs conference in San Francisco.

“We don’t know exactly how we’re going to get there,” he said when asked about the doubling goal. “Although, we see a lot of trends that are very positive for us, and we will continue to push on all these fronts.”

Apple made the internal goal public to “send a message” to investors about the importance of the services business to the company, he added. That can be a dangerous game if the message gets ahead of the strategy and tactics for achieving a big goal, as IBM (IBM), for example, discovered after loudly declaring in 2010 it would double earnings per share to $20 in five years. The figure reached just $12.39 last year.

And it’s not like Apple is off to a big start without making an acquisition. So far, its major push is financing a couple of new TV shows. New episodes of TV host James Corden’s comedy skit Carpool Karaoke and a new reality business show, dubbed Planet of the Apps, will run as exclusives on the Apple Music digital streaming service this spring. Expect more similar efforts soon.

Related: Watch the First Trailer for Apple’s Carpool Karaoke

“There are a bunch of projects. We’re in it. This is what Apple Music is going to be,” Jimmy Iovine, who oversees the music unit, told the New York Times on Monday. “Apple Music will have video and other things that I can’t talk about. We’re going to be aggressive about it.”

How that would slowly building approach would add the missing $13 billion is hard to figure. Netflix (NFLX) and Amazon (AMZN) spend billions of dollars of year on original content and have been at it for years.

Eddy Cue, Apple’s senior vice president overseeing basically the entire services business, tried to tamp down the merger speculation when he was repeatedly asked about the issue in an appearance at the Code Media technology conference in Southern California on Monday night.

“If we wanted to do what everybody else is doing, then you’re right, we might be better off buying somebody or doing that,” Cue said in his widely reported first crack at the question. “But that’s not what we’re trying to do.”

But Cue can be a slippery speaker to pin down, even among Apple executives. As the merger question kept coming back up, Cue’s answers got increasingly open ended and showed, perhaps, a flash of frustration.

“Everybody wants me to come up here and basically say ‘hey, we’re going to do the same thing Netflix is and we’re going to be just as big’ or whatever,” Cue said an hour deep into the appearance. “It’s, I, four years from now I don’t know where we will be in relation to this…how fast it grows and where it goes remains to be seen.”

It probably didn’t give investors more confidence when Cue later answered a question about Apple’s expected return on investment from the video efforts: “We didn’t go looking at this from an economic point of view of trying to do the math or that standpoint.”

Possible Targets

Cook ignited the speculation of a big media or entertainment acquisition on the January 31 earnings call, when the doubling goal was announced. After noting that Apple (AAPL) would consider acquisitions of any size—even though it has stuck to relatively small deals in the past—Cook mentioned the company’s recent efforts to back a few original video shows.

“We are obviously with our toe in the water, we’re learning a lot about the original content business, and thinking about ways that we could play in that,” Cook said. With the first two video deals, “we’re learning from that and we’ll go from there,” he added.

For more on Apple’s entertainment foray, watch:

Netflix, with its $60 billion market cap, has been one widely discussed—if expensive—acquisition option. Copying AT&T’s (T) $109 billion Time Warner (TWX) purchase by going after an entertainment giant like CBS (CBS) or Walt Disney (DIS) is hard to fathom, but Apple is expected to get access to the more than $200 billion it has stashed overseas via likely tax reform moves.

Other possibilities analysts have mentioned include service targets outside of big media, like video game maker Activision Blizzard (ATVI) or online payments star PayPal (PYPL).

Given all the recent chatter, however, it may take a while to sort this one out.