Netflix and Microsoft rumoured to merge as streaming competition gets tough
By Jenal Mehta
12:18, 22 December 2022
Microsoft (MSFT) has been involved in a number of acquisitions under the imaginative mind of CEO Satya Nadella, and rumours suggest Netflix (NFLX) could be next.
The two companies have already paired up since July 2022 to help power Netflix’s new ad-supported subscription offering.
Microsoft’s take-over of Activision Blizzard (ATVI), which would be the most expensive takeover in gaming history, costing $69bn, has been facing regulatory obstacles. Thus, it may have these funds to spend elsewhere in 2023.
Netflix’s shares are trading at half the price they were a year ago, so a decent offer may be hard to pass up.
However, some may argue that in an ever crowded streaming industry, the shares are not undervalued. At $298, the shares are now trading back at pre-pandemic levels: before they got the stay-at-home boost provided by global Covid lockdowns.
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Netflix (NFLX) Price Chart
Benefits to Microsoft
Since his appointment in 2014, Nadella has been clear in his mission to expand Microsoft’s presence in different parts of the tech industry.
Under his tenure, Microsoft has acquired Mojang, the Swedish gaming company responsible for Minecraft. It then purchased Xamarin, LinkedIn and GitHub.
Most recently Microsoft has its eye on Activision Blizzard (ATVI), a gaming company most famous for Call of Duty and Candy Crush. The tech giant has offered $69bn for the takeover, but it has regulatory push back due to licencing issues with competitor Sony (SNE).
If the deal does not go through, the extra cash might be directed elsewhere, and Netflix appears to be a good choice for the tech giant.
Microsoft (MSFT) Price Chart
Benefits to Netflix
The pioneer of the streaming services has found it hard to sustain profit growth in recent months. After a historical performance in 2020, Netflix’s fall from grace has been hard and fast.
While 2020 gave a boost to all streaming platforms, rivals such as Disney (DIS) continued to grow while Netflix did not.
It lost subscribers and reported a decline in revenue for the first time ever in 2022. One of Netflix’s growth bets was its expansion in Asia, which appears not to have earned the company as much revenue as it may have hoped. It reported a revenue growth of 18% this year.
In an effort to maintain revenue, the Netflix platform has plans to introduce a paid subscription tier, which may just have a negative effect on audience numbers or could just be the key to get back to the 20% -35% growth rates the company was able to achieve in its early days.
Netflix’s other plan is to expand its gaming services, which it has already rolled out on a small scale for its mobile app users. Its aim is to use gaming to increase screen time on Netflix. Teaming up with Microsoft could help accelerate this gaming ambition.
AJ Bell investment director Russ Mould comments “The chatter about a tie-up looks more like fantasy M&A rather than a credible story and one can imagine that it would be a tough sell to convince many Microsoft shareholders that they should own a content platform that by its own admission is finding it harder to sustain previously strong growth levels.”
However Mould admits if shareholders come on board, the deal might turn out to be a good one. “Netflix wants to offer a comprehensive streaming service for games while Microsoft has the content and wants to reach a bigger audience. Strategically the two companies could be a good fit”
However, Microsoft would need to dig deep. At its current share price, the market capitalisation of Netflix is around $133bn - almost double what it has offered for Activision Blizzard.
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