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Amazon wanting Netflix: crazy?

ENTERTAINMENT

Not necessarily. Both stream video and their strengths could mesh well, some analysts say. Still, the Wall Street rumors are just speculation.

July 14, 2009|David Sarno

Amazon.com Inc. makes its money as an online retailer. So why would it want a company that rents DVDs?

Officially, it doesn't -- or at least it isn't talking about it. But an Amazon purchase of DVD rental king Netflix Inc. has been the subject of on-again, off-again rumors on Wall Street, and that speculation Monday sent Netflix shares up 7%.

Although neither company would comment on the speculation, some analysts think it isn't that far-fetched.

Most experts believe the days of the DVD rental business are numbered, to be replaced by the online streaming of high-quality, full-length movies and television shows.

Both Amazon.com and Netflix are already streaming such programs. But Netflix, of Los Gatos, Calif., has 10 million subscribers to its mail-order rental business, all of whom are candidates for conversion to a streaming model.

Amazon buying Netflix is "not a crazy idea at all," said Jeffrey Lindsay, an analyst at Sanford C. Bernstein & Co. Steve Weinstein of Pacific Crest Securities agreed: "You can envision certain positives if you put them together."

Amazon, with about 40,000 titles it can stream to customers, would gain a company that can stream about 12,000 titles and offers some 100,000 DVD titles through the mail to its 10 million subscribers.

By snapping up all those customers, Weinstein said, the Seattle company could expand its customer base and inherit Netflix's hard-won relationships with the studios that own those movies and shows.

Netflix shares rose as high as $43.07 before settling back to close at $42.19, a gain of $2.12, or 5.3%. Amazon shares gained $3.84, or 4.9%, to $81.47.

But analysts mainly were dubious about any deal.

Digital devices such as iPods, Kindles and laptops are continuing to elbow out old-fashioned physical media such as newspapers, books and CDs:

In light of that trend, the stock price fluctuations may have had little to do with Amazon's intentions.

"You tend to get these pump-and-dump rumors from certain investors," Lindsay said.

Both companies were forged in the crucible of the late-1990s dot-com boom and survived the ensuing bust to enjoy lasting growth, thanks largely to the physical goods they became famous for: books for Amazon and DVDs for Netflix.

But as media products shed their corporeal forms in favor of the lighter-weight digital essence, bothering with packaging, postage and delivery times begins to look immensely inefficient.

In the last two years, Amazon and Netflix have caught on to this trend and made tens of thousands of movies and TV episodes instantly available through different kinds of set-top devices: TiVo, Roku, X-Box 360 and various stream-ready TV sets and DVD-players.

Amazon's titles are the kinds of new releases users are most likely to want, but those new releases come with a price. Amazon generally charges $3.99 for each movie streamed, while Netflix subscribers can stream movies free.

"We could populate the site with lots of new releases, but they're very, very expensive," said Netflix spokesman Steve Swasey, who declined to comment on the buyout rumor. "We've chosen to spend more on catalogs and TV episodes so we can continue to be the low-price leader."

Amazon, on the other hand, has demonstrated an ability to lower the prices of books, movies and music by selling at high volume, and might have more bargaining power for big titles than the smaller Netflix.

Amazon's low prices on books -- both the virtual tomes available on its Kindle reading device and the old-fashioned paper kind -- are possible because the company sells enough copies to justify tighter margins. The same could eventually happen with movies and TV episodes.

Amazon also declined to respond to any speculation.

"Adding another business that would essentially cannibalize from the moves they're already trying to make just doesn't make a whole lot of sense," Weinstein said.

"Amazon is ramping up digital distribution very quickly. They've obviously done a good job with e-books, and they're making some progress with music," he said. "So I don't think anyone's that much farther down the road than they are."

The last time an Amazon-Netflix deal was rumored, in June 2007, Netflix's stock price surged 5%, with one analyst predicting Netflix could fetch $1.5 billion if acquired by Amazon. Weinstein thought the price today might be closer to $2 billion.

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david.sarno@latimes.com

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