Will Verizon Buy Netflix?

Netflix (Nasdaq: NFLX  ) , I've maintained my thumbs-up rating on it while others are eager to cast it aside. Where others see failure (and there is admittedly a lot), I've chosen to see the potential upside.

Even former Netflix hater Whitney Tilson has had a change of heart. After being a notorious short-seller, he's added a position to his portfolio. One of his reasons? It could be a buyout candidate. His hunch got a serious bit of credit today when rumors circled that Verizon (NYSE: VZ  ) could be eyeing the fallen angel.

Obviously, it's much easier to buy a brand than it is to spend all the time and cash to build up a strong reputation, and when it comes to streaming movies, Netflix is still the biggest household name. Sure, there is competition from Apple (Nasdaq: AAPL  ) , Amazon (Nasdaq: AMZN  ) , and even Google (Nasdaq: GOOG  ) whose iTunes, Prime, and YouTube services allow viewers to easily stream movies as well. The problem with these competitors is they still don't have the recognition that Netflix has, or the penetration. Despite losing 800,000 subscribers recently, Netflix still had almost 24 million U.S. subscribers at the end of September. Compare that to Amazon Prime's 5 million users and you see how hard it is to unseat a king, even a crazy one.

Picking up the Netflix name would give Verizon instant access to the largest membership base of wireless video subscribers worldwide. If it really is serious about getting into streaming, this is the way to do it.

Deep pockets write checks
The biggest problem facing Netflix beyond a few PR bungles is the cost of content. Its severing of relations with Starz removed many of the most valuable movies from its library, and showed that the cost of content isn't as cheap as it once was. This opened it up to deep-pocketed rivals like Apple and Amazon who have the means to basically buy whatever content they want.

With Amazon's Jeff Bezos being notoriously patient and willing to play the ultra-long game, it wouldn't surprise me if he were willing to buy a ton of content and run the streaming segment at a loss in order to slowly siphon users from Netflix until it rolled over and died.

Enter the knight in shining armor, Verizon. With its nearly $11 billion in cash and short-term investments, it has almost 30 times the idle cash that Netflix does, cash that could be easily dispatched to ramp up Netflix's library with the best content. Coupled with Verizon's massive $5.1 billion in free cash flow for the most recent quarter alone and you can see there really isn't much content they couldn't buy.

Speak now, or forever hold your peace
So would a marriage between Netflix and Verizon be a good one? I think so. As mobile devices increasingly dominate our landscape, people will want access to their media whenever and wherever. Considering that Verizon just spent $3.6 billion on spectrum licenses that will let it cover 259 million Americans, or basically the whole population, I'd say it's well-positioned to do just that. While this is still in rumor-mill stage, I'm very excited to see how it plays out.

To stay updated on whether Verizon and Netflix tie the knot, please feel free to add these companies to My Watchlist. My Watchlist is a free service offered by The Motley Fool to keep you updated on all the news and events as they relate to your favorite companies. You can click here to start today.

Editor's note: A previous version of this article noted that Whitney Tilson profited from his original short position. While his stance was vindicated, he covered his position before the drop and did not realize a profit.

Austin Smith owns no shares of the companies mentioned here. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services have recommended buying shares of Netflix, Google, Apple, and Amazon.com. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. 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.


Read/Post Comments (8) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 12, 2011, at 7:58 PM, bjasleep wrote:

    NFLX brought upon itself the problems it has notwithstanding the content cost inflation. I would bemoan VZ buying NFLX. Wasn't it supposed to be that these so-called innovative companies like NFLX unseat and put the stodgy old companies like VZ out of business?

  • Report this Comment On December 12, 2011, at 8:40 PM, MKArch wrote:

    Tilson covered his shorts at ~$220 and lost his shirt.

    Netflix will break even on the streaming segment at best in Q4 and beyond. Why would anyone want to be in this unsustainable money losing business?

  • Report this Comment On December 12, 2011, at 8:47 PM, MKArch wrote:

    http://seekingalpha.com/article/303839-how-a-real-value-inve...

    Here's a former hedge fund managers rebuttal to Tilson's long Netflix argument. Maybe there's a reason why all of the natural competition is busy pushing a la carte streaming models while the analyst community sits around waiting for them to take on Netflix or buy them out. Maybe the competition is telling you something?

  • Report this Comment On December 12, 2011, at 11:33 PM, hongchang wrote:

    Whitney Tilson made a fortune off Netflix's drop?

    You fools are so sick! keep pumping this POS all the way down. You didn't even know this guy lost his shirt on shorting NFLX from 90 to 200 and covered? How can you write this junk by using his long thesis to back you up. You are truly sick!

  • Report this Comment On December 13, 2011, at 5:27 AM, patrails wrote:

    Tilson did open another short on the way down. The writer of the article is correct.

  • Report this Comment On December 13, 2011, at 6:05 AM, hongchang wrote:

    Even Tilson himself admitted that he did not profit from short in later October. So show us the link where and when he opened another short on the way down! If you can not get the basic fact right, you should not be posting here. The fools are always behind the pump of this POS, from all the way down from 300. These people are sick!

    http://dealbreaker.com/2011/10/whitney-tilson-t2-partners-na...

  • Report this Comment On December 13, 2011, at 9:05 AM, heybryan wrote:

    What does not make sense is VZ is stopping its FIOS expansion. This is supposedly to appease cable partners. Why buy a streaming service if they were not going to take cable on head to head?

    http://www.engadget.com/2010/03/27/verizon-shelves-plans-for...

  • Report this Comment On December 13, 2011, at 10:34 AM, wolfhounds wrote:

    VZ better have $11B in cash. LT debt of $46B makes a NFLX buyout dubious.

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