Netflixity… Time to Buy?

Let’s just put everything on the table and admit that we’re all sick of hearing about Netflix and its supposedly undisputed genius. We know the company has a ridiculously loyal fanbase. We heard during last week’s earnings call even more about how well it’s doing financially. And we realize its stock price is in the stratosphere, with a market cap soaring past $9 billion as of this writing. Some cable operators like to grumble that Netflix’s recent success results from its “free ride” on the broadband pipe, allowing it to offer HD-quality streams of thousands of movies to the cheers of the over-the-top masses. That’s a fair point.

 

But Netflix also owes much of its success and loyal following to years of paying its dues as a reliable and meticulously focused company. You constantly get emails asking if a disc arrived on time. Lose a DVD? Netflix just apologizes for the inconvenience (even though it’s really your fault) and doesn’t charge a dime. Receive a damaged disc? Netflix scrambles to send you a new one, usually within a day. It’s this kind of customer-service obsession that has earned Netflix its cult-like fandom. And now that the company is shifting much of its business to Internet streaming, all that past attention to its customers is paying huge dividends. Sure, you could argue that Netflix is a freeloader on the broadband pipe. But there’s a remedy for that. No, we’re not talking about any kind of “blocking” or “managing” of its streaming traffic, which would simply invite a firestorm from D.C. and broadband customers. There’s a simpler solution: Buy it.

 

That’s right. Somebody in cable needs to buy Netflix before it goes to another suitor. Comcast’s market cap is $55 billion. Time Warner Cable’s is $20 billion. Either one could step up if for no other reason than to create an over-the-top hedge against both traditional and online competitors. Cable could even acquire it through a joint venture with other ops to spread the cost. Imagine the Netflix service, recommendation engine and smooth interface combined with authentication (Comcast just officially launched Xfinity on Mon) and integrated with cable’s impressive VOD library through a third-party box like the Wii or PS3. Yes, rights and windowing issues could be tough—but they’re worth working through.

 

Buying Netflix would also keep the company away from other potential mates, which could include any of cable’s competitors. And it would keep Apple at bay. In fact, CEO Steve Jobs noted during Apple’s earnings call last week that the company is building up cash for strategic opportunities, which always refers to potential acquisitions. When Jobs mentions cash, he’s talking about stockpiles of more than $50 billion at this point. That’s a lot of dough—more than enough to buy comparatively puny Netflix and integrate its incredible interface and customer sensibilities into the larger Apple machine. That would not only create obvious synergies with Apple TV but reap much larger cross-promotional opportunities to sell Netflix’s roughly 16 million customers on other Apple products and services. In fact, Netflix would seem at this point to be an attractive target for anyone in media content and/or distribution, including the likes of News Corp., Viacom, Disney, Time Warner, Google… the list goes on…

 

Of course, we’re glossing over a few details here. First of all, Netflix isn’t a perfect VOD system. Its streaming titles, for example, don’t include the most recent releases available through cable VOD. That won’t change until producers and studios can extract more money for more recent fare—and that would have to be passed down to customers in the form of higher monthly fees (Netflix currently has no “pay per view” option). Meanwhile, what about reports that Netflix’s streaming unicast model is now eating up more than 20 percent of the Internet’s total available bandwidth during prime viewing hours? Is it healthy for cable operators to encourage that trend and soon face higher broadband upgrade costs to cope with the day when it reaches 50 percent or more of total bandwidth? Is this thing really scalable? And here’s another one: How would Washington—already uncomfortable about Comcast-NBCU—feel about a cable play for indie darling Netflix?

 

While you ponder those questions, Netflix continues to grow stronger and more expensive with every passing day. Perhaps another stock market dip will depress its shares enough to entice someone to make an offer. But it’s equally likely that it will just keep growing and growing and growing. At some point, you can’t fight the will of the people. The public just seems to love the Netflix experience. The company continues to fire on all cylinders as it moves to online streaming and gradually acquires more and more attractive content from producers and studios. It won’t be ignored. And someone will come calling before too much longer.