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Going to the flix

7 June 2007 By Robert Cyran

Amazon and Netflix belong together. Combining the Internet DVD rental company and the online retailer would strengthen both companies financially and strategically. But time is of the essence. While Netflix’s business is successful, it’s starting to stumble.

Netflix doesn’t expect to add any customers this quarter, while the cost of adding new subscribers has doubled over the past year amid rising competition from Blockbuster. Moreover, digital downloading ultimately threatens to kill the DVD distribution business entirely.

As for Amazon, DVD rental is the domestic business that got away. It has the website, the distribution network and even movie buff website IMDB. And it already rents DVDs in other countries. Combining would also generate lots of cost cuts. A 20% slice of Netflix’s administrative, development and marketing costs would come to some $100m. The value of those savings to shareholders today justifies paying a 30% premium to Netflix, while still leaving money on the table for Amazon’s owners.

The problem is Netflix, whose $1.7bn market value amounts to 23 times estimated 2008 earnings, doesn’t look cheap. But looks can be deceiving. Subtract its cash pile, and the price-to-earnings multiple drops to 18. Moreover, Amazon has its own bloated stock to use as a currency. It has almost doubled this year and trades at 55 times earnings. It’s time for Amazon chief Jeff Bezos to sneak into the movies.


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