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Next in the queue: Netflix

by Richard Morgan  |  Published December 13, 2012 at 12:46 PM
NetflixLogoPhone.jpgEven though the output deal that Netflix Inc. reached with Walt Disney Co. is last week's news, some questions remain. Where, for example, was Inc.? Or, more to the point, why didn't Amazon use its bigger balance sheet to secure Disney's theatrical output for itself?

The world's largest online retailer not only had more cash on its books to pay for Disney content­ -- $5.25 billion compared with Netflix's comparatively paltry $800 million -- but two ways to market it: Amazon Prime Instant Video and Amazon Instant Video. The former streams video, at no additional cost, to anyone with an Amazon Prime membership; the latter dispenses video, over the Internet and through the mail, to anyone who wishes to buy or rent it.

Netflix, by comparison, lets consumers stream as much as they can for $7.99 a month or subscribe to one of three through-the-mail DVD plans priced between $7.99 and $15.99 a month. What Netflix's subscription service doesn't allow is a flexible array of pricing points. And this inflexibility, some believe, should have disqualified Netflix from the get-go as a possible vendor of Disney's vast and varied library. All the more so given that Amazon is already set up to stream "Hugo" for free, say, yet charges $14.99 to customers who add "The Dark Knight Rises" to their video libraries.

So what happened? Why did Disney, which admitted at a recent conference to having "broadly surveyed the market" before picking Netflix, snub Amazon? The short answer is Disney could never buy Amazon, even if it wanted to, which it doesn't. But Disney could buy Netflix, and, under the right circumstances, it might want to.

Assume, for an instant, that Netflix makes another bone-headed move of the sort for which it's infamous between now and its 2016 start date as the exclusive U.S. subscription television service for animated and live-action films from the Walt Disney Studios. Or, if not that, simply imagine a convincing analyst determines the video streamer's content costs have gotten too far ahead of projected subscriber gains. Either way, as amply demonstrated in the past, Netflix's market cap would crumble.

This is where Disney could enter, a white knight seeking not only to protect its Netflix agreement but also to redress the decision announced last month to shutter Disney Movies Online. Scooping up Netflix's best-of-class streaming interface on the cheap would, after all, right what Disney told the Associated Press was wrong with its own online operation: "Disney Movies Online does not have the flexibility that many users today demand. We made a business decision to close the service until we are able to provide the greatest value and experience to our customers."

A Disney-owned Netflix wouldn't just deliver the "greatest value and experience" the Mouse House demands for its customers. It would also please analysts such as Bernstein Research's Todd Juenger, who in a research note last week acknowledged Disney's decision to press ahead with Netflix was not without opportunity costs. "The pipe dream of pursuing game-changing upside, by building their own service, is off the table (and definitely takes an item off our list of upside option value)," the analyst wrote. But that's not to say the pipe dream has to stay off the table forever, particularly since the Magic Kingdom is involved.

Tags: Amazon Instant Video | Amazon Prime Instant Video | Inc. | Netflix Inc. | Walt Disney Co. | Walt Disney Studios

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