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Amazon Buys Netflix? Microsoft Is a Much Better Guess as a Potential Acquirer
Posted Jul 14, 2009 10:37am EDT by Kara Swisher in Investing, Electronics, Internet, Media, Newsmakers, BankingFrom All Things Digital, July 14, 2009:
Yesterday, shares of Netflix got their semi-regular rocket boost–with its stock up more than five percent to close at just over $42–from rumors that Amazon was interested in buying Netflix.
Oh, it’s a seemingly dreamy match–the top online retailer snapping up the upstart U.S. mail-order DVD movie and television show service.
But the speculation completely ignored the giant price needed to buy the Silicon Valley-based Netflix–well above its current $2.43 billion market cap, to be sure – which would be a big chunk of Amazon’s $35 billion valuation.
And it also leaves out the nearly impossible tax problem Amazon would acquire if it ever bought Netflix, given Netflix has many distribution U.S. locations for its subscription rental business. Amazon does not like paying state taxes and avoids them carefully.
Instead, those interested in seeing the independent company in the embrace of a larger one might want to consider a more suitable and very interested candidate: Microsoft.
Neither Microsoft nor Netflix will comment about such a hookup.
But several sources close to Microsoft told BoomTown that that the partnership between Netflix and Xbox Live to allow users to watch movies and TV episodes on the Xbox 360 device–struck exactly one year ago today–is going like gangbusters, with one saying it was “en fuego.”
Very loosely translated: On fire.
So much so, several sources said, that Robbie Bach–who is President of Microsoft’s Entertainment and Devices division, which includes the Xbox business–has been meeting with Netflix CEO and Co-founder Reed Hastings (pictured above) in recent weeks about what else the pair can do together to expand its current partnership.
The deal already in place between them is a hit, according to sources at both companies.
It gave Netflix access to 12 million Xbox members, and handed Microsoft what has turned out to be a very popular application and an unusually successful joint effort.
While an acquisition would be a much bigger move, some at the software giant think it would necessarily be such a bad one for Microsoft, which has long been seeking to forge better ties in the entertainment arena.
Many of Microsoft’s major Hollywood forays over the years have been duds. So, stronger ties with Netflix–even a more robust partnership, at the very least–would give it a more definitive video strategy most think it lacks.
Its archrival Google has been trying–with similarly lackluster impact–to accomplish the same results via its pricey and money-losing YouTube unit.
But Netflix–which has an office in Beverly Hills, as well as Los Gatos, Calif.–has much better relationships with the industry there, mostly because it has become such a big buyer of DVDs, as it has grown its business (see charts below of subscriber and revenue growth; click on them to make them larger).
In addition, it has added more subscribers than ever in the last year and is solidly profitable, mostly due to sending consumers all those DVDs in little red envelopes.
And while a lot of execs at Hollywood studios that Netflix does business with have been wary–and told me so in no uncertain terms on my recent visit to Los Angeles–about its entry into the digital video delivery business, they have also been thrilled with the checks that Netflix has been writing them since it was founded more than a decade ago.
But, it is that main DVD business that Hastings, in a recent interview with The Wall Street Journal recently, has said is “doomed.”
Noted the article:
“As soon as four years from now, [Hastings] predicts, the business that generates most of Netflix’s revenue today will begin to decline, as DVDs delivered by mail steadily lose ground to movies sent straight over the Internet. So Mr. Hastings, who co-founded the company, is quickly trying to shift Netflix’s business–seeking to make more videos available online and cutting deals with electronics makers so consumers can play those movies on television sets.”
With Internet video still in its infancy–and barely in gestation in terms of any viable business models–Netflix might indeed need help, especially since Hollywood has been slow to give it rights to more movies for online distribution.
That will be increasingly troublesome, given that digital delivery is the way consumers are headed. According to the Journal story, over 20 percent of Netflix members now use the streaming service.
But it only has about 12,000 titles–mostly older films–licensed its online service, compared to 100,000 DVD rental titles.
That’s because, for now, much more powerful pay channels usually win out over Netflix in these online video distribution wars, which also include Amazon and Apple (AAPL), along with many others.
Thus, even with a strong and unusually long-term executive bench, the close-knit Netflix will still be facing a major battle in moving in a direction it must head in sooner than later
Such an epic journey could be easier for Netflix with a powerful ally like Microsoft.
One more interesting link would make such a relationship even more smooth: Hastings in also on the board of Microsoft, having joined in 2007.
So, the savvy and innovative entrepreneur–well known for his close-to-the-vest dealmaking and eager to not miss a key turn for his company–might very well decide to keep friends very close.
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23 Comments
Ray - Tuesday July 14, 2009 10:55AM EDT
Show me the money but speculation is exciting. In the future movies will be sent over the internet.
shags1_23 - Tuesday July 14, 2009 10:58AM EDT
Why didn't entertainment companies see that digital delivery was the new medium a long time ago? The general consumer always wants what's easier and smaller. Consider music: started at Vinyl LP's (actually shellac at the beginning), then it was 8-track (smaller), then it was cassettes (smaller, but crap quality), then CD's (smaller in volume than cassette, better quality than cassette), then MP3's (a player the size of a deck of cards that holds more music than a box full of CD's, and you don't even have to go to the store). Why didn't they see this coming? Any idiot could have!
Dennis - Tuesday July 14, 2009 11:03AM EDT
GW Bush is the reason we are in this economic situation, By diverting our public attention away from the economy, and directing our focus on the Iraq war. along with his backdoor oil scamming, which costs have equaled the real estate dilemma
shags1_23 - Tuesday July 14, 2009 11:12AM EDT
The best way for entertainment business to move forward is for content producers (Warner Bros., Disney, etc.) to have non-exclusive deals with all of the content providers (iTunes, Netflix, Amazon) to get their product out through as many channels as possible. Then it's up to the content providers to differentiate themselves through the services they provide to win the consumers' business.
Yahoo! Finance User - Tuesday July 14, 2009 11:36AM EDT
I see a problem with Internet delivery of movies, First even with high speed it takes time to down load or play the movie on the Internet. Second a big part of the rental business by mail is to rural areas where high speed is not available. (of course there is blue ray for high speed but the cost is around $80.00 a month). Third the turn around by mail is pretty fast and you can watch the movie as many times as you want, most internet movies are limited to only one watching.
Yahoo! Finance User - Tuesday July 14, 2009 11:36AM EDT
I see a problem with Internet delivery of movies, First even with high speed it takes time to down load or play the movie on the Internet. Second a big part of the rental business by mail is to rural areas where high speed is not available. (of course there is blue ray for high speed but the cost is around $80.00 a month). Third the turn around by mail is pretty fast and you can watch the movie as many times as you want, most internet movies are limited to only one watching.
Yahoo! Finance User - Tuesday July 14, 2009 11:37AM EDT
I see a problem with Internet delivery of movies, First even with high speed it takes time to down load or play the movie on the Internet. Second a big part of the rental business by mail is to rural areas where high speed is not available. (of course there is Wild Blue for high speed but the cost is around $80.00 a month). Third the turn around by mail is pretty fast and you can watch the movie as many times as you want, most internet movies are limited to only one watching.
Yahoo! Finance User - Tuesday July 14, 2009 11:38AM EDT
I see a problem with Internet delivery of movies, First even with high speed it takes time to down load or play the movie on the Internet. Second a big part of the rental business by mail is to rural areas where high speed is not available. (of course there is Wild Blue for high speed but the cost is around $80.00 a month). Third the turn around by mail is pretty fast and you can watch the movie as many times as you want, most internet movies are limited to only one watching.
cw - Tuesday July 14, 2009 11:40AM EDT
I see a problem with Internet delivery of movies, First even with high speed it takes time to down load or play the movie on the Internet. Second a big part of the rental business by mail is to rural areas where high speed is not available. (of course there is Wild Blue for high speed but the cost is around $80.00 a month). Third the turn around by mail is pretty fast and you can watch the movie as many times as you want, most internet movies are limited to only one watching.
cw - Tuesday July 14, 2009 11:40AM EDT
I see a problem with Internet delivery of movies, First even with high speed it takes time to down load or play the movie on the Internet. Second a big part of the rental business by mail is to rural areas where high speed is not available. (of course there is Wild Blue for high speed but the cost is around $80.00 a month). Third the turn around by mail is pretty fast and you can watch the movie as many times as you want, most internet movies are limited to only one watching.
Yahoo! Finance User - Tuesday July 14, 2009 11:57AM EDT
cw - Ok ok- we got it, you see a problem with internet delivery of movies. BTW, it takes 10 minutes on a highspeed line. Even if it took 3 hours, that's faster than mail. There's a lot bigger markets in cities rather than rural areas, so frankly you don't matter that much to these people. 90% of the DVDs you have, you watch 3x when you get it and put it on the shelf to gather dust.
Yahoo! Finance User - Tuesday July 14, 2009 12:10PM EDT
The problem with this scenario is that Netflix is at a crossroads, and MSFT absolutely cannot innovate and neither Balmer nor the MSFT board recognize that. So, if MSFT buys Netflix, Netflix will become another Yahoo -- slowly dying, once-glorious tech giant.
Joseph - Tuesday July 14, 2009 12:13PM EDT
Actually, this makes a ton of sense. You have to start thinking of XBox as more than a game machine though. It is becoming the computer/media device for your TV. Photos, videos, music, movie streams...and oh yes, gaming too. They just need to build in a DVR (or buy Tivo!) :-).
trouble - Tuesday July 14, 2009 12:53PM EDT
in all seriousness, if Microsoft was to buy Netflix, i will most likely stop my subscription.
JoeW - Tuesday July 14, 2009 01:01PM EDT
I agree with the multiple-poster that thinks broadband delivery is ahead of its time. We shouldn't waste all that pipe space on huge static data like movies. The post office and Netflix is a match made in heaven. Using broadband for interactive applications such as retail, social networks, and corporate communication are much more useful purposes. Why waste a two-way medium on a one-way application?
Bart - Tuesday July 14, 2009 02:55PM EDT
What happens when all the ISP's start charging extra because you're using to much bandwidth? Several ISP's are already doing this. I can't imagine what my cable bill would be if I downloaded a bunch of movies. I agree that it would be a good idea to have access to any movie I want to watch via the internet, but I'm not willing to pay extra to the cable company for downloading the movies. Why not just order them via Pay Per View or Video On Demand from the cable company or Directv for the same price as renting them?
Yahoo! Finance User - Tuesday July 14, 2009 04:31PM EDT
No way I will keep my NFLX if the beast buys it. They should go with Apple instead, then the content would actually work everywhere, even on iPods (imagine that). MSFT will kill it, but Hastings might not care if he just wants to cash out and retire.
Yahoo! Finance User - Tuesday July 14, 2009 04:39PM EDT
They have basically already sold out to the DOLTS at Microsoft, any wonder that the streaming only works in WINDOZE? Pathetic.
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Jesse - Tuesday July 14, 2009 10:48AM EDT
Seems like a mismatch to me