4 Reasons Why Netflix Will Say No

Amaflix? Netazon? The Microhoo-esque amalgamations don't quite fit, and neither do yesterday's rumors that Amazon.com (Nasdaq: AMZN  ) might want to acquire Netflix (Nasdaq: NFLX  ) .

Investors still bought the bogus chatter, sending shares of Netflix 5% higher on the day.

The deal won't happen. Well, just to be on the safe side, it probably won't happen. There are several reasons why Amazon won't bother to bid a meaty premium to get its hands on Netflix.

1. Thinking inside the Unbox
Amazon and Netflix have taken different paths to digital distribution. Amazon is following in the footsteps of Blockbuster (NYSE: BBI  ) and Apple (Nasdaq: AAPL  ) , offering piecemeal digital rentals and outright purchases.

Netflix, on the other hand, wants you to subscribe to the cow and get the milk for free. It doesn't charge subscribers to its unlimited plans any additional fees to access the 12,000 titles it makes available digitally. That's a far cry from its content library of more than 100,000 DVDs, but its online offerings are steadily (if slowly) growing.

Amazon and Netflix may seem like a perfect partnership. If a Netflix subscriber wants to see a newer release that isn't even available in DVD form -- as demand typically outstrips supply during the first few weeks of a new release -- it can offer an a la carte digital purchase through Amazon.

Of course, Netflix could easily offer this service if it wanted to. It hasn't, one would think, because that would destroy the value illusion that Netflix might ultimately offer its entire library digitally for a single subscription fee. Sure, we all know that the major studios will never practically give away their hottest releases. Nonetheless, the moment that Netflix begins charging extra, Instant Watching's value proposition is shot forever. Netflix will become like everybody else. That's not a good place to be when you're the industry leader.

2. Amazon has loved and lost before
Retailers once wanted some skin in the Netflix game. Wal-Mart (NYSE: WMT  ) launched a DVD-rentals-by-mail knockoff, growing it to a user base of 100,000 before realizing that it would never catch up to Netflix. The Bentonville Behemoth handed over the keys to Netflix four years ago.

Amazon also wanted in on the fun at the time. Netflix alertly launched a proactive price war, spooking Amazon all the way across the pond, where it launched a similar service in the United Kingdom.

If Amazon could get its feet wet in the Thames, the e-tailer may have thought it could come back and take on Netflix closer to home. That never happened. Amazon couldn't even be the market leader in the Netflix-less U.K. It cashed out to the larger Lovefilm in Europe, settling for a minority stake instead.

Clearly, Amazon has regrets. But publicly paying a princely sum for Netflix today -- when it could have made its move several years ago, while Netflix was significantly smaller and cheaper -- would only remind investors about its failures in a game it has long stopped playing.

3. Buying Netflix is not in Amazon's DNA
Amazon's all over digital distribution these days. It sells music, books, movies, and even video games as downloads. It has approached these fields organically. Did it snap up a popular music-streaming subscription service when it began offering tunes online? No. It could have bought Napster for nearly the amount of cash on Napster's balance sheet, but instead it let a rival retailer steal it. Rhapsody parent RealNetworks (Nasdaq: RNWK  ) , another easy target, is still rocking on as a solo project.

Amazon could have snapped up e-book specialist Fictionwise, but instead saw the company go to Barnes & Noble (NYSE: BKS  ) . 

In fact, the only deal that comes close to matching a play on Netflix would be its purchase of digital audiobook leader Audible. However, the $300 million deal was one that Audible couldn't refuse. If it did, Amazon could have just pushed hard into the market with its own offerings, until Audible was marginalized.

Netflix has no such fears. It has vanquished Wal-Mart, has Blockbuster on the ropes, and sent Amazon off to fail overseas. In short, it has taken on the big boys and won, even if Amazon opens up its wallet for an unprecedented $3 billion-to-$4 billion offer.

4. Enemy of the states
I touched on the state sales tax issue yesterday, but I may as well elaborate. Amazon collects sales tax in five states (New York and four states where it has a physical presence).

In theory, taking on Netflix would tack on sales tax to all Amazon.com orders in states where Netflix has a distribution center. In a cutthroat online world, that would put Amazon at a pricing disadvantage to other out-of-state online retailers.

Are there legal loopholes? If so, trust that hungry state legislators with scary budget deficits will close them. They even went after small blog publishers that belong to Amazon's free affiliate marketing program, forcing the online retailer to boot its boosters in a few states. If Amazon were on the cusp of hooking up with Netflix and forcing most of the country to pay state sales tax, it wouldn't have played hardball with its own backers this summer.

So move along. There's nothing to seize here. Start a buyout rumor where it's actually sensible instead.

Other Netflix-ish headlines:

Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor recommendations. Wal-Mart Stores is a Motley Fool Inside Value selection. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. He does not own shares in any other companies in this story. Rick 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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