Will Amazon bid for Netflix?

Netflix (NFLX) stock moved up seven percent yesterday on rumors that Amazon (AMZN) might buy the video rental company. The deal, should it happen, makes a lot of sense.

Netflix has a market cap of $2.4 billion and trades at just 1.7 times sales. Amazon's market cap is $35 billion, or 1.8 times sales. The market looks at the relative value of the two companies as being fairly similar. Amazon has enough cash on its balance sheet to write a check to buy Netflix.

The key to the value of the video rental company is mentioned in a line in The Los Angeles Times, "Netflix, of Los Gatos, Calif., has 10 million subscribers to its mail-order rental business, all of whom are candidates for conversion to a streaming model." Amazon is trying, and trying hard, to build a VOD streaming business for premium content.

Netflix has content, relationships with the content providers, and the huge treasure of its customers. Amazon may be able to fight its way into a business dominated by cable and telecom companies, but that would be a long and very expensive fight.

Amazon has a huge fulfillment business for its current product line. Adding the Netflix customers would be easy. Getting the Netflix customers to build its VOD business may be the only way for Amazon to jump-start that operation.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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