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If Apple’s soaring profits on the iPods and iPad and the recent sell-outs of the new Apple TV are of any indication, much of the company’s future with these devices is going to rely on the sales and distribution of content and applications on the App Store and on iTunes.
As the company grows, it’s going to need to expand its content distribution infrastructure. That means in order to get things like huge, bandwidth-hungry HD movies downloaded to iTunes or even streamed directly to Apple TVs and iPads, it is going to have to get that content in close proximity to the ISPs that provide broadband service to consumers as well to the Tier 1 providers that provide backhaul services to wireless carriers that sell the iPhone and iPad 3G worldwide.
Apple has invested lots of money in new datacenters to house servers and storage that power its back-end infrastructure — its most recent infrastructure expansion project was building a huge, One-Billion dollar 500,000 square foot facility located in North Carolina in order to house the iCloud infrastructure.
Rumor has it that Apple is looking into possibly doubling its size.
However, having huge centralized datacenters isn’t enough. It won’t solve latency issues globally, Apple will need to spend a considerable amount of money connecting these datacenters to the ISPs with high-speed links and possibly even replicate some of that data globally so that the most popular or in-demand content doesn’t overload the centralized infrastructure.
Content Distribution Networks, or CDNs, can solve these problems. Apple could build its own global CDN, or it could purchase an existing CDN, such as Limelight Networks (LLNW) or even Akamai (AKAM). Limelight is currently capitalized at about $347M and Akamai, which is considered the leader in the space, is hovering around a whopping $5.64B.
Both of which should be considered a bargain since that's about half of what they were capitalized at two years ago.
A lot has changed in the wireless landscape in the last two years for the iPhone and and the iPad. In the United States, AT&T lost its exclusive on the iPhone, and Verizon and Sprint joined in on the fun. But each carrier has had their own set of problems accommodating the devices and huge amounts of data demand from iPhone and iPad users.
Despite the phenomenal device growth on all the US carriers combined, It hasn't been as smooth a ride as everyone has wanted. Apple is an extremely customer service oriented company and having to leave the network support to the carriers is probably not something the company will ever admit to be happy about.
In order for Apple to not have to deal with carrier mishegas in the US anymore, it probably makes sense for it to become a carrier itself. Obviously, there would be significant regulatory issues that the company would have to overcome, but it wouldn’t be impossible for Apple to do.
In terms of actual infrastructure costs of what would be needed to build a 4G network, the company would be looking at anywhere between 5 and 10 billion dollars to pull it off, depending on whether or not they needed to build new towers, could piggyback their transceivers on existing ones, what backhaul services they would need to buy, network operations centers needed, et cetera.
Of course, Apple could just go and buy a carrier that already does business in the US. The logical choice would be Sprint/Nextel (S), which is currently capitalized at approximately $6.4B and already has a significant customer base.
The other carriers are way too big for the company to swallow. The next smallest would be T-Mobile USA, which is actually a subsidiary of Deutsche Telekom AG (DTEGY.PK) a German-owned company.
Apple could certainly offer to take the US subsidiary off the company’s hands, and it may still even be attractive for Deutsche Telekom to dump the asset, as it tried and failed to do in its aborted $39B acquisition with AT&T, but given how painful it is to buy a telecom company of any substantial size without going through a huge regulatory approval ordeal, it’s unlikely Apple could complete the transaction, even though it could easily finance it all by itself.
But you never know.
FaceBook. Uhhhhh, yeah. FaceBook.
As much as it drives me crazy, FaceBook is the hottest company right now next to Apple itself. And with over 800 million users sharing data and communicating, it makes it among the most desirable, if not the most desirable audience for Apple to integrate its products with.
This has become something of a hassle of late, as in 2010 Apple tried to launch its own pseudo-social network with iTunes version 10 in the form of Ping, which was supposed to have FaceBook connectivity at launch date but issues with last-minute negotiations apparently caused Apple to have to pull that feature from the software.
Apple also tried to get Facebook integrated into the last iOS 5 release that debuted with the iPhone 4S, but the companies failed to friend each other. As it happened, Apple chose to go with Twitter instead. There is some evidence to support that that iOS 5.1 will have Facebook integration, but we can only wait and see.
The problem of course is that FaceBook isn’t (yet) a publically-traded company and its market valuation depending on who you talk to is estimated between $50B and $100B.
That’s a huge chunk of change for Apple to blow even with its massive war chest for what is essentially a freakin’ web site, so the chances of the Fruit Loop and company completely sucking up Zuck and Friends is pretty close to nil.
For Apple to have a private controlling share it would probably have to cough up anywhere between 10 and 20 billion dollars in order to have a 20 to 30 percent stake in the company. Whether that would be actually enough for Zuckerberg and friends to seal the deal is unknown.
If the companies couldn’t come to some sort of agreement, Apple could certainly go head to head with FaceBook, by hiring away its top talent, and built an Apple Social Network, which I’m tentatively calling “iFriends”.
Also Read: FaceBook for Grownups — Can Apple, Microsoft or Google Build One? (May 2010)
I actually proposed this earlier in a piece I wrote about the maturity and questionable ethics of FaceBook and its founders, because I believe Apple does indeed have the skills and talent to produce a high quality and secure, family-friendly Social Network. But iFriends would have to be something of a Manhattan Project for the company, and it would likely eat up at least a billion dollars in development and infrastructure, if not more.
If not FaceBook, perhaps Apple should consider going the professional network route, and throw some cash at LinkedIn, which in 2008 was valued at about $1B. Apple could probably snatch up the whole thing for around twice that today, if not significantly less. And unlike a fresh Social Network that Apple would have to build from scratch, it already comes with a strong user base.
That might actually allow the company to make some serious inroads with the enterprise and business crowd, which may still have reasons to be tied to their uncool BlackBerries and may see a business networking advantage integrated into their smartphones and tablets as a reason to switch to Apple’s platform.
And then of course, there's Twitter, which like LinkedIn is still a private company that Apple could make a huge land grab on.