Facebook and Netflix: What Collaboration Could Mean

Jun.27.11 | About: Netflix, Inc. (NFLX)

Facebook announced last week that Netflix (NASDAQ:NFLX) CEO Reed Hastings will join the company's board of directors. And with that announcement a potential "Netflix killer" not only declines to attack the online video provider, but now appears poised to collaborate with the company at a much deeper level than has been widely expected.

After all, it was only four months ago that Facebook offered a pay-per-view streaming of Warner Brothers' The Dark Knight on its platform. At the time, analysts interpreted the move as a "shot across the bow" against Netflix in the "escalating battle over online entertainment." Netflix shares dropped over 5 percent on the news.

It turns out that observers expecting a long fight between the social giant and streaming upstart will be clamoring for refunds. That battle has been canceled. In its place, investors are left with a still rapidly changing online media environment, but one that appears to benefit Netflix, Facebook, and also Microsoft (NASDAQ:MSFT), while challenging Google's (NASDAQ:GOOG) position.

Don't Act Surprised

The Netflix-Facebook brawl was never really a high probability in the first place. Just two months before the Dark Knight episode, Netflix released its Q4 2010 results. And in his shareholder letter (available here), Hastings had this to say about Facebook:

We’re working on an extensive Facebook integration, which will further the notion of a personal Netflix account.

"Extensive integration" doesn't sound to me like the kind of project you take on with a bitter rival. In fact, I would avoid using the words "extensive integration" to describe my relationship with just about anyone. The term may not be the corporate equivalent of "best friends forever," but it's close.

Direct competition between the two companies never quite made sense either. Netflix is not in the business of promoting popular releases in a pay-per-view model. Instead, the company focuses on the unlimited streaming of back catalog, prior season, and serialized content. If you don't think that's a vibrant and separate business from new releases, flip through your TV stations and take note of all the reruns, syndicated, and back catalog entertainment being offered.

Hastings brings some unique talents and experience to Facebook's board, at a critical time for both companies and the industry. Collaboration between the two tech leaders could mean a much different online media landscape.

You Scratch My Back

For Facebook's part, the company could benefit from Hastings' experience taking a company public, which Facebook may be preparing for in 2012. Hastings also sits on the board at Microsoft, which has been including its own deeper integration of social features in a bid to differentiate the Bing search engine from Google's.

More importantly, Hastings knows how to go about securing content for internet distribution. That's why it's no surprise when Hastings says he is ready to help Facebook "share all kinds of content." Video content in particular is something that Facebook needs as it seeks to pry eyeballs away from Google's search and YouTube. Facebook must expand its content umbrella in order to convince users to spend even more time experiencing the web through its platform.

I'll Scratch Yours

For Netflix's part, the company tried to integrate social features but gave up last year after they failed to catch on with users, leaving a glaring hole in Netflix's user experience that the company is itching to fill.

And then there is Netflix's major strategic push to broaden the company's addressable market. It plans to launch in a second international market this year, and has made some commitments in a third, which it intends to launch in early 2012. Aiming to take full advantage of its internet roots, Netflix sees an opportunity to go after a dramatically larger footprint and in the process leap-frog cable and broadcast companies like Comcast (NASDAQ:CMCSA) who are still shackled to their regions. Facebook has experience taking an internet platform global not to mention a strong platform already in place in key markets.

At a minimum, a cozy relationship between management teams makes some strategic sense for both Netflix and Facebook. And a deep integration of Facebook into the Netflix platform could turn out to be a win for both companies in the evolving internet media landscape. The scrapping of the online video battle might have disappointed some, but the entertainment is just beginning.

Disclosure: I am long NFLX.