Who Wins In The Netflix Breakup?

by: Dana Blankenhorn

The Netflix decision to divide its service in two – with mail-in DVDs to be called Qwikster – has everyone predicting doom for the company, and I'm not going to get in their way.

But it also provides opportunities, and the chance for investors to ask where the power lies in this business. I am certain many at Seeking Alpha will say it's in the copyright, that the movie studios and TV networks that supply content to these services can now control the market, and the price.

  • I disagree. I continue to insist that it's in the channel, the relationship between a willing buyer and the product being sold. The power of Netflix lay in controlling that relationship. Now that relationship is up for grabs. And here are some companies that might grab it:
  • WalMart (NYSE:WMT) – You may not know this but WalMart's Vudu service is the third largest content streamer. WalMart also has a direct channel to consumers for their video purchases. So why not do what the phone companies do – offer a discount on the set for a year-long subscription to Vudu? And make sure its software is installed as an app on every video unit the company sells.
  • Amazon (NASDAQ:AMZN) – Brian Caulfield of Forbes says Amazon can stand a tablet price war but doesn't say why. It's because Amazon can control the resulting channel. We know the Kindle is designed to sell books. So as a tablet it's bound to be able to sell Amazon's streaming video services as well.
  • Apple (NASDAQ:AAPL) – Ditto. Apple controls the music market through its iTunes store, and has been bidding to control the video market as well through the iPad. Here is its opportunity.
  • Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG) will also be eying the collapse of Netflix as an opportunity. Microsoft says it will be the exclusive seller of software and services through its Metro user interface, designed into Windows 8 for use in tablets and phones. Google offers the lowest-cost Internet infrastructure out there, and I've speculated for months it could buy Netflix after its collapse.

I know the first instinct here is likely to bid the stocks of movie studios and TV networks higher, and assume they will control the channel. But name me one business where the producer controlled the channel. Publishers need stores, because managing relationships is not in their business DNA. I don't think that's going to change.

Just the nature of the store will change.

Disclosure: I am long GOOG.