Netflix an acquisition target? The case for and against

Samantha Bookman wonders if Netflix is an acquisition targetAbout a month ago, Paolo Pescatore, an analyst with CCS Insight outlined the idea that Netflix may be a shiny acquisition target. While the thought seems a little far-fetched -- Netflix almost certainly has no interest in being bought -- it isn't the first time this possibility has been floated, and now other outlets have picked up the ball and are outlaying cases for acquiring Netflix.

So far, a number of potential buyers have been named by Pescatore and others: from Alibaba to Google (sorry, Alphabet), and from Apple (NASDAQ: AAPL) to Comcast (NASDAQ: CMCSA).

Let's take a quick look at why these companies may or may not want to buy Netflix:

Alibaba

Why would a China-based Internet company be interested in Netflix? And why would Netflix be interested in being bought by them? Simple: It's the easiest way for Netflix to get its service into China and start picking up that huge untapped broadband user market.

Foreign companies cannot operate within China unless they partner with existing Chinese companies, meaning Netflix just plain can't launch its service directly in China the way it has in Europe, Australia, Japan and even Cuba.

Netflix so far has been cautiously circling China, dipping its toe into the waters by licensing some of its content, including its flagship series, House of Cards, to Chinese online video services like Sohu.com.

Hence the rumors about Alibaba, an online retail giant that dwarfs Amazon in terms of sales. Buying the SVOD provider would certainly solve the problem of launching a branded Netflix service in China.

However, Alibaba is already building a Netflix-like SVOD service, TBO (Tmall Box Office), and has a solid presence in China's online market, a good relationship with major media companies there (allowing it to bundle TBO with pay-TV offerings, for example), and inroads with the Chinese government. The company is a formidable competitor that Netflix will have to face if and when it enters China on its own.

In the meantime, Netflix is staying mum about its plans for China. "I would say China continues to be sort of its own entity in terms of the challenges and the particular characteristics of the market," said Netflix CFO David Wells. "We're taking our time and being deliberate in finding a path and the right model to work."

Alphabet (Google)

Another possibility in the acquisition arena is Alphabet -- the rebranded Google (NASDAQ: GOOG). Beyond the mild note that the company doesn't need a division to fill the letter "N" (Nest occupies that space), owning Netflix could give Google Fiber an additional competitive edge.

The purchase would also help stabilize Netflix, which operates on pretty thin margins at this point (1.6 percent as of June 30) as it continues an aggressive growth trajectory.

"An acquisition by a Web company would give Netflix more reach and greater stability as it expands," Pescatore said in his note on the possibility.

At the same time, Google Fiber doesn't need Netflix to succeed in the broadband arena. Already, incumbent service providers like AT&T are systematically slashing their broadband subscription prices in areas where Google Fiber operates or will be building out to. The threat of affordable 1 Gbps broadband alone has spurred competitive pricing activity in areas like central Texas, Nashville, Atlanta and Charlotte, N.C.

Apple

So, what about Apple? It's another huge technology player trying to establish an unshakeable foothold in the OTT space. The company has a "cash hoard that is big enough to buy a third-world country," with a market cap of $200 billion, analyst Victor Alagbe said in a LearnBonds article. It could easily swallow up Netflix, which has a cap of just $45 billion, he argued.

Furthermore, Apple has been unsuccessful in launching its much-talked-about linear OTT service. Would acquiring Netflix help it?

The first clue here is the word "linear": Apple has been approaching the OTT segment with an eye to becoming a virtual MVPD. Video on demand service would be a secondary consideration. Given Apple's focus on being not just a supplier of products and services, but a highly integrated, market-dominating company, it's no surprise that it has avoided rushing to market with a linear OTT service. Apple will crack the technology and licensing roadblocks that plague the virtual MVPD concept -- such as serving local TV to local audiences, a problem CBS All Access is also hammering away at -- or it won't launch its service.

The second issue is that Apple doesn't really make high-profile purchases. And buying Netflix would be a very high-profile move. That might also signal to the industry that Apple's IP delivery infrastructure is perhaps not up to the task of delivering large amounts of video -- something Netflix has been working on nonstop since debuting its streaming service in 2007. If true, that's something Apple would not want to highlight.

Comcast

Why would it make sense for Comcast to buy Netflix? According to a Forbes article, buying the dominant SVOD provider would instantly give the cable giant a base of nearly 43 million subscribers in the U.S., and a strong library of originals. Comcast is also a part owner of Hulu, so owning Netflix could generate some interesting content and licensing models between both SVOD providers.

But Comcast just launched an OTT service, Watchable.  Would it ditch that service to chase Netflix instead? Based on the business model it put forth for Watchable, it seems unlikely.

Furthermore, Verizon's experience with attempting to meld an already-established brand, Redbox, into its existing VOD strategy was, to put it mildly, disastrous. The experience probably didn't give Comcast any warm fuzzies about incorporating an outside OTT player into its fold.

So while tantalizing, don't look for an acquisition of Netflix to happen anytime soon. Then again, the OTT market is an interesting thing to watch, and as consolidation begins to pick up in the ecosystem portion of IP video delivery, we may see some surprising moves yet. --Sam

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