Dave,
OK. Forget BBI vs. NFLX. Instead, imagine yourself in Jeff Bezos’ position. You want to get into online DVD rentals and have already launched in the UK.
If you build from scratch, it’ll cost you approx. $250MM to open 30 distribution centers and stock a substantial DVD library. In addition, it’ll take you probably 2 years to amass 2+ Million paying subscribers.
On the other hand, you can simply acquire Netflix for approx. $600MM, a 25% premium over NFLX's current market value. Acquiring Netflix would allow you to hit the ground running with almost 3 Million happy, paying subscribers.
The build vs. buy ratio has changed dramatically in favor of buying since October, 2004, when the market first learned about Amazon’s interest in DVD rentals. Back then, NFLX had a market cap of around $1 Billion.
In addition, I believe that Amazon can operate Netflix much more efficiently than Netflix operates on its own. Netflix’s Subscriber Acquisition Cost (SAC) is over $35. And at $100MM+, marketing expenses are by far Netflix’s biggest operating expense.
In contrast, Amazon CFO Tom Szkutak previously stated, "Our customer acquisition costs can be low to none, given Amazon.com's traffic and certainly from our subsidiary IMDB, the Internet movie database"
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Amazon's potentially-low SAC is also evidenced by the fact that Amazon's IMDB site generates almost twice the daily traffic as Netflix's site.
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Consequently, Amazon's SAC would be very low, perhaps less than $5. If Amazon operated Netflix, then Amazon would likely be able to pocket almost all of the $100MM annually that Netflix currently spends on marketing.
Ultimately, I believe that there’s a floor on how low NFLX will go. Wedbush Morgan analyst Michael Pachter has stated that NFLX will hit $3/share. I think that this prediction is way too extreme, as NFLX brings substantial value to the table, especially if operated by a better-capitalized entity such as Amazon.
I don’t see NFLX going much lower than $6/share. Hopefully, NFLX will lower guidance, as I’d love to pick some up under $8/share. |
