Purely Conjecture: A NetFlix/Amazon Hookup?

A few days ago, NetFlix (NASD: NFLX) filed a  Executive Severance and Retention Incentive Plan, form 8-k, with the SEC.  The filing, for the first time, provides generous severance pay to a wide range of company executives in the event of losing their job--presumably in a buyout:

3.2 Severance Benefit. Each Covered Executive who becomes eligible for a Severance Benefit under Section 3.1 shall be paid a lump sum cash payment equal to nine (9) months of Base Pay and nine (9) months of Stock Option Allowance Value. The Severance Benefit shall be paid to the Covered Executive as soon as administratively practicable following the Severance Date, but in no event more than two and one half months following the Severance Date but subject to the Covered Executive’s compliance with Section 3.3.   

3.3 Release and Non-Disparagement Agreement. As a condition to receiving a Severance Benefit under this Plan, each Covered Executive will be required to sign a waiver and release of all claims arising out of his or her Involuntary Termination and employment with the Company and its subsidiaries and affiliates and an agreement not to disparage the Company, its directors, or its executive officers, in a form reasonably satisfactory to the General Counsel of the Company.

Companies, presumably, don't make such filings for nothing, it's certainly possibly that a buyout is in the works.  Besides the fact that the company has a great brand, and zealous customers it doesn't hurt that they're selling at around 1-time next year's sales, that they have 1/6Th of their market cap in cash, no debt, and are expected to grow revenue at a 31% clip next year.  Their competition, Blockbuster, is quite weak, and they even have Wal-Mart in their camp.

So who could be a potential suitor?  How about Amazon (NASD: AMZN).  They've already got an extensive distribution network in place, so they could probably streamline the two operations, and it would make for a an immediate increase in customers to whom they could make other pitches, offer coupons, or incentives for low-cost shipping.  Furthermore the home of books and kitchenware on the internet still doesn't have a good strategy for distributing digital media and they've been on a bit of a buying spree lately.  Netflix isn't a digital distro, per se, but their captive and zealous customer base would probably follow them to the land of digital downloads when they choose to go in that direction.

If you're looking to speculate some money on a buyout candidate, perhaps this is worth your look.

(This Author has NO stake in any of the companies in this article)

Comments

[pwb]

I can see NFLX getting purchased but my money's on Barry Diller. NFLX just put two former IACI excs on its board. Amazon could replicate NetFlix in a few monhts at a much lower cost and without the additional warehouse baggage.

[Martino Mingione]

I do recall that The Economist started an article off last week with this line:

"LATER this year, Netflix will launch a new service for downloading movies from the internet. 'It will be underwhelming,' promises Reed Hastings"

Perhaps Internet distribution of Netflix movies is the straw that breaks the Amazon's back and forces some reaction?

[The Other Stalwart]

Interesting speculation. It would seem Netflix is getting ready to be bid on by *someone*. It could be friendly or a hostile, but it seems that they are getting ready for some sort of action.

As for Amazon replicating the business easily- I think its a harder task than it seems. Netflix has pretty strong brand-awareness, and has everything up and running. Can Amazon afford to wait a year or so to get a copy-cat business up to speed? They would also face the risk that their copy-cat flops.

I also read that Economist article which was commented on, I was suprised by Mr Hastings' description of the new downloading service as "underwhelming".

[pwb]

I think it's actually a lot easier than it looks.

It's one of the very few big services that you can build slowly.

For example, you could literally launch merely offering the current top 100 movies to 3-5 markets (NY, LA, SF, etc.).

Amazon already has all the reviews, recommendation engines and IMDB. It'd be crazy to spend a lot of money on more warehouses. DVDs are outrageously easy to store.

[The Other Stalwart]

Good point, thanks for the comment. I guess the way I see it is that perhaps, for Amazon, buying netflix isn't about buying extra warehouses. Those would just be extras, to be shut down due to redundancy.

Perhaps at $730Mn net of cash, you're paying just for the happy customers who are already using NetFlix, plus the fact that everyone already knows what NetFlix is, and that it is reliable.

How long would it take for Amazon to get something running that is equal to Netflix? 2 years? 3 years?
Over the course of these 2-3 years, there are opportunity costs such as lost dvd revenues (from not buying the up and running Netflix) *and* lost add-on Amazon sales to Netflix's already built up customer base.

I'm not sure if this value adds up to $730Mn, perhaps someone could do the math, but this is the value I'm referring to, you are right in that the warehouses are worth nothing to Amazon.

And one final question: How many years do we have left for DVD delivery (until dvd downloads are a reality)? If Amazon goes it alone, maybe they won't have their DVD business running at full speed before the whole service changes. By then Netflix could have already transitioned their customer base to online downloads- and thats when the competition will get fierce- but thats for another post. Ok I've got to run. Thanks for the contribution.

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