Reed and the Giant Apple

We've all heard the story of James and the Giant Peach. James is orphaned, left to live with his cruel aunts, and given a bag of glowing green things that he drops by a peach tree. A massive peach grows to 20 feet wide, falls off the tree and rolls over Aunt Spiker as James starts his fantastical journey.

Reed Hastings is about to live his own version of this popular story, but in this case it looks like he's Aunt Spiker and Steve Jobs is riding the giant Apple over his company, Netflix.

This week has seen a flurry of speculation and rumors about Apple's plans for its new North Carolina facility, which reportedly is now open after two years of clandestine preparations. CNBC has featured Jefferies analyst Peter Misek twice this week (on Street Signs and Fast Money. So what's really going on? Here are the facts, rumors and speculations. Add them up and form your own conclusions. Be prepared for something big.

The facts:

• Apple has been planning and constructing a massive data center in North Carolina for a long time.
• The facility has a reported cost of $1BN and will encompass either 500,000 or 1,000,000 square feet of space. Even at 500,000 square feet, this data center will be almost five times as large as their existing data center in Newark, CA.
• The facility takes up just 60 acres of the 180 acres owned by Apple in this location, and the company owns another 70 acres on the other side of Highway 321.
• According to Apple's official statements, this facility will be used for supporting iTunes, MobileMe (Apple's subscription-based service for personal management and file storage), and the company's corporate systems.
• The facility is up and running as of April 15, 2011, according to Fox News in Charlotte, NC.
• Apple has hired Kevin Timmons, the former general manager of Microsoft's data center group.
• Cablevision has been asked to remove content from some of its providers from its iPad application, and Viacom is currently battling Time Warner in court over similar issues with Time Warner's iPad application.  See PC Magazine article.

The rumors:

• Apple is rumored to have recently purchased 12 petabytes of storage capacity from Isilon Systems. The North Carolina data center is the logical place for housing this storage, but what does 12 petabytes really mean?
  • 1 petabyte is roughly equivalent to 1,000 terabytes, or 1,000,000 gigabytes
  • 12 petabytes of storage could hold over two billion songs in a typical MP3 format, or over three billion Amazon Kindle books. In other words, this is way too much storage for iTunes and corporate uses.
  • On the other hand, 12 petabytes is too small for a major cloud application filled with users' images, music, videos and other files. At 20 gigabytes per user, this much storage could only support around 500,000 users.
  • If this is too much storage for the stated purposes but too little for user-based cloud storage, for what purpose might 12 petabytes be appropriate? See the speculation below.
• Similarly, the size of the North Carolina data center seems too large for its stated purposes. In fact, there are rumors that Apple is actively planning another four or five similar data centers to be constructed around the world in the near future.
• The land itself is far more than is needed for the data center as well, and rumors include the possibility of an Apple East Coast campus, possibly to support the operations of the data center.

The speculation (everything below is pure speculation and is not based on any solid evidence confirmed by this author):

• Despite his amazing work ethic, Steve Jobs cannot continue with Apple forever. He has taken three major leaves of absence in the last few years. In a style befitting his flamboyant personality, many believe that his last hurrah will include finally bringing to market a truly integrated home entertainment experience that incorporates together TV, archived personal and mass media content, and the internet. On this note, Peter Misek mentions that Jobs' authorized biography is due out in 2012. Could this be a personal deadline of sorts?
• Viacom and other content providers have been working to remove their content from the cable providers' iPad applications in order to open the door to direct negotiations with Apple.
• 12 petabytes of storage is perfect for a subscription-based streaming video service to rival Netflix. This amount of storage could hold 503,316 Blu-ray discs at an average of 25 gigabytes of data on each disc.
• If Apple is about to announce a Netflix-killer, it is likely to incorporate music and video streaming together. With the capabilities of Apple's iOS, it could easily seamlessly integrate movement from one device to another. Combining this with internet access on those same devices, and possibly a basic level of cloud storage for images and files could set an entirely new standard.
• Apple has learned its lessons in recent years and returned to its hardware roots. Although a subscription-based Netflix-killer application could provide a very substantial revenue stream, the possibilities for new hardware to support this standard are much larger. Peter Misek's research has apparently turned up prototypes of TVs and set-top devices that could support such a system. He has referred to this as Apple's “assault on the living room” in a recent report. At the end of the day, hardware and device sales mean that Apple does not even need to make money on the subscription piece of the business. This could be the aspect of this deal that truly makes it a Netflix-killer.
• According to the report released by Peter Misek, Apple's new offering could add from $6-25BN to the company's top line in 2012.

If the rumors and speculation bear out, a major announcement is most likely forthcoming from Apple in the very near future. Reed Hasting's $2BN in revenues could begin to look quite small when competing with a company that spent almost that much in the last fiscal year just on IT assets.

A call on April 15, 2011 to the media helpline at Apple has not been returned at this time. Should Apple respond to any of the questions raised in this article, their responses will be posted in an updated version of this document.