Who will buy Netflix?

Verizon's rumored to be interested, but it may not be alone.

By Motley Fool Pick of the Day Dec 13, 2011 4:30PM

By Rick Aristotle Munarriz

 

Can you buy me now?

 

Rumors of Verizon (VZ) eyeing an acquisition of Netflix (NFLX) were enough to send the beleaguered video buffet operator 6% higher Monday on an otherwise dreary market day, but let's not run out to see what's on the bridal registry just yet.

 

Is this the same Verizon that was rumored to be making a play for Redbox parent Coinstar (CSTR) last week?

 

It's easy to see why Verizon is being attached to this kind of chatter. The telco giant is reportedly working on a streaming video service. Why start from scratch -- an approach that finds it with just 4 million FiOS broadband television subscribers after a few years of aggressive deployment -- when it can slide right into Netflix's more than 20 million global streaming subscribers?

 

Instead of competing against Netflix as one of the many big names with tiny audiences, Verizon can corner the market as a debutante.

 

Verizon won't succeed in this space on its own. It's not just about marketing to its 107.7 million wireless connections. We've seen how well that has worked out for FiOS, and then we get to the tens of thousands of digital titles that need to be corralled in licensing rights for an unlimited digital streaming service to stand a chance.

 

Coinstar would be a much cheaper alternative, but it would really be just gaining a recognized video brand saddled with looming bricks-and-mortar liabilities as optical discs fade in relevance. DISH Network (DISH) did this -- and a lot cheaper since it snagged Blockbuster in bankruptcy.

 

If Verizon's going to do this, it may as well do it right.

 

Gentleman callers on the porch
If Verizon is the only buyer -- and if Netflix is a desperate seller -- things will get boring in a hurry. So let's really rattle the cage, call in the romance novelists, and hand Netflix a dance card for potential suitors to stamp.

 

After all, it's not just Verizon that's been a rumored buyer of Netflix in the past. Let's dig up some old flames.

 

  • Amazon.com (AMZN) has been tied to Netflix for years. In fact, shares of Netflix also rose exactly 6% on June 6, 2007, when the rumor mills were carving AMZN and NFLX inside a heart. That tree's bark proved to be worse than its bite. Netflix appears to have scared Amazon away from a stateside DVD rental service when it showed aggressive pricing mettle before that, and now the mere girth of Netflix is making it hard for the leading online retailer to make its Amazon Prime streaming smorgasbord a force in this realm -- even as it gives it away to millions of existing Prime members. Amazon will always be the most logical buyer for Netflix, and Netflix's overseas push over the past year makes it even more appetizing.
  • Microsoft (MSFT) is another popular suitor. (Microsoft owns and publishes Top Stocks, an MSN Money site.) Netflix CEO Reed Hastings sits on the Microsoft board, and we learned how Xbox gamers are also real video junkies when Netflix streaming was introduced three years ago on Xbox consoles. Microsoft's Xbox Live and Netflix have grown in popularity, but they now see other people. Buying Netflix would not only make Microsoft a force in streaming video, but it raises the tantalizing possibility of making portable streaming exclusive to Xbox gamers, Windows Phone users, and eventually Windows 8 tablet buyers. The move would alienate many Netflix customers, but it would dramatically improve Microsoft's iffy status in smartphones and tablets.
  • AT&T (T) also makes sense, if only in making sure that Verizon doesn't get Netflix. The T-Mobile deal is dead, but regulators won't flinch at this deal. Like Verizon, AT&T has a large base of smartphone customers. I can't see Netflix smartphone streaming becoming exclusive to a single carrier, but it's certainly possible that a telco buyer can make an enhanced platform available only to its wireless customers. AT&T also has a small but growing broadband television service in U-verse that lacks Netflix's reach with couch potatoes.

 

Shutting down the rumor mill
The one thing working against Netflix as a buyout candidate right now is its low share price.

 

You didn't misread that.

 

If a company would have moved to buy Netflix at $300 this summer when its stock was peaking, investors would probably cheer the move. Netflix was a market darling. Buying Netflix at $100 right now -- when it's as popular as a DVD copy of "Gigli" -- would probably send the acquiring company's stock lower.

 

However, potential buyers aren't as emotional as the individuals burying Netflix these days. They realize that Netflix has a seemingly insurmountable lead in this niche and that its stock will begin to turn higher once the subscriber defections stabilize.

 

You know, that could very well be happening now. The "I'm canceling Netflix" fervor has subsided, and it wouldn't be a shock to see the company begin to sign up more new accounts than those bolting by next quarter.

 

In other words, as improbable as a Verizon buyout -- or any acquisition -- may seem right now, we're actually in a rare window where the price may be right for the buyer, Netflix may be a willing seller, and investors of the acquirer will be gradually forgiving as Netflix prospects improve heading toward a deal closing date.

 

Can you hear me now, Verizon? Can you buy me now? Dismissing the chatter is the right approach, but this really is a window that isn't going to be open forever.

 

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. The Motley Fool owns shares of Microsoft and Amazon.com. Motley Fool newsletter services have recommended buying shares of Coinstar, Netflix, Microsoft, and Amazon.com; and creating a bull call spread position in Microsoft. 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.


8Comments
Dec 14, 2011 9:02AM
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It was the arrogance of the Netflix leaders that caused their current financial and investor downturn. Companies larger than Netflix have sunk because of arrogance. Has anyone recently flown on the one time world leader Pan American Airline? I hope that other business leaders take note and return customer service to the top of their business model.

Dec 14, 2011 10:44AM
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As the article points out, starting with a subscriber base the size of Netflix would provide a big advantage to a company that acquires the provider. Plus, if the prices were brought back down a little, and the word get out that the company is under new management, I think it might sway some to give it another try. As a Netflix subscriber (no, I was ticked but, I didn't leave), it would really help if the new company could do something to update the library and get movies on line sooner than they are. This would put them way ahead of the competition. I'm not really sure about the stabilization issue yet as I'm still thinking about leaving as the current executive staff obviously has only money on their mind and could care less about the customer, they definitely proved that!
Dec 14, 2011 8:12AM
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@Stephen: Regardless of your personal feelings toward Netflix, the defections really have stabilized.  Most people who were leaving have already left.  That means that there aren't many people leaving anymore and most of those still there are not likely to leave.  So it really is stable and it is quite possible to start seeing an upward climb in subscribers soon.

 

This has nothing to do with what those who left think.  The article isn't calling them "cattle".  It simply says that those who chose to leave have already left and those who are staying are staying.  You seem to be purposely looking for someone to blame.

Dec 14, 2011 12:11PM
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Netflix is under $ 70 now, not close to $ 100. 

FIOS is a perfect fit of incompetence for them.They ran the wires in our neighborhood in March and said we would be hooked up in 30 days. Hear the crickets chirping? 9 months later and they have not run a wire from the box in our front yard to the house. They spend plenty on advertising, but say they dont have it in the budget to install us this year. Is that stupid or what?

Can the CEO either way.

signed: former Netflix customer
Dec 14, 2011 2:06PM
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I cant even get FIOS step it up Verizon  
Dec 14, 2011 2:12PM
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I live in Baltimore.  Verizon doesn't have FIOS available in my zip code.  Would buy it if they would set up the switching station with the equipment.  Hate C__ma_t and D_r_ct  T_.  Do without. 
Dec 13, 2011 9:50PM
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How about give me free text messaging with my $30 Internet Verizon?
Dec 14, 2011 2:01AM
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....Oh yeah?...Subscriber deflections have stabilized? Is this like saying that all is forgiven for the Bank of America and I'll just hurry on down and open a debit card? I generally find MSN.money writers insightful, but this article seems to suggest that American consumers are just cattle at the trough. Line them up when they are hungry and slaughter them when they are well fed.
Well guys, it is lean and hungry bunch out there and they plan to eat the rich. Let Netflix become a rotting corpse and someone else re-build the sevice when more TVs are directly set up for the internet interface. Why do I want to play it through with my wee-wee?
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