What Does Microsoft Want with Netflix?

Netflix delivers to its subscribers and shareholders.As Microsoft (NASDAQ:MSFT) prepares for its biggest product launch since Windows 95, the company is rumored to be interested in acquiring Netflix (NASDAQ:NFLX). Already, Netflix has developed an application specifically for the new operating system.

Over the past few months, a number of companies have been linked to possible mergers with the DVD rental and streaming video company, including Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG).

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While in the early months of 2011 when Netflix shares traded above $300, the company would have been impossible to acquire, but its fortunes have changed. Verizon (NYSE:VZ) and Comcast (NASDAQ:CMCSA) have since developed their own video streaming services, and Amazon (NASDAQ:AMZN) has been much more successful in adding new content to its Prime service than Netflix. At the beginning of its history, the company’s challenge was to convince content providers to license their videos, but the challenge has now become keeping both content and subscribers in an intensely competitive market. Netflix is in a difficult position because providers can offer to license what content they want to who they want.

Netflix stock tumbled rapidly after the company’s CEO Reed Hastings decided to split the business in two in September 2011, with the DVD-by-mail service renamed Qwikster. At the time, Hastings wrote on his company blog, “Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business.” In fact, Netflix did hurt its business, and the company was forced to halt the change after customers objected. For users who wished to continue both services, the price increase would have been 60 percent.

Now, the company’s problems are mounting. Netflix’s profit margins are much higher for DVD rentals than they are for streaming video. However, over the next five years, DVD rentals are expected to drop by as much as 50 percent. Furthermore, its streaming business will also face challenges. After the company’s third quarter earnings statement revealed that Netflix was not adding new subscribers at the rate it had predicted it would, shares dropped by 15 percent.

But, according to Benzinga, Netflix is not yet in the position where it needs to find a buyer immediately, however, “if an interested party were to step forward and make an impressive offer right now, it is hard to imagine that the company would turn it down.” News of the rumor drove the company’s stock price higher on Friday afternoon.

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