After rough second quarter results, could Netflix become an acquisition target?
At the start of 2022, streaming giant Netflix seemed to be on the rise. In the previous two years, largely thanks 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 paid by these subscribers. While its stock price was down slightly from the all-time high it hit in the fall of 2021, it was still near $600 per share, giving the company a market capitalization of nearly $270. billions of dollars. When people talked about Netflix as one of the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google), few hesitated at its inclusion in a group of the most powerful and valuable technology companies in the world.
Today, no one would put Netflix in this group. Since the beginning of the year, the company’s share price has dropped 67%. Its subscriber growth not only stagnated, but reversed: lost 200,000 subscribers in the first quarter and, in its earnings call on Tuesday, said it lost nearly a million subscribers in the second. The expansion of HBO Max (soon to be Discovery+/HBO Max) and Disney+, as well as Amazon Prime, Hulu and Apple+, and the addition of a host of new streaming services (including Peacock and Paramount+) mean that Netflix now faces a lot more competition for viewers and for content. And high inflation and worries about slowing growth are now raising the prospect of a “streaming recession” as users abandon streaming services in order to cut costs.
In response, Netflix has made a small number of layoffs (rare in the company’s history) and recently unveiled plans for something it’s always avoided before: a lower-cost ad-supported subscription, with Microsoft manages advertisements. But investors remained skeptical, and while the market was pleased with today’s earnings report, which saw revenue rise 9% and the company lose fewer subscribers than the 2 million it had previously planned, there is still a very long way to go for Netflix to get back to where it was a few months ago. All of this has given rise to speculation from some on Wall Street that Netflix could become an acquisition target.
It’s not a crazy idea. The case for a big company to acquire Netflix is simple: it’s now solidly profitable, has 220 million subscribers, and its share price has fallen so much that the company is now listed more as a value stock than a stock. of growth. While it’s still worth $87 billion (meaning any deal would likely cost around $100 billion, taking into account a typical acquisition premium), it’s not an exorbitant price for a company that is poised to make around $5 billion this year.
As for Netflix itself, while its ambition has always been to become the dominant player in the space and control its own destiny, operating as part of a larger corporation with other significant revenue streams would bring certain advantages: easier access to capital if you need it, a certain degree of insulation from the changing moods of investors and, depending on the acquirer, potential synergies with other business sectors of the company. It may not be a coincidence that all the other major players in the streaming space are part of a bigger and more diverse company.
Netflix management has, unsurprisingly, said nothing about putting the company on the sales block; and all other things being equal, he would probably prefer to remain independent. But if an attractive offer presented itself, it would be difficult to say no. So the interesting question is who might be able to make that offer. And the truth is, as you sift through the list of potential acquirers, there are significant hurdles to nearly every Netflix purchase.
Disney, Warner Bros. Discovery and Comcast
At first glance, the companies that should be most interested in Netflix are those that are already big players in the streaming space, as acquiring Netflix would dramatically increase their subscriber counts and, not coincidentally, eliminate the one of their main competitors. But that kind of move would almost certainly be blocked by regulators on antitrust grounds. There’s Disney, which not only owns Disney+ but also owns 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. An acquisition proposed by one of them would almost certainly have no chance of succeeding.
Amazon and Google
Regulatory concerns, along with the economy, also make it unlikely that Amazon or Google will make a run at Netflix. Amazon actually tried to buy Netflix back in 1998. But today, streaming is mostly a perk it offers to entice people to sign up for Prime. Given that, the economics of spending $100 billion to add 200 million new subscribers (many of whom are likely already Prime customers) seems a bit dodgy. On top of that, Amazon faces considerable pressure from antitrust regulators and Congress; and adding Netflix would attract more attention of the kind the company doesn’t need right now.
The same is true for Alphabet. While in theory you can imagine some synergies between YouTube (which is owned by Alphabet) and Netflix, in practice the two companies have little in common, with YouTube being primarily an advertising-focused business powered by content that Google doesn’t. don’t have to pay. And Alphabet is unlikely to strike a massive deal that would raise antitrust concerns.
A more interesting and plausible contender would be Apple. Apple has tons of cash (about $200 billion) on its balance sheet and a market capitalization of $2 trillion, so paying for Netflix wouldn’t be a problem. And while Apple TV+ is enjoying moderate success – it just won its first Oscar – it still feels a lot like an afterthought next to Netflix, HBO Max, Disney+ or even Hulu. Buying Netflix could change that overnight.
And yet, when you really look at it, it’s hard to see Apple stepping in. First, it’s not entirely clear that adding Netflix would bring synergistic benefits to Apple’s core businesses. Apple is so profitable that even at $5 billion a year, Netflix wouldn’t increase the bottom line much. And there’s also a simple cultural problem, which is that historically Apple has always avoided big acquisitions, preferring instead to grow from within. Forking out $100 billion — and having to bring an entirely different culture to Apple — would be totally irrelevant for the company.
That leaves one company that could buy Netflix without too much trouble, and that, interestingly, is the company Netflix just partnered with. Namely, Microsoft. Unlike Amazon, Disney, Google, or Apple, Microsoft currently has no streaming services, so buying Netflix would raise fewer regulatory issues. There are some potentially interesting synergies between Netflix and Microsoft’s Xbox division. In particular, Microsoft could bundle Netflix with its Xbox Ultimate Game Pass to increase subscriptions to both services, much like Disney offers bundles with Disney+, Hulu, and ESPN+. And on the back end, Netflix currently uses AWS for its back end – somewhere down the line Microsoft could potentially migrate it to Azure. With a market capitalization of nearly $2 trillion, Microsoft obviously has the resources to seal the deal. And it’s not afraid to make acquisitions: It’s buying game developer Activision Blizzard for $68.7 billion.
So if you had to bet on someone deciding to acquire Netflix, Microsoft would be the logical choice. To be clear, that doesn’t mean the deal is going to happen, or even that it should. Microsoft has yet to complete the deal with Activision (including getting approval from regulators) and onboarding the game developer. Doing another big deal immediately after that would be a big ask. And given that the track record of big acquisitions is generally poor for acquirers (who usually pay too much), it might just make more sense for Microsoft to build on its new advertising partnership and strike deals with Netflix rather than just lending a hand. buy outright. Microsoft and Netflix don’t need to merge, after all, for the two companies to offer a discounted Ultimate Game Pass/Netflix bundle.
Ultimately, however, the real driver here may come down to the simple question of how much Microsoft should pay to acquire Netflix. If Netflix stems its subscriber losses, its ad-supported tier is successful, and the stock rebounds, it would be inclined to stand on its own. But if things continue to go south – or even sideways – and investors remain disillusioned, don’t be shocked if the Redmond giant ends up rushing to buy Netflix on the cheap.