Apple, Not Amazon, Should Buy Netflix

Rumors of a merger between Amazon (AMZN) and Netflix (NFLX) have been rampant for months now, with the latest sending Netflix shares up over $25 each last week. However, with Blockbuster (BBI) lowering prices on their online movie rental service, Netflix is slumping back down to $20 per share. Amazon seems to be trying to get their hand in everything these days, which is probably why rumors of a Netflix purchase won’t go away. However, given the price tag that it would take to land Netflix (about $1 billion after accounting for the company’s $400 million in cash), I think it would make more sense for Apple (AAPL) to make the deal.

Obviously, the mail order rental business won’t be around long term given the move to digital media distribution, so the value in Netflix is their subscriber base. It isn’t clear which method of digital home movie watching will win out five or ten years from now. The retail storefront is already dying, thanks in part to the mail order business, but video-on-demand (VOD) from cable companies like Comcast (CMCSA) seemed like the most reasonable candidate to take over the movie rental industry.

However, Apple TV might throw a wrench into that idea. Being able to purchase movies online, download them to a set-top box, and watch them on your television as well as your computer, iPod, or iPhone could be a game changer. We also learned this week that Apple is in discussions with the movie producers about electronic movie rentals through iTunes, rumored to be $3.99 for a 30-day rental. If Apple can perfect both renting and purchasing movies online, video-on-demand might have a tough time competing since the cable companies would house the content on their own servers, allowing for a lot less mobility and flexibility.

If Apple is serious about rivaling VOD, a purchase of Netflix could make a lot of sense. The mail order business will likely do well until new digital technologies become mainstream, at which point converting users over to a digital model wouldn’t seem to be very difficult. After deducting the cash on Netflix’s balance sheet, an acquirer is paying less than 1 times revenue for their millions of subscribers. I think a Netflix-Apple combination would really match up well against Blockbuster and the cable companies. Netflix is already trying out some new digital download technology to distance itself from Blockbuster, so Apple would be a great partner on that end. An Amazon deal just seems to make less sense, which is perhaps why that rumor seems to never come true.

Full Disclosure: Long shares of Apple at the time of writing

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5 Thoughts on “Apple, Not Amazon, Should Buy Netflix

  1. Elaine Vigneault on June 12, 2007 at 12:41 PM said:

    your blog has been added to 2k bloggers :)

  2. Research Intensive Investing on June 13, 2007 at 2:54 AM said:

    Another reason AMZN would be unlikely to buy NFLX is due to the tax consequences of their online business of operating warehouses in all 50 states.

    As an aside, I also think AMZN is very overvalued, especially after its last jump. Recently posted a short thesis on AMZN on my blog. Would be curious to get your thoughts.

    Keep up the great blog,
    Eric

  3. Chad Brand on June 13, 2007 at 6:07 AM said:

    It is very overvalued based on current margins, but investors seem to think they can boost margins if they want (although now they prefer to go after market share) via actually charging for shipping and doing other things. That combined with how crowded the short side on AMZN is makes it a dangerous short, although the stock does appear to be overvalued based on what we know now.

  4. Pingback: Enough Waiting — It’s Time for Amazon to Buy Netflix – GigaOM

  5. Pingback: Enough Waiting — It’s Time for Amazon to Buy Netflix

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