Expect a Netflix Bidding War to Erupt in 2012

Dec 16, 2011
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Last week, I talked about Verizon’s reported desire to acquire Netflix, and why such a maneuver would be a bad one for the company.

And although I still feel that way, it’s quickly becoming clear that in a year, Netflix won’t be Netflix. The streaming company will be part of a much larger firm that will use it as a key component in a move to expand a home-entertainment empire.

Some might be surprised to hear that Netflix might be acquired. They might say that the company will turn things around next year, and as its stock price starts to rise, any potential suitor will back off for fear of paying too much for the service.

But I see things differently. I think Netflix’s ill-fated decision earlier this year to spin off its DVD business into a new company, called Qwikster, was designed to make its streaming service more attractive to buyers. And although Qwikster didn’t work out, I think Reed Hastings and his executive team are still trying to find a way to sell off the streaming business to the highest bidder.

Over the last several months, we’ve seen the soft underbelly at Netflix. We now see a company that doesn’t quite know how to handle relationships with content providers, and a management team that has lost all sense of what consumers really want in their streaming and rental services. What’s worse, we see a company that’s trying to stay the course, while just about everyone around it knows status quo won’t work.

[aquote]The only choice is to sell to the highest bidder[/aquote]

At some point in the next few months, I think we’ll see Netflix’s executive staff finally raise the white flag as Starz takes its content elsewhere, content costs explode, and company revenue stays the same. Netflix will know at that point that it will need to raise the price of its streaming offering, but it won’t want to do it for fear of losing more customers and watching its corporate value slide. The only choice, then, is to sell to the highest bidder.

Of course, that doesn’t solve the problem of its DVD-by-mail business. Unfortunately for Netflix, that’s a significant liability. Although many people still rent DVDs, the by-mail idea is starting to give way to Redbox’s kiosk strategy. And few companies, if any, would want to get caught up in paying for a by-mail service.

So, Netflix will have to make some tough choices in the months to come. Should it follow through on a spin-off plan? Should it try to find a buyer for its DVD-by-mail business first? Should it close the entire service down?

It’s tough to say. But if nothing else, Netflix will realize that it needs to prepare its business for a sale. And the company that gives it the most cash will walk out the winner.

Now the question is, what company will buy Netflix?


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