Why Netflix Will be Acquired by Microsoft

Why Microsoft Will Acquire Netflix

Join me writing about retail, technology and the future of the internet on Sublink?here. I cannot continue to write without community support.

https://firstfuturist.substack.com/subscribe

If it happens, it could be around 2026.

I’m calling it, there’s a 45% chance in the future Netflix will be acquired by Microsoft.

As the stock of Netflix tanks, I agree with analysts that are hinting it could be a match for a future acquisition. Last week, Netflix named?Microsoft as its partner for its ad-supported?service. That was a signal of the future of what Microsoft and Netflix might be planning.

Netflix has been facing some uncertainty or even long-term financial trouble, or at least as much trouble as a major corporation can have in relative terms, over the last several months after the company announced that it had lost subscribers for the first time since 2011.

Microsoft is becoming more sophisticated in advertising and also in gaming, and Netflix could be important for the evolution of its Game Pass subscription. Microsoft is eating the world with software subscriptions and its Gaming Metaverse ambitions are no longer any secret with its proposed acquisition of Activision.

Microsoft is already a cloud leader with Azure, but how it is getting more into Ads and Gaming makes it the most diversified technology firm in the world.

Netflix’s choice might seem strange because, although Microsoft Advertising (by one name or another, formerly all grouped under the Bing brand) has been around since 1997, Microsoft wasn’t considered a serious programmatic contender until it bought the longtime programmatic?tech leader Xandr?(née AppNexus) from AT&T – which was announced in December of last year but didn’t close until last month.

Netflix Faces Increasing Competition

As the first-mover of Netflix fades with a strong showing from Disney and mounting challenges eventually from Amazon and Apple, the market cap of Netflix could go from hype to a challenging reality pretty quickly. The market cap of Netflix is down to $84 billion, but that’s still way too high for Microsoft to acquire anytime soon. The stock of Netflix is down over 68% year to date and it could get worse after Earnings.

The P/E of Netflix’s stock is now around 18, which is getting closer to intrinsic value, but what happens if it losing more subscribers? The competition in streaming is heating up, so in theory the market cap of Netflix could continue to correct into the 2020s reaching a point where Microsoft would be more likely to try to acquire it.

The whole logic around this acquisition ultimately comes back to Xbox Game Pass, Microsoft's nascent gaming subscription service, which the company expects will become the driving force behind its expansion beyond its Xbox consoles. Netflix thus could provide Netflix incredible gaming and advertising synergy as well as give it a competitor vs. what Amazon Prime Video and AppleTV becomes, which should eventually be great. If the fortunes of Netflix are not great, this could be as early as 2026.

The stock market correction has hit Netflix, Meta and Shopify uniquely hard. But admit those it’s Netflix that suffers now from the most competition.

Microsoft has been aggressively expanding its cloud-streaming capabilities for gaming, putting its Xbox Cloud Gaming service on smartphones and Samsung TVs, allowing you to play titles like Halo and Flight Simulator without buying a console.?As Netflix itself gets more into gaming, it could become even more attracted to Microsoft eventually that could evolve into the leading Gaming-Tech company.

Microsoft does not fight fair in that it has made a long string of rather large acquisitions in the gaming sector. If Starfield is a big hit in 2023, it will truly put Microsoft more in the map. Valve (the maker of Steam) also based in Washington state may not be able to hold up against Microsoft forever. To imagine both Valve and Netflix could eventually be owned by Microsoft isn’t so far fetched.

Microsoft Owning Netflix would be Scary

That all ads served on Netflix will be exclusively available through the Microsoft platform is a huge win for Microsoft’s Ad capabilities. Netflix dove head-first into gaming last year and has since acquired three gaming studios. If Microsoft is one day able to acquire Netflix, it would push its digital transformation edge in the future of digital even further.

Netflix needs a buyer. Flying solo while content costs and competition skyrocket and subscription levels stagnate or fall is not sustainable. Not when you are competing with Disney, Amazon, Apple and others. Netflix already over-spent to grow as fast as it did, but with increased prices it’s not the same was it once was. Quality of Netflix content during the pandemic wasn’t just bad, it wasn’t up to its own former standards. Netflix’s ceiling in total global users may not have been higher as it was pretending it to be for investors.

Thus being acquired means only a few BigTech firms could afford to acquire Netflix, even at it bleeds money and valuation. Netflix also confirmed that it expects to lose millions of additional subscribers in the coming months, something that caused concern for investors after Netflix routinely dominated the stock market for years in bull-market hype. With that said, Netflix may be looking to Microsoft to throw it some kind of life preserver, if not now, sometime in the future.

There are no firm rumors that Netflix is actually looking to be acquired in any kind of way, but it does pose interesting ideas. But the speculation begins to make sense if the bad year of Netflix goes from bad to worse, which is a distinct possibility with higher interest rates. What once would have seemed like a ridiculous place for Netflix to end up, in 2022 it looks a bit more believable.

Netflix, which is slated to report earnings Tuesday, has warned it expects to lose 2 million subscribers during the second quarter. I will be watching closely among many analysts. Microsoft is getting away with acquisitions the size that in a normal regulatory environment, it would never be able to pull off. Activision and Netflix are just so big, it’s almost a violation of digital rule of law. But crazier things have happened in the evolution of the American internet.

Subscribe now

"Microsoft has the proven ability to support all our advertising needs as we work together to build a new ad-supported offering," Netflix said. "More importantly, Microsoft offered the flexibility to innovate over time on both the technology and sales side, as well as strong privacy protections for our members." The ad-supported streaming subscription will be offered "in addition to our existing ads-free basic, standard and premium plans," Netflix said.

Needham Senior Analysis?Laura Martin?contends this deal is simply Phase One of a wooing process that could bring Microsoft inside until it decides to bring Netflix all the way inside.?

"Netflix is trying to get closer to Microsoft in hopes that, after Microsoft digests its Activision acquisition, it turns and buys Netflix next," said Martin, referencing the still under regulatory scrutiny $68B Activision acquisition. As Martin rightly assumes, Microsoft is unlikely to make any other company buys - at least of this size - until that deal is done.

Join me writing about retail, technology and the future of the internet on Sublink?here. I cannot continue to write without community support.

https://firstfuturist.substack.com/subscribe