Netflix split to set up Amazon streaming merger?

[Jaaa!&]

Netflix CEO Reed Hastings may have a trick up his sleeve as he separates the streaming and DVD-by-mail businesses: A sale to Amazon.

 

That’s the theory floated by Wedbush Securities Michael Pachter on Thursday and the idea makes sense.

Pachter upgraded Netflix shares to an outperform from underperform. The analyst argued that Netflix formed Qwikster so it can be spun off eventually. From there, Amazon can easily buy Netflix, which would be a streaming business.

In a research note, Pachter said:

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.

 

The tax issue is that an acquisition of Netflix’s DVD business would give Amazon more sales taxes to collect.

Pachter explained:

One of the impediments to Amazon’s purchase of Netflix outright is the state sales tax rules. Under the rules in most states, any company with a physical presence in that particular state (a “nexus”) is required to collect sales taxes for all retail transactions in that state. Amazon has carefully avoided nexus with virtually every state that collects sales tax, providing it with a significant pricing advantage over its brick-and-mortar competitors. Should Amazon have purchased Netflix’s business outright (including the DVD-by-mail business), the company would have found itself subject to sales taxes in virtually every state that imposes sales tax, due to Netflix’s extensive network of distribution centers. Accordingly, we never thought that Amazon would seriously consider purchasing Netflix, as such a purchase would severely (and negatively) impact Amazon’s core retail Internet sales.

 

If Pachter’s theory pans out, Netflix’s separation of its DVD business makes more sense. Initially, Netflix looked like it was botching the customer user experience and annoying users. All true to date. But if Netflix, which will be the streaming business, becomes a takeout for Amazon, the separation and angst would be worth the trouble.

 

source: http://goo.gl/cbCLC

[Krayzie]

Dear Cole,

 

I messed up. I owe you an explanation.

 

It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes. That was certainly not our intent, and I offer my sincere apology. Let me explain what we are doing.

 

For the past five years, my greatest fear at Netflix has been that we wouldn't make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn’t have changed the price increase, but it would have been the right thing to do.

 

So here is what we are doing and why.

 

Many members love our DVD service, as I do, because nearly every movie ever made is published on DVD. DVD is a great option for those who want the huge and comprehensive selection of movies.

 

I also love our streaming service because it is integrated into my TV, and I can watch anytime I want. The benefits of our streaming service are really quite different from the benefits of DVD by mail. We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service.

 

So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently.

 

It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming.

 

Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to qwikster.com to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option, similar to our upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games. Members have been asking for video games for many years, but now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated.

 

There are no pricing changes (we’re done with that!). If you subscribe to both services you will have two entries on your credit card statement, one for Qwikster and one for Netflix. The total will be the same as your current charges. We will let you know in a few weeks when the Qwikster.com website is up and ready.

 

For me the Netflix red envelope has always been a source of joy. The new envelope is still that lovely red, but now it will have a Qwikster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be similar for many of you.

 

I want to acknowledge and thank you for sticking with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly.

 

Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions.

 

Respectfully yours,

 

-Reed Hastings, Co-Founder and CEO, Netflix

 

p.s. I have a slightly longer explanation along with a video posted on our blog, where you can also post comments.

 

 

The email I received from them, and I'm sure many others did. I doubt that Netflix will be merging or selling anything. Otherwise they would lose money.