After rumors that Verizon (NYSE:VZ) was looking to partner with RedBox in order to provide stand-alone online streaming streaming services next year, a new Bloomberg report has it that Verizon is now looking at potentially placing a bid for Netflix (NASDAQ:NFLX) instead.  Earlier, Verizon had also considered Hulu when it was up for sale last summer before ultimately passing. A joint Verizon-Netflix offering will be a major force to reckon with for cable operators such as Comcast (NASDAQ:CMCSA) and Time Warner (NYSE:TWC) who are already concerned about cord-cutters dropping their pay TV subscriptions in favor of cheaper web-based alternatives.
The streaming market has seen tremendous growth, enabling market leader Netflix to grow its revenues by almost three times in the last four years. Launching its own streaming service will therefore enable Verizon to enter this high growth market and make a profitable venture out of it.
Our price estimate for Verizon’s stock is $43.50, which is about 15% above market price.
Verizon Wants to Join the Streaming Party
We believe that while partnering with one of the established brands in digital distribution will help Verizon market its offering better and address a wider audience from the very start, it might have a better chance if it goes solo and tries to break the duopoly that Netflix and Hulu have on the market. Netflix, after the Qwikster debacle that saw subscribers leave in large numbers and Hulu, after it failed to find a buyer last summer, look increasingly weakened now and the time is ripe for a new market entrant like Verizon to come in and disrupt the market. This might also win the backing of content providers.
Content owners hate a lack of competition in their sales channels as it leads to lower prices for content and that, in turn, waters down their brand value. This was a major reason why Netflix’s talks with Starz collapsed a few months back. Starz wanted to charge a premium price for its content but Netflix wanted to provide its content on a ‘basic’ channel that allows users to stream as much as they want in return for a flat monthly fee. This would have devalued Starz’s content and risked its ‘premium’ position in the market. 
Streaming Could Imitate Evolution of e-Books
We have already seen his pan out in the publishing industry as well. When e-book seller and market leader, Amazon, tried to de-price its e-books to $9.99, the Big-6 publishers put their foot down and preferred shifting to Apple’s iBookstore that allowed them to price their own books. We believe that this will also play out in the video space when Verizon enters the market and content providers actually welcome the move in the hope that more competition in the online streaming market tilts the balance more evenly.
Since Netflix is already a dominant force in the industry, acquiring Netflix will not increase competition in the space. However, Redbox is only in the DVD rental business and is looking to expand into the online streaming space. This makes Redbox a better acquisition target. Its existing relationship with content providers will make Verizon’s work that much simpler. However, Coinstar may not want to sell Redbox and Verizon may not be interested in a partnership deal with Redbox that would limit its capability to choose markets outside FiOS to launch this service. (see Verizon’s Potential Redbox Partnership Looks Smart But Questions Remain)Notes:
- Verizon ‘Very Serious’ About Making Bid for Netflix, Banker Says, Bloomberg, December 12th, 2011 [↩]
- Netflix CEO Looks Beyond Starz Deal, WSJ, September 5th, 2011 [↩]