Falling Netflix Shares Might Attract A Hungry Buyer

Apr.25.12 | About: Netflix, Inc. (NFLX)

As I stated in my last column, I believe that Netflix will be facing a massive wave of competition, degenerating in scope and stock, as competitors bid up content rates and build their own streaming services.

While I have been short the stock, which was a pretty good move considering after hours action where it dropped 16% on disappointing customer numbers, I do not believe the company is without value, and I feel that there is an good chance someone might wish to purchase the company, which of course might not be so great for my position. So let's run trough the possible candidates.

Unlikely potential bidders (though possible) include Walmart (NYSE:WMT) and Viacom (NYSE:VIA). Walmart, having appointed Google VP Marissa Mayer to their board, is trying to get more "internety," which is an actual word Walmart execs use, which shows you what I think of their chances, despite their own streaming service, and their new service where they charge customers who own physical DVD's $2 for their own web stream rights to the film.

Viacom would be shooting themselves in the foot, as they'd much rather sell their content to Netflix rather than start their own streaming service. In buying Netflix they would be cannibalizing a HUGE customer.

Comcast (NASDAQ:CMCSA) is another unlikely bidder, having begun their own streaming service Streampix, which undercuts Netflix (NASDAQ:NFLX) on price, available only to current cable subscribers in an effort to keep them from "cutting the cord."

On the next level up, are Apple (NASDAQ:AAPL) and Verizon (NYSE:VZ).

Apple, the famously tight lipped company, who has Apple TV coming out, has not shown any willingness to pay for content, as evidenced by the following interview given by Viacom CEO Les Moonves to CNBC, as he relates a story of a conversation he had with Steve Jobs about putting his content on ITunes--

"There was a story reported, which was true, about Steve Jobs and I discussing putting CBS content on Apple, but we felt he didn't want it pay for it. What Netflix is paying for right now, they're giving us hundreds of millions for that content, Steve Jobs wanted us to put the content on and play with him on terms of subscriptions. We didn't think that was the wisest thing to do. We need to be protective of our content. We make billions in advertising. We make billions in syndication. We make hundreds of millions in retransmission. The idea is to put your content online, that enhances that, doesn't take away or cannibalize our main business. Our content are the family jewels."

Despite Apple's bottomless pockets, they have shown remarkable restraint in buying companies, purchasing only if it met its broader strategy, which is heavily hardware, and I just don't see Netflix fitting in.

As for Verizon , they have partnered with CoinStar (NASDAQ:CSTR) in streaming/DVD distribution deal which would make Netflix's DVD segment redundant, and an impediment to any deal. Perhaps this was why Reed Hastings originally attempted to break off the DVD service in the Quixster move , to help grease the way to a sale. (with unfortunately disastrous results for the company)

This leaves three companies who I believe would have any real shot/ interest in purchasing Netflix. Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), and Time Warner (NYSE:TWX).

Must see TV, Video: Amazon or Google buys Neflix

Time Warner has the pipes, and the combination of HBOGo with Netflix is a service that as a consumer I would find mouth watering. There is a tremendous amount of really good Time Warner (specifically HBO) content, that combined with Netflix's streaming library, would have me sign up for the service instantly. (I am a former Netflix subscriber) I could see this taking place, as the combination would jump them to industry leader.

The two most likely vultures however- Google and Amazon.

Google cares about speed. Not just internet speed, but speed of growth. It is why Larry Page offered 6 billion for Groupon, which I am glad was spurned, as the barriers to entry to internet coupons is small, and in developing Google Offers, they have created a viable competitor in short order, capitalized on their vast amounts of traffic, and saved shareholders money.

The point being, just the offer and its size shows just how much Google values speed of growth, and how much more likely they are to pull the trigger on a Netflix purchase than aforementioned Apple.

With their upcoming Google TV, YouTube will undoubtedly be a major part, and Google has invested 100 million dollarydoos into fresh, proprietary content from known Hollywood players, and the addition of Neflix, its library, and its new content seems like a very solid play.

However, of all the companies mentioned, a combination with Amazon makes the most sense.

First off, Amazon already has its own streaming service, both pay per view, and the all you can eat Netflix variety buffet, in Amazon Prime, which costs $79 a year and includes two day shipping on all additional Amazon products at no additional charge, which makes for a pretty good deal.

I am a member of Amazon Prime, and they recently upgraded the streaming catalog for the service, but it still does Not come close to rivaling Netflix. Given the fact that Amazon is trying to upgrade their content, and also trying to recruit Hollywood players to create their own shows, doesn't a massive upgrade of Netflix's library make sense? I think of my Amazon Prime pre-paid year as a free call option on this merger.

And Why does Jeff Bezos, Amazon's exacting CEO, want to offer this all you can eat buffet, to upgrade his library? Because everything that Amazon does is designed to make it the center of the E-Commerce world. Bezos dreams of the day when his company fulfills every order, for every item demanded by mankind, and adding value to the Amazon consumer makes them a more loyal customer, it helps create the Amazon ecosystem.

Additionally, a Netflix purchase gives Amazon access to devices they are not currently on, like the Xbox, for their online store, and helps with technical problems Amazon currently has with video streaming onto devices other than the Kindle Fire.

Netflix already is on the Amazon cloud, further reducing friction, however slightly, associated with any sale.

I am sure that some of you might cry over the negative effect this may have on the Amazon balance sheet, to which I answer: 1) Amazon has no debt 2) Bezos has never been afraid to make a bold brazen move if he thinks it will better his company.

So to me, I could really see Amazon (or Google) buying Netflix if the stock falls. I am currently short Netflix, but in evaluating the possible negative sides of the short, I have to take this possible acquisition into consideration, which is why I run through this exercise. I would cover my Netflix short in the low 60's as at that point I see an acquisition looking more palatable to buyers. Netflix is by no means a worthless company, it was just overvalued.

Disclosure: I am long GOOG.

Additional disclosure: I am short NLFX