Analyst: Netflix split is set-up for Amazon deal

AP News
Posted: Sep 22, 2011 1:07 PM
Analyst: Netflix split is set-up for Amazon deal

An analyst believes he's hit upon the reason that Netflix Inc. is splitting its DVD-by-mail service from its Internet streaming service: It's setting up the online portion for Inc. to buy it.

Wedbush Morgan analyst Michael Pachter said he, like many others, had struggled to understand the motivation for Netflix's Solomonic separation, which was announced Monday. The DVD-by-mail service will be called Qwikster, and its billing, queue and website will be separated from the streaming service which will keep the Netflix name. Customers greeted the announcement with jeers.

Pachter argues that the streaming service would be highly valuable to Amazon and a good complement to its existing Amazon Prime service. However, buying the DVD-by-mail portion would present a problem, because it has many warehouses around the country that send out DVDs. Amazon doesn't want to have a substantial business presence in more states, because it then has to collect sales tax on sales to those states, Pachter wrote in a Thursday research note.

Netflix and Amazon didn't immediately respond to requests for comment.

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Pachter raised his price target on Netflix shares from $110 to $155, a figure he said is based on a $25 value for the DVD business and a $130 per share for the streaming side.

Netflix shares rose $2.17, or 1.7 percent, to $130.67 in midday trading, as the Standard & Poor's 500 index was down 3 percent.

Other analysts have speculated that separation is a prelude to Netflix spinning off the physical DVD business.