Amazon.com Doesn't Have to Buy Netflix

Just as it goes with Freddy Krueger and Halloween's Mike Meyers, there's no killing the rumor that Amazon.com (Nasdaq: AMZN  ) is going to buy Netflix (Nasdaq: NFLX  ) .

The very whiff of chatter was enough to send shares of the DVD-rental specialist to a new high late last week, before three analysts -- Citi, Merriman, and UBS -- checked in with downgrades on Netflix.

UBS even noted the Amazon scuttlebutt in its analytical diss, arguing that a deal is unlikely in the medium term.

There's a good reason the rumor has lasted over the years: It makes sense.

A history of near misses
Six years ago, Netflix slashed membership prices after several sources confided to the company that Amazon.com wanted to launch a similar DVD-rental service. We may never know how committed the leading e-tailer was to rolling out a Netflix clone. Shaving its monthly rate by $4 was enough to scare it overseas, as Amazon decided to launch a DVD-rental service in the United Kingdom instead.

Buying Netflix at the time would have allowed it to practically own this space by absorbing the undisputed leader. It didn't happen.

At the time, Amazon investors probably figured they'd caught a break. Netflix was tethered to an optical disc platform that would undergo a severe test in the digital age.

Well, six years later, Netflix is now the undisputed leader of digital rentals, as more than half of its whopping 14 million members are taking advantage of the service's unlimited streaming. Netflix not only faced up to the beast that threatened its extinction, but it also learned to ride it better than anyone else.

Once again, Amazon would love to have a meatier profile with couch potatoes. And, again, it isn't likely to happen.

If it wanted Netflix, it would have Netflix
The popular argument against a buyout is that Amazon would have to begin collecting state sales taxes on its namesake site in the 30 states in which Netflix has distribution centers. Currently, Amazon.com tacks on state sales tax only in Kansas, Kentucky, New York, North Dakota, and Washington.

Amazon has a sound argument, but I'm not sure that every tax attorney would agree. Are there ways around this stipulation?

Some budget-strapped states are already going after Amazon to collect tax at the state level, and Amazon in response has shut off the affiliate marketers in the litigating states. Clearly, Amazon sees this as a pricing advantage, even if customers are ultimately liable for self-reporting the equivalent charges as use tax.

Well, let's consider Zappos. Amazon completed the purchase of the Nevada-based shoe retailer last year. It's still living up to its customer-first reputation in Henderson. Did you see Nevada on that list of states where Amazon slaps on sales tax? Neither did I.

If Amazon can keep Zappos separate, why can't it do the same with Netflix?

There may be other suitors
Let's say that logic is rebuffed, and this deal never happens. Why should Amazon be the only feasible buyer? I can think of several companies that would look good with Netflix on its arm, including companies with several billion in the bank to get it done.

  • Microsoft (Nasdaq: MSFT  ) : Netflix CEO Reed Hastings became part of Microsoft's board of directors three years ago, and the DVD-rental company has been showing favoritism toward the world's largest software company ever since. Netflix launched its streaming service on Microsoft's video platform. Streams also became available for Microsoft's Xbox Live members before it was released on other consoles. I'm not suggesting that a buyout is in order to return the favor. Netflix would make perfect sense in improving the visibility of Xbox, Zune, and perhaps even online advertising if Netflix were to go down that road of monetization.
  • Google (Nasdaq: GOOG  ) : The operator of the world's most popular video site has been having a difficult time associating YouTube with premium transactions. Google also happens to run the largest online-advertising network, which would come in handy, again, if Netflix ever decided to offset streaming costs with sponsored spots. Google hasn't been much of a force in pushing digital books, music, and movies. Netflix would be the perfect crash course.
  • Apple (Nasdaq: AAPL  ) : The most popular third-party app during iPad's launch last month was Netflix. Clearly, there's some overlap between Netflix's 14 million subscribers and Apple loyalists, regardless of Hastings' Microsoft board seat. Video has been a weak spot at Apple, judging by its relative flop with Apple TV and considering that digital music downloads far outweigh its video transactions through iTunes.
  • Comcast (Nasdaq: CMCSA  ) : The country's largest cable-service provider doesn't have the balance sheet of Microsoft, Google, and Apple, but it does have a shortcoming in terms of subscriber retention. Even though 23.5 million video customers may seem like a lot, that's 3% fewer than it had on its rolls a year ago. It teamed up with Time Warner (NYSE: TWX  ) last summer to launch the TV Everywhere initiative, providing more value to subscribers by granting greater flexibility to stream the content that they are already paying for. Sounds a lot like Netflix's thinking, don't you think?

So, yes, Amazon is still the company that would find Netflix to be a perfect fit. However, plenty of other companies have the greenery and tactical weak spots to make it happen, too.

Will Netflix be acquired this year? Share your thoughts and your potential suitor in the comment box below.

Microsoft is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers pick. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a diagonal call position on Microsoft. 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's 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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