As Netflix continues to build one of the most formidable online movie services, investors continue to send the company's stock price soaring.
For that reason, Amazon.com may be considering an acquisition of the Web's No. 1 movie rental service, according to a report Thursday in The Wall Street Journal.
Rumors that Netflix is an acquisition target are nothing new and the Journal story is definitely long on speculation. But the author makes a good case for why an acquisition makes sense. For the past couple years, Netflix has been one of the tech sector's most compelling growth stories. This week, the company reported another blowout quarter, as profits rose 36 percent to $30.9 million and revenue jumped 24 percent to $445 million. Netflix also boosted the number of subscribers by 1 million, giving the company a total of 12 million.
Since reporting those numbers on Wednesday, Netflix's share price has jumped more than 20 percent. The stock closed trading Friday at $62.25, up from $50.97 on Wednesday.
Netflix has posted a run of good quarterly reports, but what really puts a shine on the Los Gatos, Calif.-based company is that there isn't another service offering consumers a better price or viewing experience. Most of Netflix's Internet competitors can still only deliver films to computers. None of the them have made the leap from the PC to consumers' TV sets as successfully as Netflix--not Apple, Hulu or YouTube.
Netflix staked out the territory from the Internet to the living-room TV by cutting deals to offer its service on almost every major set-top box and several high-profile TV sets, including Microsoft's X-box, Sony Bravia, the Roku Box, and most recently on Nitendo's Wii.
In perhaps the Netflix's most masterful move, the company continues to add to its online film library though Hollywood has long been wary of distributing through the Web rental store. By giving Netflix access to films, the studios run the risk of alienating better-paying customers, such as the cable operators.
Earlier this month, Netflix CEO Reed Hastings stirred controversy by announcing the company wouldn't rent newly released DVDs from Warner Bros. for 28 days. This is intended to help the studio boost disc sales.
In exchange, the studio agreed to give Netflix access to more catalog titles. Pundits and many subscribers howled, arguing that Hastings sold out his customers. What they don't understand, however, is that to continue growing the streaming-movie library, Netflix needs to find something to trade with. If he just pays outright for expensive Internet rights to movies, subscription fees will likely go up. Right now, Netflix provides most subscribers the ability to rent physical discs and stream movies for the same $9.
Netflix's potential problems with its Hollywood suppliers is a potential threat to the company's growth. If Amazon is sizing up for Netflix, one question to ask is whether the service can continue to acquire film rights for the streaming service once bigger players, such as the cable companies, start to wade deeper into Web streaming? Or will the cable companies outbid Netflix for content? And will Hastings stick around after an acquisition?
Who at Amazon or anyone else for that matter has proven to have the kind of deft touch Hastings has in dealing with the studios?
The thing with Netflix is that it has built a large community of supporters by mailing movies to consumers for a low monthly price. What happens to the company when movie viewing goes online and Netflix's massive and expensive DVD-distribution system is no longer a barrier to entry for would-be competitors?
The real question Amazon must ask is whether Netflix can continue to obtain Internet rights while offering all-you-can-eat viewing for a low price? Or will the cable companies muscle their way in and just move their subscription models to the Web?