Microsoft should eye Netflix for a deal, just not a buyout

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Microsoft could be poised to snatch up Netflix in 2023 if its $68.2 billion dollar bid to acquire Activision Blizzard falls flat, according to editor Jennifer Saba over at Reuters.

The general thesis of Microsoft buying Netflix is couched in the idea that with a market value of 13 times that of the streaming service, Microsoft could whether a potential 30% premium value for the company while also advancing their desire to “offer a video-game streaming service over multiple devices.”

Taken at face value, the prospect of a Microsoft and Netflix merger does make moderate sense, however, the combo negates several outlying factors that benefit neither.

Financially speaking, market caps are not viable indicators of actual transferable funds, and as it stands, Microsoft is $107 billion liquid which means the company would need to come up with another $80 billion to buy out Netflix in the near term.

Barring any public relations catastrophes next year that sink its net worth, the payout for Netflix is likely out of reasonable reach for Microsoft in 2023.

However, if Microsoft CEO Satya Nadella does throw his strategic caution to the wind and musters the capital necessary to purchase Netflix, the next issue becomes profitability.

Prior to this year, Netflix tended to skirt around a 15 percent profit margin while front loading billions in investment projects. However, as market conditions tighten with more competitors in the market, Netflix CEO Reed Hastings and the board are looking for greater sustainability while building a secondary profit base with advertising.

While Microsoft and Netflix are partnering to run ads on the streaming platform via Azure cloud, the deal is temporary and quite unproven for the platform. Until Netflix can show a proven track record of pushing ads to a sustained ad base, Microsoft will most likely avoid anchoring another ad platform to its nascent one while also being saddled with managing content, publishing, licensing, entertainment contracts, and additional public relations for margins well below its own customary 30%.

If the idea is to somehow leverage its current Netflix partnership to expand its Game Pass service over multiple devices, Microsoft would be better off simply striking a deal to have either its games of the full branding of Game Pass offered in Netflix’s new gaming sector.

Netflix has shown the technological proficiency to stream content to almost any device, and Microsoft would be served well to partner with the streaming service to push its Game Pass platform. A deal where Microsoft games or its Game Pass service shows up on devices running Netflix is a low-stakes benefit for both companies.

While Netflix wouldn’t own the full publishing rights or revenue generated, Game Pass offerings could help legitimize its efforts in bringing games to its platform and Microsoft would benefit from the reach of devices Netflix has already permeated. With a deal of this nature, Microsoft can continue to chase its ambitions of expansive game streaming while avoiding couch hunting for billions to buy a company in flux.

Perhaps most importantly, Microsoft could avoid being in the regulatory spotlight for trying to buy yet another leading content publisher in under two years.

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