Netflix to be swallowed up?

Small innovators attract powerful suitors. That's the case with Netflix

Netflix to be swallowed up?

Small innovators attract powerful suitors. That's the case with Netflix, one of the most innovative Internet companies , one that's fulfilling the dreams of the online bubble, and making good money doing it. The company has income of $55 million, has started turning a profit, and it's growing rapidly.

Netflix, if you don't know it, is an online video rental store. It has over 15,000 DVD titles available to its customers, who can set up a priority list of the titles they want. The DVDs are mailed back and forth to the customers, who can rent three flicks at a time and face no late penalties. The cost is $20 a month.

The company has recently been awarded a patent that covers its mode of doing business. Such patents are dicey, particularly when facing competition with big pockets, But it's likely to scare away any new startups.

But the consequences of the patent may reach further. According to an article in Business 2.0. “some observers believe that the Netflix patent makes the company a very attractive takeover target… Interest in a Netflix acquisition makes sense: The company has been around for five years, has built a solid distribution system, expects to post a profit this quarter for the first time, and has more than 1 million customers. The fact that a buyer could score all that and a patent to boot is pretty sweet.”

” Dennis McAlpine, a managing partner at McAlpine Associates, notes in the article: “If I were a company that had a distribution system like Wal-Mart, and I wanted to get into the business, I would say, Let's buy Netflix and eliminate the build.” In fact, Wal-Mart is already starting to get in this market.

The other likely suitor, according to the article is Blockbuster (a division of Viacom), which is also interested in expanding into this model for video rental. It sounds like a bidding war is likely.

One thing is for sure, Netflix, now tasting success, is in a very vulnerable position. It has two giants ready to push it out of the way, clients that have lawyers and marketing budgets that dwarf anything Netflix can come up with. Thus, our basic principle that innovators are tolerated by oligopolies until they provide either a threat or a big-boy opportunity is happening n Netflix's world. But don't worry about the principals or the stockholders. They'll. have lots of cash to comfort them.  [Oligopoly Watch]

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