The Sunday Times is reporting that the leading online retailer has made a buyout offer for the United Kingdom DVD-rental service, according to unnamed sources. The deal would presumably value Lovefilm at just more than $300 million, though Amazon wouldn't have to shell out that much since it already owns 42% of the flick flinger.
Before delving into the meaty implications, a quick history lesson is in order.
Amazon was ready to take on Netflix
Amazon simply turned its attention to launching a Netflix-esque service in Europe, instead. When it failed to gain serious traction, it sold its business to overseas rival Lovefilm in 2008 for a minority stake.
Amazon's probably watched On the Waterfront plenty of times. It can mutter out "I coulda been a contender" with the best of them.
It should have gone ahead with its stateside DVD rental service in 2004, as originally planned. At the very least, it could have gobbled up Netflix. It only had 2.6 million subscribers, but that was 80% of the market when it came to online-based DVD rentals. Today, Netflix watches more than 15 million couch potatoes -- and counting.
Netflix also commands a $7.5 billion market cap these days, a shell of the nine-figure cap it brandished after it triggered the 2004 price war. How much would it cost to buy Netflix these days? Keep in mind that Netflix hit a fresh all-time high last week, so it would take a juicy premium to sway a sellout.
Just this morning, Jefferies analyst Youssef Squali boosted his price target on the shares -- from $128 to $175. It's easy to buy a company when it's down. It's not so easy when shareholders are giddy and Wall Street is pointing higher.
Lovefilm at first sight
The old "Amazon is buying Netflix" chatter died a long time ago. Netflix's fortunes turned when it became less known for mailing out DVD and Blu-ray discs through its network of distribution centers, transforming itself into the leader of digital streaming.
Netflix's online library continues to grow, and making it available to subscribers on unlimited disc plans at no additional cost has kept churn in check. As Netflix's fundamentals -- and long-term outlook -- have improved, vultures have gone on to circle elsewhere.
However, it is the very transformation at Netflix that makes it that much more desirable to Amazon today.
Six years ago, Amazon was likely drawn to the Netflix model as a way to capitalize on its popularity in physical media distribution. Now Netflix should be even more appealing because it's the only company that has made a serious dent in digital video subscriptions.
Piecemeal rentals and sales don't work, and if it ever does, Amazon will always be second fiddle to Apple
Google and Apple also have set-top boxes hitting the market later this year. Amazon isn't likely to dive into that crowded pool.
Netflix wouldn't come cheap, but it makes as much sense as ever for Amazon these days. Netflix already has the installed base and the mobile streaming. It has shoehorned its streaming functionality into TiVo
And let's be frank here: Why the heck would Apple want to more than double down its wager in DVD rentals in Europe?
Netflix has already announced that it would roll out a digital streaming service in Canada this year. It's a safe bet that England would be next. Amazon has to know this. Why would it broaden its presence in a region where it knows that Netflix is coming, at least digitally? Is it a glutton for punishment, readying a stateside push anyway, or making Netflix's job easier by building up Europe for when Amazon does make a play for Netflix? Doesn't it essentially boil down to one of those three scenarios.
Despite missing out on its best chance to acquire Netflix in 2004, Amazon typically makes the right decision. Isn't that time now?
Oh, and before one argues the state sales tax implications of such a purchase, ask yourself why it acquired Nevada-based Zappos and Texas-based Woot.com and it doesn't automatically tack on sales tax in those states. There is apparently a way to get this deal done without having to collect sales tax wherever Netflix has a physical presence.
Amazon's finally serious about this space, and it's hard to imagine it making a dent without Netflix.
Will Amazon.com acquire Netflix? Share your thoughts in the comments box below.
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Longtime Fool contributor Rick Munarriz has been shopping online since the early 1990s, even before Amazon.com was around. He does not own shares in any of the stocks in this article, except for Netflix. He 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.