At the beginning of 2022, streaming giant Netflix seemed to be on high. In the past two years, thanks in large part to the pandemic, it had added a remarkable 55 million subscribers, making it by far the most popular streaming service, while steadily increasing the price subscribers paid. Although the stock price fell slightly from its all-time high in the fall of 2021, it was still close to $600 a share, giving the company a market cap of nearly $270 billion. When people talked about Netflix as one of the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google), few blinked at its inclusion in a group of the world’s most powerful and valuable tech companies.
Today, no one would put Netflix in that group. Since the beginning of the year, the company’s share price has been decreased by 67%. Subscriber growth has not only stalled, but also vice versa: lost 200,000 subscribers in the first quarter and said during its earnings call Tuesday that it lost nearly 1 million subscribers in the second. The expansion of HBO Max (soon to be Discovery+/HBO Max) and Disney+, along with Amazon Prime, Hulu, and Apple+, and the addition of a host of new streaming services (including Peacock and Paramount+) mean that Netflix now has a lot more competition for viewers and for content. And high inflation and concerns about slower growth are now raising the prospect of a “streaming recession,” with users dropping streaming services to cut costs.
In response, Netflix made a small number of layoffs (rare in the company’s history) and recently unveiled plans for something it had previously avoided: an ad-supported, cheaper plan, with Microsoft handles the ads. But investors have remained skeptical, and while the market was pleased with today’s earnings report, in which revenue grew 9% and the company lost fewer subscribers than the 2 million it previously projected, there is still a long way for Netflix to to get back to where it was a few months ago. All of this has led to speculation by some on Wall Street that Netflix could become a takeover target.
It’s not a crazy idea. The argument for a major company to acquire Netflix is simple: it is now solidly profitable, has 220 million subscribers, and its share price has fallen so far that the company is now priced more as a value stock than a growth stock. While it’s still worth a hefty $87 billion (meaning each deal would likely cost around $100 billion, if you factor in a typical acquisition premium), that’s not an outrageous price for a company on track to close this year. earn about $5 billion.
As for Netflix itself, while its always ambition has been to become the dominant player in the space and determine its own destiny, operating as part of a larger company with other sizable revenue streams would bring certain benefits: easier access to capital if you can afford it. need a degree of isolation from the ever-changing moods of investors and, depending on the acquirer, potential synergies with other parts of the business. It may not be a coincidence that every other major player in the streaming space is part of a larger, more diversified company.
Unsurprisingly, Netflix management has said nothing about putting the company up for sale; and all things being equal, it would probably prefer to remain independent. But if a great offer came along, it would be hard to say no. The interesting question then is who could make that offer. And the truth is that if you go through the list of potential buyers, there are significant obstacles for almost all of them to buy Netflix.
Disney, Warner Bros. Discovery and Comcast
On the face of it, the companies that should be most interested in Netflix are the ones that are already big players in streaming — as the Netflix acquisition would dramatically increase their subscriber numbers and, not coincidentally, become one of their main competitors. to eliminate. But those kinds of steps would almost certainly be blocked by regulators for antitrust reasons. There’s Disney, which not only owns Disney+, but also a majority stake in Hulu; Warner Bros. Discovery, owner of HBO Max; and Comcast, which owns Peacock, as well as a movie studio, cable channels, and cable networks. A proposed takeover by one of them would almost certainly have no chance of success.
Amazon and Google
Regulatory concerns, plus economics, also make it unlikely that Amazon or Google would make a run for Netflix. Amazon even tried to buy Netflix in 1998. But these days, streaming is mainly a perk it offers to get people to sign up for Prime. Considering that the economics of spending $100 billion to add 200 million new subscribers (many of whom are presumably already Prime customers) seems a bit questionable. In addition, Amazon is under significant pressure from antitrust regulators and Congress; and adding Netflix would draw more attention of the kind the company doesn’t need right now.
The same goes for Alphabet. While in theory you can envision certain synergies between YouTube (which is owned by Alphabet) and Netflix, in practice the two companies have little in common, with YouTube primarily being an ad-driven company powered by content that doesn’t require Google. to pay. And Alphabet is also unlikely to make a massive deal that would raise antitrust concerns.
A more interesting and plausible suitor would be Apple. Apple has tons of cash (about $200 billion) on its balance sheet and a market cap of $2 trillion, so paying for Netflix wouldn’t be a problem. And while Apple TV+ is somewhat successful — it just won its first Oscar — it still feels very much like an afterthought next to Netflix, HBO Max, Disney+, or even Hulu. Buying Netflix can change that overnight.
And yet, when you really look at it, it’s hard to see Apple emerging. First, it’s not really clear that adding Netflix would bring synergistic benefits to Apple’s core business. Apple is so profitable that even at $5 billion a year, Netflix wouldn’t increase its profits much. And there’s also a simple cultural issue, which is that historically, Apple has always avoided major acquisitions, preferring to grow from within. Throwing out $100 billion—and having to integrate a very different culture into Apple—wouldn’t suit the company at all.
That leaves one company that could buy Netflix without much effort, and is, interestingly enough, the company that Netflix has just partnered with. Namely Microsoft. Unlike Amazon, Disney, Google or Apple, Microsoft currently doesn’t have a streaming service, so buying Netflix should bring less regulatory concerns. There are potentially interesting synergies between Netflix and Microsoft’s Xbox division – in particular, Microsoft could bundle Netflix with its Xbox Ultimate Game Pass to boost subscriptions to both services, much like Disney offers bundles with Disney+, Hulu and ESPN+. And on the back end, Netflix is currently using AWS for its backend – somewhere along the line, Microsoft could potentially migrate it to Azure. With a market cap of nearly $2 trillion, Microsoft clearly has the resources to close the deal. And it’s not afraid to make acquisitions: It’s in the process of buying game developer Activision Blizzard for $68.7 billion.
So if you had to bet on someone deciding to take over Netflix, Microsoft would be the obvious choice. To be clear, this doesn’t mean the deal is coming, or even that it should. Microsoft still need to close the Activision deal (including regulatory approval) and the game developer. Doing another big deal right after that would be a big question. And since its track record of major acquisitions is generally bad for acquirers (who typically overpay), it might make more sense for Microsoft to build on its new ad partnership and cut deals with Netflix rather than buy it outright. After all, Microsoft and Netflix do not have to merge to offer the two companies a discounted Ultimate Game Pass/Netflix bundle.
Ultimately, though, the real driver here may come down to the simple question of how much Microsoft should pay to acquire Netflix. If Netflix curbs its subscriber losses, its ad-supported tier is a success and the stock bounces back, it would tend to stand on its own. But if things continue to head south — or even sideways — and investors remain disillusioned, don’t be alarmed when the Redmond giant finally steps in to buy Netflix cheaply.