It sounded crazy to me at first... but then thinking about the fact that Netflix streaming only has nexus in California, the one state where Amazon has just reached an arrangement with over taxes, it suddenly seems plausible. It certainly would fit Hasting's history of building up and selling.
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Netflix To Sell Streaming Biz To Amazon, Analyst Theorizes
forbes.com
Eric Savitz, Forbes Staff
Now here’s a theory I haven’t heard before. Wedbush analyst Michael Pacther this morning floated the notion that the real goal of the Netflix decision to split the business in two was to prepare for the sale of the streaming business to Amazon.com. That is a stunning, career-enhancing call if he happens to be right.
Pachter this morning raised his rating on the stock to Outperform from Underperform, while boosting his price target to $155, from $110 on this loopy idea.
“Upon reflection, it appears to us that the driver for the separation of Netflix into two businesses—Netflix.com (for streaming) and Qwikster.com (for DVD rentals) —was to position the streaming business for sale to Amazon.com,” he writes in a research note. “In our view, Amazon has always wanted to be in the streaming business, and has been constrained from buying Netflix due to tax considerations. The split up of Netflix’s business addresses the state sales tax issues raised for Amazon in having a ‘nexus.’ If Amazon were to acquire only Netflix’s streaming business, it could triple the size of its content library, and gain traction as an industry leader. Netflix streaming has current content deals that provide it with access to movie content during the premium cable TV window, and Amazon has the financial resources to secure additional streaming rights, including Starz content. Netflix’s financial flexibility is quite limited, while Amazon’s is virtually unlimited.”
Pachter offers a variety of reasons that such a deal makes sense:
Taxes: Buying only the streaming business would avoid the sales tax consequence of having fulfillment centers across the country, which would create “physical nexus” in states where they Amazon does not currently collect sales taxes. Amazon would triple the size of its content library, and increase the allure of Amazon Prime, which includes streaming in addition to shipping. Content: Netflix has streaming deals that Amazon lacks. The deal would eliminate the biggest competitor for a serious streaming play from Amazon. Amazon has far superior financial resources to Netflix, potentially allowing them to pay for content that Netflix can’t afford. Reduced customer attrition: He notes that Amazon can provide services – like Prime, and discounts on merchandise – that Netflix cannot, giving subscribers an incentive to stick around. Now, I want to underline here that Pachter is guessing; neither side has discussed such a transaction publicly. Give him credit for thinking creatively, at least.
Meanwhile, UBS analysts Brian Pitz and Brian Fitzgerald today upped their ratings on the company to Neutral from Sell, while trimming their target on the stock to $130, from $185. They write that valuation now seems “more reasonable,” following a 58% drop from the stock’s 52-week high in July, and a 38% retreat in just the past 7 trading days.
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