Netflix Split

Just to create some context around this issue and why it’s important, consider this: Netflix streaming videos take up 20% of the bandwidth on the across the entire  internet in United States at any given time.

They are a giant, and in one of the busiest weeks in tech news… well… this month : ) the Netflix Split raises eyebrows.  It comes at the same time that Facebook, and Amazon are making some major moves and I would argue that this is not a coincidence.

Netflix proclamation last week that it was splitting its business model in half, decoupling its mail-order DVD service from its streaming service was met with outrage from consumer and a steep drop in the stock market.

Individual customers and some industry critics are both assuming that the split signals the beginning of the company’s descent from its pinnacle and many have predicted huge losses in subscribers over the long-term (in fact, Netflix lost several million subscribers in the days immediately after the announcement). But if the Qwikster split were destined to create such havoc in the long-term, why is Netflix CEO, Reed Hastings sticking to his guns? Could it be possible that there is a deeper, as yet unrevealed strategic logic behind this sudden shift?  What does Reed Hastings have up his sleeve?

One possible scenario: Netflix might be trying to rearrange its business to make itself more attractive, structurally ready for a merger.  But what larger company is in a place to buy the video-content giant?

In a word: Amazon.

Amazon, with its recent build-out of new services and products (such as the Kindle Fire, introduced Wednesday), offers a major nexus of cloud computing resources, some configuration of which is already necessary for Netflix’ continued functioning.

If Amazon purchases Netflix, both companies benefit, which is–of course–a theoretical pre-condition for any business merger, however in this case both companies are acting out of a position of strength, which would make the merger a sort of rare beast.   Amazon is better capitalized and has a broader customer base.  The data collected by both businesses could be used in total to amplify both companies’ sales.

Merging with Amazon would allow Netflix to triple its inventory of licensed content–more than replacing the loss of diversity offered by the DVD service and catapulting its lead to create an unbridgeable abyss between itself and its nearest rival, Blockbuster.  Coming up behind Netflix any customer will find itself in a Bing-like position: there will be just nothing left to do but try desperately to replicate every last move that Netflix has made.

The clincher: splitting from Qwikster removes a major hurdle for Amazon in purchasing Netflix: navigating geographical tax issues.  Why else would Reed Hastings have alienated so many millions of customers and watched unblinking while his company’s stock prices plummeted?
Let’s take a more granular look at three reasons why there’s an excellent chance that Netflix is planning a merger with Amazon:

No. 1: Triple your inventory, Triple your power
If Netflix were to triple its inventory online streaming video content, this would virtually spell the extinction of physical competitors who are slinging objective, archaically materialist merchandise.

Amazon already has a content-library of considerable bulk that they offer to customers for streaming.   But Amazon’s library is overwhelmed by the sheer scale of media available to Netflix through its manifold licensing deals. If Amazon could on the Netflix licensing deals along with its content library, the combination of licensing powers combined would have a multiplying effect.  Rather than simple addition we’re talking about exponential expansion here.

The resulting hybrid would be able to offer so much video-content that no physical competitors will be able to offer any real resistance to the service. There will always be YouTube, but like many of Google’s recent attempts to plagiarized the concept of other successful companies (Facebook, Groupon and Yelp to name a few) Google’s attempt to catch up with Netflix by charging for streaming on YouTube will probably fizzle.

Many Amazon users are unaware of the availability of streaming video on the site and, when they finally stumble upon it, they’re often disappointed by how shallow the library is (iTunes selection is similarly disappointing).  Absorbing Netflix would not only strengthen Netflix, it would strengthen Amazon.

No. 2: Amazon’s got mad $$$

With $34.2 billion in revenue in 2010, Amazon’s market cap dwarfs Netflix, whose market income was a comparatively  $2.17 billion in 2010.   Due to the high cost of buying up new content licenses, a process that is especially complicated by the reticence of major television networks and movie studios to move away from a business model where they were selling physical DVD’s,

Amazon is better provisioned to boost Netflix’s already massive library up to the ceiling that it needs to get to catalyze a transformation in the industry akin to the one that took place in the music industry at the beginning of this century. The onslaught of cash that Netflix would get plugged into if they hooked up with  Amazon would buy them a place at the table with even the biggest studios.

At present, such as, TV shows and movies aren’t available on Netflix until they’re released on DVD, but with enough capital backing the company, Netflix could negotiate for deals like Hulu, where new episodes could be streamed anywhere from one day to one week after the original air date.

No. 3: Pooled Demographic Data

Amazon uses a recommendation system built up from a customer profiles. Purchases made by customers, viewed or filed on their wish-list get saved to Amazon’s servers and used to create an overview of an individuals tastes and preferences.

Similarly, Netflix allows users to rate items they’ve viewed and pays attention to what kinds of shows and movies they watch, using that information to recommend other media to keep users engaged.

If Amazon and Netflix  pooled their demographic data, they could build up more fleshed-out profile of the media consumption habits of their customers and leverage that to give more accurate recommendations, amplifying user consumption.