3 Reasons Netflix Will Merge with Amazon

Posted by ThomasStone on Sep 29, 2011 | 4 comments

Netflix’s announcement that it was splitting its mail-order DVD service and its streaming service was instantly met with derision and rage. Consumers and industry commentators both declared that it signaled the beginning of the company’s fall from the top and predicted huge losses in subscribers. But if the Qwikster split was going to be so damaging, why would Netflix allow it? Is it possible that, instead, Netflix is trying to set itself up for purchase by a larger company? Amazon, with its recent onslaught of new services and products, offers a major cloud computing resource which is already being used by Netflix. If Amazon were to purchase Netflix, both companies would benefit, which is the ultimate goal of every business deal. Amazon would be able to greatly increase its inventory of licensed content, would be able to reach more customers than Netflix alone and is better capitalized, giving it a better ability to obtain new content. The data collected by both businesses could be used in aggregate to boost both companies’ sales. Also, the spin-off of Qwikster removes one major hurdle for Amazon in purchasing Netflix: navigating geographical tax issues.

Amazon will triple inventory, effectively burying physical competitors

Amazon already has a large library of content available for streaming, but it’s eclipsed by the amount of media available to Netflix through its many content licensing deals. If Amazon can get its hands on Netflix’s library, it will be able to offer so much media that no physical competitors will be able to offer any real resistance to the service. Many Amazon users are unaware of the availability of streaming video on the site and, when they discover it, are often disappointed by the lack of depth in the library, which could be turned around by the addition of Netflix’s library.

Amazon is better capitalized

With a revenue stream of $34.2 billion for 2010, Amazon’s capital dwarfs that of Netflix, which earned $2.17 billion in 2010. Because of the high cost of acquiring new content licenses, particularly with major television networks and movie studios, Amazon is better equipped to expand Netflix’s already large library. The influx of cash that Netflix would receive from Amazon would allow it to negotiate better deals for television shows and movies. Currently, TV shows and movies are not available on Netflix until they are released on DVD, but with enough capital backing the company, Netflix could negotiate for deals similar to Hulu, where new episodes can be streamed anywhere from one day to one week after the original air date.

Shared Demographic Data

Nevermind, for the time being, another strata of Netflix’s decision to spin-off Quickster–we’ll call it the Facebook factor.  Now that Facebook has rolled out its new Open Graph protocol, people will be able to watch Netflix on Facebook.  The aggregation of Netflix consumer data and Facebook consumer data is certain to give birth to interesting chimeras of possibility.  The whole landscape of social media marketing is bound to change in interesting and exciting ways as further offshoots and hybrids are created through this new Open Graph protocol.
Amazon provides a recommendation system based on a customer’s profile. Things that a customer has purchased, viewed or placed on a wish list are saved on Amazon’s servers and used to form an overview of that person’s shopping habits and likely interests. Similarly, Netflix allows users to rate items they’ve viewed and pays attention to what kinds of shows and movies they watch, using that information to recommend other media in order to keep users engaged. If Amazon and Netflix were to combine their demographic data, they could create a fuller profile of the media consumption habits of their customers and leverage that to provide better recommendations, increasing consumer consumption.