Here we go again.
The source this time is The Wall Street Journal, though it could have been anybody. A Netflix-Amazon hookup looks more likely than ever, says the Journal, because streaming media has become a major component of the Netflix business model and that fits in with Amazon's own movie-rental ambitions. Moreover, Netflix is known for an obsessive focus on happy customers, just like online shoe retailer Zappos was before Amazon bought it for $850 million. The corporate cultures would blend nicely, or so the argument goes.
No, no, no!
And here are the top three reasons why the Journal is wrong:
- The Netflix culture only seems close to the Amazon climate on the surface. Dig a little deeper into Netflix and you'll see a cutthroat business environment where execution is everything. "In many companies, adequate performance gets a modest raise. At Netflix, adequate performance gets a generous severance package," say the firm's recruitment materials. Recruitment, as in "this is how we attract new workers." At Amazon, there's just a vague "bias for action." While this combination might work better than Microsoft
(NASDAQ:MSFT)and Yahoo! (NASDAQ:YHOO)ever could (or Oracle (NASDAQ:ORCL)plus Sun Microsystems ever will), it's not the perfect match you might think.
- The tax implications for Amazon are still very real. Yes, the company is building more distribution centers, which increases the sales tax load, but Amazon is picking those spots with care. Buying Netflix would instantly require Amazon to charge sales tax from Hawaii to Maine, from Key West to Fairbanks and everywhere in between. No sir, no way.
- So Amazon should buy Netflix for the streaming video operation and drop the physical DVD distribution, right? Wrong. Let's say that Amazon forks over $4 billion to buy Netflix -- a modest 20% buyout premium over the $3.3 billion enterprise value. That's $333 per Netflix subscriber. Then Amazon turns off the DVD faucet and watches the 52% of current Netflix customers who don't watch online video scurry away, not bound by any long-term contracts. The remaining 5.8 million new clients just got a lot more expensive. In reality, the carnage would be even more grisly. Many Netflix customers, myself included, do watch some streaming films but are mainly in it for the discs.
Maybe next time
The time might come for someone like Amazon, Microsoft, Apple
If there was a buyer today, it wouldn't be Amazon, but rather one of the other possible suitors I just mentioned. Even then, I don't think Netflix CEO Reed Hastings is ready to hand over his baby to another father (or mother). The grand vision of a digital cinema on every screen in your house is too close to a reality to give it up now. When the true form of Netflix emerges, the one that puts proper emphasis on the “Net” part of the company’s name -- that's when I believe he might sell out for a lot more than $4 billion. The buyer at that point will get an established giant in a whole new era of the entertainment industry, and that will be worth a lot.
So put those buyout rumors to rest and check back in two or three years. Maybe then I'll believe it.
That's my two cents -- but what do you think? Share your thoughts in the comment box below.
Fool contributor Anders Bylund owns shares in Google and Netflix, but he holds no other position in any of the companies discussed here. Microsoft is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers pick. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor selections. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Oracle. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.