4 Reasons Why Amazon Should Buy Netflix

Gossip has a funny way of inflating stocks. Yesterday it was Netflix (Nasdaq: NFLX  ) climbing 6% higher on whispers of an Amazon.com (Nasdaq: AMZN  ) buyout. It's easy to see why Netflix would jump at the reported $34 per-share price.

Not only is it a 59% premium to where the stock closed at on Monday, but it also comes during a very trying quarter for Netflix. If the company's subscriber count clocks in at the low end of its projected range, this would be the first quarter in the company's history that it loses more subscribers than it gains. Obviously, it's hard to grow while you shrink.

So Netflix is vulnerable at this point. Sure, it writes off digital delivery as only a long-term threat, but aggressive moves by companies like Apple (Nasdaq: AAPL  ) and Amazon -- as well as expansive video on demand offerings from companies like Comcast (Nasdaq: CMCSA  ) -- seem to indicate otherwise.

The future is already here. Netflix has to know it, having dramatically reduced its subscriber count guidance earlier this year.

So the real question here isn't one of the availability of Netflix. The real question is, why would Amazon find Netflix attractive? If Amazon's Unbox service is aiming to squash physical DVD rentals, why would it snuggle up to a supposed has-been like Netflix?

Like any good buyout rumor, there are deeper reasons that deem it plausible.

1. Capture the brand
Netflix has as close as you can get to a golden brand in e-commerce. Last week, market researcher ForeSee tapped Netflix and QVC.com as the Web's highest-rated players in customer service. Yes, Netflix outscored even Amazon.

Netflix is synonymous with movie rentals, and rebranding its Amazon Unbox digital service as a Netflix online offering would give the fledgling service a major boost.

2. Capture the audience
Inheriting the 6.8 million happy Netflix subscribers isn't just about the beefy number. Keep in mind that this is an audience of consumers with enough disposable income to enter into a subscription deal with Netflix and with expectations of several monthly transactions with a company they trust.

Netflix has evolved to push marked-down versions of some of its overstocked DVDs to its consumers, but Amazon is the company that can also sell you the related book, video game, soundtrack, and licensed bed sheets. Sure, it has to be a soft sell. Amazon can't alienate the trusting user base. However, the potential is there for the mining.

3. Capture the data points
Anyone who has been delighted at following through on a Netflix recommendation -- the discs that the service recommends after you rent and rate a few titles -- can vouch for how Netflix knows them even better than their own Unbox-friendly TiVo (Nasdaq: TIVO  ) .

Netflix excels at munching data. If it knows how you feel about certain movies, it can scour its database to see others who feel the same way. Then it's just a matter of cross-recommending the other highly rated titles.

Amazon is no dummy. It pitches items on its landing page to you based on your purchasing and viewing habits. How much better can Amazon be if it knew its customers even better? You know the answer. More importantly, a Netflix-armed Amazon would know you know the answer.

4. Capture the content
Amazon's Web 2.0 ways find it pitching message boards on individual merchandise pages, as well as a collection of customer product reviews. Netflix has an articulate audience that loves to share thoughts and armchair critiques of movies big and small.

All of this would be more data for Amazon to massage and repackage if it had Netflix in its back pocket.

These four reasons aren't enough to justify Amazon overpaying for Netflix, but if Amazon is able to build on all of these reasons, the company would be getting a bargain even if a desperate Netflix may be had for even less if it does, indeed, close out the second quarter with fewer subscribers than it started with.

Amazon.com, Netflix, and TiVo are Stock Advisor recommendations. Find out why with a 30-day trial subscription offer.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. He also owns shares in TiVo. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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11/28/2014 9:45 AM
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