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Analyst Michael Pachter Has A Different View of The Splitting of Netflix Services

Sean W. Sep 23, 2011 2

Michael Pachter, analyst for Wedbush Securities, has made a case on why Netflix is splitting up their services into Quickster and Netflix.  Where some Lazy Tech Dudes are thinking streaming is the future and Netflix is trying to shed off some physical DVDs, Mr. Pachter is looking at the situation very differently.

According to Mr. Pachter, the reason the services were split was to prepare for a merger between the streaming side of Netflix and Amazon.  Amazon wants Netflix, but has brick and mortar distribution which will force Amazon to pay tax, something they have been fighting against for a while.  This move would also give Amazon a much larger library of content for Video On Demand.

According to Mr. Pachter,

In our view, Amazon has always wanted to be in the streaming business, and has been constrained from buying Netflix due to tax considerations. The split-up of Netflix’s business addresses the state sales tax issues raised for Amazon in having a “nexus.” If Amazon were to acquire only Netflix’s streaming business, it could triple the size of its content library, and gain traction as an industry leader. Netflix streaming has current content deals that provide it with access to movie content during the premium cable TV window, and Amazon has the financial resources to secure additional streaming rights, including Starz content. Netflix’s financial flexibility is quite limited, while Amazon’s is virtually unlimited.

He continues,

One of the impediments to Amazon’s purchase of Netflix outright is the state sales tax rules. Under the rules in most states, any company with a physical presence in that particular state (a “nexus”) is required to collect sales taxes for all retail transactions in that state. Amazon has carefully avoided nexus with virtually every state that collects sales tax, providing it with a significant pricing advantage over its brick-and-mortar competitors. Should Amazon have purchased Netflix’s business outright (including the DVD-by-mail business), the company would have found itself subject to sales taxes in virtually every state that imposes a sales tax due to Netflix’s extensive network of distribution centers. Accordingly, we never thought that Amazon would seriously consider purchasing Netflix, as such a purchase would severely (and negatively) impact Amazon’s core retail Internet sales.

It is amazing how just a little explanation can really take an opinion that seems out of this world to plausible, may even possible. We’ll keep you informed on the events of Netflix and this strange move of theirs.