Can Netflix Escape Amazon's Grip?

Feb.12.13 | About: Netflix, Inc. (NFLX)

The two most over-priced stocks on the market today are probably Amazon.Com (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX).

It's not a coincidence.

Over the last year Netflix has emerged as one of Amazon's most regular and valuable cloud customers. Despite repeated outages at Amazon's Virginia facility, Netflix has actually gotten more deeply-embedded in Amazon's orbit, not less.

It's gotten to the point where Netflix is busy solving some of Amazon's most vexing cloud problems. The company is in the process of releasing a series of open source programs, with "monkey" as a naming theme, aimed at making use of Amazon's infrastructure easier and more flexible.

In doing this, of course, Netflix is hoping to get help from other companies, and from outside developers who also use Amazon for their cloud infrastructure. It seems to be succeeding at that, drawing large crowds of open source developers to its events whom Amazon wouldn't let in the door.

While other companies, most notably Facebook (NASDAQ:FB), have abandoned Amazon for their own cloud infrastructures as soon as they saw the growing dependence, Netflix has stayed loyal. Thus, the techniques it is developing to extend its reach, like OpenConnect, will work seamlessly with Amazon's Web Services - it's what they were designed around.

While most investors see Netflix and Amazon strictly as competitors, they are in fact complementary. Amazon would have a tough time replacing Netflix' revenue, especially given its wafer-thin margins, while Netflix is becoming increasingly dependent on Amazon's technical standards for its very existence.

How will this end? The way such things usually end, with a marriage. The next time Netflix falls hard - and it will - look for Amazon and no one else to be its white knight. They need each other.

Forget about Google (NASDAQ:GOOG) buying Netflix, or Apple (NASDAQ:AAPL) buying Netflix. Either Amazon buys it or no one does.

Disclosure: I am long GOOG, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.