Sell Netflix to Amazon? That Might Be Crazy Enough to Work:
This whole Netflix-Qwikster split had a fair number of people wondering if Reed Hastings had lost his mind.
Hastings is no dummy, though, so there’s got to be some sort of method to the perceived madness. Industry analyst Michael Pachter wrote in a note to clients the very same thing; that there’s “a method to their madness,” reports MarketWatch.
Pachter’s theory? Netflix could sell its streaming business to Amazon, a company with deep pockets that’s been aggressively trying to make inroads with its digital content offerings. It’s done well with digital books, it’s still trying to get its footing with digital music, and perhaps now we get to see how big it can go with movies and TV. And what better way to go big with streaming movies and TV than to buy the company best known for streaming?
I don’t agree with this logic, for one reason. Netflix is a very useful brand; they wouldn’t attach the brand to the part they intend to sell. so the intent, I think, is to keep the streaming, because that’s the part branded as Netflix moving forward.
I do think there’s a good reason to do this that I haven’t seen others talk about. It comes back to two key points:
First, I think pretty much everyone agrees that at some point, streaming is going to disrupt and kill mailing DVDs out via the post office. So if Netflix doesn’t disrupt itself, someone else will do it to them at some point. It takes a brave company to make the decision to take itself on and take a short term hit to implement a long-term strategy, so I give Netflix major kudos for being willing to take this step, whether or not it succeeds.
Second, Netflix has struggled to convince the studios and media owners to license for streaming. Early on, the streaming service was layered on top of the physical Netflix to bootstrap it. Now, it’s mature enough they’re shifting gears to make it independent, even though in the short term this hurts Netflix and its revenues. Why?
Because in the old model, revenues were co-mingled with both services. It’s easy for studios to downplay streaming and not see a reason to license to it. Now, in this new setup, the physical DVD revenues and the streaming revenues are completely separate, and negotiated separately. the Netflix team can look at the studios and say “here’s the money you’re going to get from selling us DVDs” (and see how it’s dropping?). And here’s the money you can get from licensing for streaming” (and it’s going up). It makes a clear, pure financial statement to the studios they can’t argue. it doesn’t mean they’ll buy into it immediately, but no longer can they claim ambiguity about where the money comes from, or financial shenanigans about how it’s generated. Both forms of media will be accounted separately, and Netflix can use that to negotiate and leverage with the studios to get that material into the streaming part of the company.
So to me, this is part of the Netflix strategy to convince the studios it’s time to get serious about licensing for streaming. It’s going to mean a short term hit to the company, but in the long run, it sets Netflix up to own the market for streaming video the way it owned distributing DVDs. And if Netflix doesn’t do this — someone will do it to them.
give them credit for being willing to take the hit. Few companies would.
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