Why Would Amazon Buy Netflix Now?

Everybody loves to speculate on when Amazon.com (Nasdaq: AMZN  ) and Netflix (Nasdaq: NFLX  ) will hook up, but this is Harry and Sally, Ross and Rachel, or Sam and Diane.

The latest chatter comes from Collins Stewart analyst Mayuresh Masurekar. According to Barrons.com, Masurekar believes that there is a "high likelihood" of Amazon rolling out a 10-inch tablet below $300 by early next year and buying Netflix's streaming business.

Everyone seems to agree that a more iPad-sized tablet is coming in a few months, so he's not really going out on much of a limb with that call. However, I'm a bit stunned that the "Amazon will buy Netflix" rumor continues to live on.

I'm a big fan of both companies, and I've owned Netflix stock for years. However, I can objectively see that Amazon no longer needs Netflix, just as I know that Netflix wouldn't punch out on the cheap.

Let's cover Amazon's reasons for buying Netflix. Is it the brand? Well, there's been a lot of ill will for the Netflix brand in recent weeks. Is it the content? Well, Amazon didn't even have an unlimited streaming service when the year began, and it's been able to go from zero to 11,000 on the title count this year.

Would Amazon love to have Netflix's 21.8 million domestic streaming customers and its more than a million international streaming subscribers? Sure. Would Amazon love to have the home theater gadget penetration? Absolutely. Is there content available through Netflix.com that Amazon would love to have? You know it.

However, at the end of the day, Netflix is striking new content deals at a healthy pace this month because studios now know that their content isn't being devalued given Netflix's new $7.99-a-month pricing. These same studios aren't going to want to be part of a freebie given to folks paying $79 a year for free two-day shipping through Amazon.com.

What would the plan be if Amazon bought Netflix? It can't just fold it into the Prime freebie, yet it's already marketing Kindle Fire on the premise of access to 11,000 video titles at no additional cost.

In short, Amazon has moved on. It has learned to live without Netflix, despite the obvious appeal on some levels.

Netflix, on the other hand, is a company that saw its stock trading for more than $300 just two months ago. Subscribers and shareholders may be upset, but analysts haven't done a whole lot of hacking away at their profit targets. In other words, the fundamentals aren't deteriorating at the same pace as the share price. Why would Netflix sell itself for anything close to today's price?

There are other buyers that actually make more sense now. Netflix CEO Reed Hastings sits on Microsoft's (Nasdaq: MSFT  ) board, and he's been a recent app presenter at Apple (Nasdaq: AAPL  ) . Both of those companies have more ground to cover than Amazon, and they also happen to have enough money to make it happen. However, bidding too high for Netflix would send those stocks lower. Bidding too low won't interest Netflix.

I wouldn't necessarily be shocked if Netflix becomes buyout fodder at the right price, but enough already with making Amazon the obvious suitor. It's just not happening.

If you want to follow this saga, track the latest news by adding Netflix to My Watchlist.

The Motley Fool owns shares of Microsoft and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, Netflix, Apple, and Microsoft, as well as creating a bear put spread position in Netflix and a bull call spread position in Apple and Microsoft.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (8) | Recommend This Article (12)

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  • Report this Comment On September 29, 2011, at 10:13 AM, MKArch wrote:

    <<<Why would Netflix sell itself for anything close to today's price?>>>

    --------------------------------------------------------------

    Because with the average life of a sub at about one year, this is an unsustainable Ponzi scheme destined too implode that isn't worth anywhere remotely near $120.00/ share let alone $300.00/ share. I whole heartedly agree on the sentiment of why would AMZN be a buyer.

  • Report this Comment On September 29, 2011, at 12:12 PM, beachdudeca wrote:

    The only persons spreading rumors about Amazon buying Netflix are the sorry fools that bought this stock and are scared knowing that Netflix is heading down to $25- per share.

  • Report this Comment On September 29, 2011, at 12:14 PM, AceInMySleeve wrote:

    It's not a very strategic purchase as an online retailer first and foremost to make a 8B$ bet on a company who either continues to dominate the online video space or loses most of its value, and there's no Buffet type guarantees about the future security of Netflix's market position. They could be dead in 5 years easy (not saying they will, but this is a fast moving environment with strong winds).

    Reed Hastings didn't think he could succeed at online video while also concerning himself with DVDs by mail (two things that most people believe complement each other very closely). Amazon has just a few more complexities in their business than that.

  • Report this Comment On September 29, 2011, at 9:00 PM, Threedollarbill wrote:

    Beachdudeca--so I take it by your Netflix comment of it only being worth $25. a share you are shorting the stock, like it's going out of style...

  • Report this Comment On September 30, 2011, at 2:41 AM, beachdudeca wrote:

    @Threedollarbill ,

    Hey there , I have no direct investments in Netflix , but this stock has some serious issues. They should not be profitable in any of the International expansions with the possible exception of Canada. Netflix just said go away to 2 million customers that do so DVD rentals only, this would have been less of an issue if they had not so damaged the value of the physical disk division. That leaves you with the streaming only clients where you will see a churn hit come Q2 at the latest. Last you have the hybrid users that are gradually moving to other physical providers and who might also cut the Netflix cord in Q2 2012 when streaming choices are possibly reduced.

    I see Netflix a decent buy when it returns to the 2009 price level.

  • Report this Comment On September 30, 2011, at 5:03 PM, racchole wrote:

    @Beachdudeca - in the next 5 years, all entertainment will be available via streaming. If Netflix can strike content deals, it will be on of the most popular companies in the world.

    The 2-million subscriber loss from the decision to split the business is negligible. I am sure you have heard of "consumer sentiment" and "fear in the markets," well, this ain't much different. You piss people off, they will go elsewhere. Looks like 90% of the consumers didn't succumb to their emotions.

    You also make a wildly empty claim: "They should not be profitable in any of the International expansions with the possible exception of Canada," Umm....why? No matter how you respond to that, it will be a misinformed opinion. Not one soul can tell how the expansion into Europe will fare. But if NFLX picks up 20 million subscribers there, all I have to say is look out $300 here we go again.

  • Report this Comment On September 30, 2011, at 5:04 PM, racchole wrote:

    Not to mention that American entertainment is quite popular all around the globe.

  • Report this Comment On October 01, 2011, at 3:23 PM, beachdudeca wrote:

    Racchole,

    1st, with the exception of Canada, Netflix is not expanding into markets that lack serious competition or local protections against an American company coming in and dominating the media experience, plus Netflix lacks brand recognition outside of North America.

    There are already projections out there that Netflix will not break 10% of market share in any country other then the US or Canada, breaking this saturation point is important for profitability.

    2nd, If you are tracking existing customer that will reduce service you need to look beyond the 2 million customers only renting disk, you need to include the 12 million users that have a hybrid service also and take into consideration that we are talking about losing 14 million disk account. Plus of the 22 million or so streaming accounts you need to figure in a higher then average churn rate.

    This is not to say that I do not like Netflix, just that I think Earning are going to have taken a huge hit by the time Netflix has completed this remaking of the company which should be complete by Q2 of 2012. It is based on a streaming only customer base and a significant churn hit to existing customer that I think that Netflix is worth far less then the current value.

    The up side is that the math might not be evident to most until we get to Q2 of 2012.

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