Please ensure Javascript is enabled for purposes of website accessibility

Amazon Should Try to Buy Netflix... Again

By Rick Munarriz - Oct 8, 2012 at 5:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Amazon and Netflix have reportedly been in bed before. A union makes more sense now.

Netflix (NFLX -3.79%) is finally starting to roll again.

Shares of the leading premium video service provider soared 22% last week, moving higher after a bullish Citigroup analyst note pointed to increasing customer satisfaction at Netflix.

Are the gains sustainable? Will investors now begin to start following subscribers that have been flocking back to Netflix?

If this organic revival sputters, will a humbled Netflix be more considerate if a lucrative exit strategy emerges?

Bobbing for Bezos
One of the more intriguing revelations in Netflixed -- a book detailing a third-party account of the flick flinger's history and its present challenges that hits stores later this week -- is that Amazon.com (AMZN -3.21%) once offered to buy the company.

Sure, it was 1999 when Netflix founders Reed Hastings and Marc Randolph reportedly met with Amazon CEO Jeff Bezos. This was three years before Netflix even went public. Amazon's offer of $12 million, according to the book, was too low.

Neither company is confirming that the talks took place. Netflix even called CNET over the weekend to deny that Amazon made the offer.

However, it's perfectly clear that Amazon did have dreams of entering the DVD rentals by mail market several years ago, and is now a distant second to Netflix when it comes to streaming video smorgasbords. Why not make another run at Netflix?

Looking for LOVEFiLM in all the wrong places
It's a rumor the never dies.

Amazon snapping up Netflix makes the rounds every few quarters. The reasons only get better -- and the excuses only get weaker -- over time.

It may have seemed strange to see Amazon want in on Netflix's mail-based disc rentals several years ago, but that's exactly what it did when it bought into Europe's LOVEFiLM. Amazon and Netflix also began serving up online video just months apart between late 2006 and early 2007.

Acquiring Netflix wouldn't be just a matter of acquiring a service with more than 30 million premium video customers. Amazon would be able to corner the market, lifting the prospects of its Kindle Fire ecosystem as it cashes in on Netflix's wider content library and consumer access.

Netflix could grow its revenue exponentially by offering Amazon's pay-per-stream rentals of the newer movies that Netflix's streaming service will never get. Amazon would get the juiciest mailing list in all of Hollywood -- the names of tens of millions of people willing to spend money on digital video.

Limited downside
Outside of the potentially negative near-term impact that an acquisition would have on Amazon's stock price, doesn't a deal make more sense now?

Amazon has acquired category killers in areas where the competition is just doing things better than it ever could. It bought Audible even though it was already selling audio books. It snapped up Zappos.com even though it was already selling shoes.

Why not Netflix?

The old can of worms -- state-tax collecting -- doesn't have the same ring anymore. The online retailer has been gradually playing nice with a growing number of states.

It's also hard to argue with the price.

Netflix's current enterprise value of $3.3 billion prices the company at just $110 per subscriber. It has been ages since this metric has been this low.

Sure, a digital subscriber isn't ridiculously valuable. They can be fickle. There's a reason why Netflix stopped reporting churn figures last year. However, we're not just talking about the value of a customer shelling out $7.99 a month for unlimited streams. Amazon will be able to do what Netflix has avoided in pumping up average revenue per user through its piecemeal rentals. Amazon will be able to feed more people into its Kindle Fire tablet -- and eventually Amazon's own smartphone.

More importantly, it keeps anyone else from buying Netflix.

Verizon (VZ 2.03%) has been promising a digital video service launch later this year. It partnered with Coinstar's (OUTR) Redbox to make it happen, but wouldn't Verizon be better off simply acquiring Netflix? It can make Verizon wireless deals more attractive by including -- for instance -- Netflix streaming off its data clock.

What about Google (GOOGL -4.95%)? It also has been following Amazon into carving out its own ecosystem. Don't you think that Google could make a killing if it snaps up Netflix and then devotes its developer resources to Android?

Buying Netflix is starting to make more sense for several key players longing for the undisputed champ in digital video. If Amazon doesn't come a-knocking, somebody else probably will.

Stream on
A new premium report on Netflix details the opportunities and challenges in store for its shareholders. The report includes a full year of updates, so time's ticking. Click here to check it out now.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$180.34 (-3.79%) $-7.10
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,082.00 (-3.21%) $-69.14
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$50.68 (2.03%) $1.01
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,119.40 (-4.95%) $-110.36
Coinstar, LLC Stock Quote
Coinstar, LLC
OUTR

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
334%
 
S&P 500 Returns
117%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.