Netflix Needs to be Bought
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Netflix (NASDAQ: NFLX) story has already delivered many exciting moments and unexpected twists over the last few years. Once the adored leader in the online streaming industry, the company has now fallen from grace, and there are some serious questions regarding its long term viability on a standalone basis. Rumors about Netflix being acquired by a bigger player have been around for a long time, perhaps because a deal makes a lot of sense. In fact, an acquisition may be the best possible scenario for Netflix investors at this point.
The Rise and Fall of Netflix
Things changed dramatically for Netflix investors in the summer of 2011. The company then announced a separation of its DVD and streaming services, which also meant materially higher prices for subscribers. The move backfired, and many customers decided to leave Netflix, infuriated by this decision.
Netflix has been trying to recover from that mistake since then, but things are getting more complicated. It´s not only about making up for past mistakes, competition has been rapidly increasing lately, with companies like Amazon (NASDAQ: AMZN) entering the streaming business with a very competitive attitude and deeper pockets than Netflix.
Amazon, which has disrupted many industries in the past, is probably the biggest threat to Netflix at this stage. Amazon announced a deal with Epix in September to add 2,000 movie titles to Amazon's Prime streaming service, including "The Avengers," "The Hunger Games" and "True Grit." The online retailer is entering the streaming business with strength, and it has plenty of experience in undercutting competition by offering lower prices.
Apple (NASDAQ: AAPL) has chosen a different path by offering a la carte options for movies, shows and all kinds of video. Apple operates under a less risky business model, the company doesn´t need to pay for licensing and it simply makes a profit when customers buy or rent videos through iTunes. Although pricing can be much more expensive for customers under this model, it offers a wider selection of highly demanded titles.
As if if that weren’t enough, Google (NASDAQ: GOOG) is trying to monetize YouTube to a larger extent. YouTube is the most popular video platform around the planet, with more than 800 million global users according to the New York Times. Furthermore, YouTube is not only a video streaming platform; it’s also a social network: People upload content, share that content, comment on the videos, etc. Google is experimenting with new venues to profit from YouTube via advertising and paid content, and it could become a serious problem for Netflix in the middle term.
Netflix has the first mover advantage, more than 30 million streaming subscribers and a strong collection of content, so the company could be a valuable target acquisition for bigger players willing to bet on the future of streaming.
At the same time, Netflix needs a lot of money to invest in content and international expansion; internally generated cash-flows don´t look sufficient to finance the company´s growing needs in the long term. Partnering with a bigger company could be a smart move from Netflix when it comes to financial resources and strategic positioning.
Maybe because a deal makes sense for both participants, an acquisition by Amazon has long been rumored. Amazon has enough money and expansionary drive, and Netflix would combine very well with Amazon´s library of content and Kindle Fire products. A deal between Amazon and Netflix sounds like a good thing for both companies, so it’s a very reasonable path going forward.
But I wouldn´t leave Microsoft (NASDAQ: MSFT) out of the equation. There have been rumors about a Microsoft-Netflix deal too, and there are good reasons for speculating about such possibility. Netflix provides an opportunity for Microsoft to make a big entry in streaming for a relatively low cost; and it would be a great asset in the war for the living room that Microsoft is trying to win.
Bottom Line: Live Together or Die Alone.
The Netflix movie has been getting complicated lately, the competitive landscape looks threatening and the company needs money to finance its growth. A purchase by a big player like Amazon or Microsoft seems like a very reasonable idea that should be beneficial for both parties, but until we see clear indications about such a move, Netflix looks too vulnerable.
acardenal owns shares of Apple, Google and Amazon. The Motley Fool owns shares of Apple, Amazon.com, Google, Microsoft, and Netflix. Motley Fool newsletter services recommend Apple, Amazon.com, Google, Microsoft, and Netflix. 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.If you have questions about this post or the Fool’s blog network, click here for information.