Netflix: To Acquire Or Be Acquired

| About: Netflix, Inc. (NFLX)

There should be no argument that Netflix (NASDAQ:NFLX) has done an amazing job of destroying its competition since its start in 1997. It took a virtual approach to a historical brick and mortar business model that has been dominated by Blockbuster (BBI) and smaller mom and pop movie rental enterprises. The success and capabilities of Netflix, we believe, led to a Blockbuster US bankruptcy in September 2010 and an announced bankruptcy of Blockbuster Canada in May of 2011. The question is can it continue to do it alone, or will it soon need to make giant leaps to stay ahead of its competition given the focus and cost of content?

We believe there are many potential opportunities for NFLX in the future, but two situations that we discuss below could be especially interesting for shareholders of both of the companies. We have briefly outlined both opportunities below which involves one being a potential target for NFLX and one having NFLX as a target.

Potential Target: AOL, Inc. (NYSE:AOL)

This seems to be an interesting fit as a result of its quest in being a major player in the original content and media sector. AOL, through its Cambio platform, has previously announced a slate deal with Dolphin Digital Media, Inc. (OTCPK:DPDM) involving 4-6 original scripted webisodic programs and also has content from Warner Brothers (NYSE:TWX), Mark Brunett and many other large brand name players that are focused on creating such content.

A NFLX / AOL combination would broaden the user base of both platforms, while also bringing together to highly known brand names. NFLX would benefit from the existing viewership and traffic of AOL, the original content currently secured by AOL and the new markets and distribution methods that they can offer to the brand. AOL would benefit from the broader content already secured by NFLX as well as an additional revenue stream to offer via and brand names.

It appears this would have to be more of a hostile approach given Tim Reynolds, CEO of AOL, has stated Netflix's intention of staying an independent business as it builds out its platform. But if NFLX stock rebounds from its recent decline, this could be a viable option as we believe AOL would only go for a large premium to market, and NFLX would need its currency to appreciate from its current levels to meet such demands.

Potential Acquirer: Time Warner Inc. (TWX)

This one could be a stretch, but Time Warner very well may be looking to broaden its suite of products and acquire the best of breed players in the content distribution environment. In turn, Netflix could potentially get exactly what they need through TWX’s already existing breadth of content. These two businesses coming together could save TWX a significant amount of costs of building out its on demand product that it is currently offering by combining it with Netflix’s already existing streaming product.

If acquired, we believe maintaining the Netflix brand name on certain product offerings, despite the recent negative sentiment, would be an important aspect for the company. If TWX was to attempt this deal they would have to offer NFLX a major premium to market especially given the recent turmoil in the market.

Given the recent developments of Netflix and the mishaps around communicating its pricing strategy, we believe NFLX is oversold in the market and still has a bright future given its strength in its sector and brand name recognition. This future may exist as a standalone operation, but we believe Netflix could significantly enhance shareholder value either as a potential acquirer or as a major subsidiary of a parent holding company in the entertainment sector.

Disclosure: I am long AOL, NFLX.