What An Amazon-Hulu Tie Up Means For Netflix

Everyone has been talking about a Netflix NFLX killer for months, if not years, and the run to over $300 per share only made the bears even louder. Now it looks like they may have their answer. According to the Wall Street Journal, Amazon AMZN, along with other potential bidders, Google GOOG, DirecTV DTV and Yahoo YHOO are supposed to submit bids for Hulu today. Hulu, which is currently owned by News Corp. NWSA, Walt Disney DIS and Comcast CMCSA, could be acquired for as much as $2 billion, depending on how the auction goes and the content is split up. If Jeff Bezos and his team were to get Hulu, it would be a massive win for the Seattle-based company, and be a huge blow to Netflix. Amazon already has over 100,000 streaming videos through its Amazon Prime service, and it would take on Netflix in a way that should leave Reed Hastings and his team up late at night. Amazon Prime costs $79 per year, and if you tack on Hulu Plus ($7.99 per month), Amazon could have the most up to date content at the cheapest price. Recent deals with CBS CBS, and NBCUniversal have left Amazon is "primed" to kill Netflix, or any other competitor that will stand in its way. There are heavy rumors out there that Amazon is going to launch its first tablet, perhaps by the end of the year. With the massive amounts of content it already has, it can afford to give away the tablet for next to nothing. Throw in Hulu, and the possibilities are endless. Amazon has a market cap of $86 billion compared to Netflix's $11 billion. It has considerably more muscle to throw behind this venture if it should choose to do so. It looks like this is happening, slowly but surely. It has $6 billion in cash sitting on the books, more than enough to pay for Hulu. Of course there is the possibility that Apple AAPL gets into the bidding, but that is not Apple's style to acquire companies. It has only made a few large acquisitions in its history, and one of them was to bring Steve Jobs back to the company in the late 1990's. Of course, as the Journal reports, no one is 100% certain what Amazon, or any potential bidder is getting. There is the potential that the owners of Hulu could choose to delay their content appearing on the site for a week, unless customers subscribe to certain paid services. This could throw a monkey wrench into the deal, but it does not seem like a deal killer. Hulu's CEO Jason Kilar is the former media head at Amazon, and a deal to bring him back to Seattle seems more likely than not. If and when Amazon does get its hands on Hulu, Hastings and the rest of the Netflix team will need to do something extravagant to beef up the content offerings it already has. It has started to do with, by having its own original content, but it will need more of that. Otherwise, Amazon is "primed" to kill off Netflix faster than you skip those pre-roll ads on Hulu. ACTION ITEMS:

Bullish:
Traders who believe that Amazon gets Hulu might want to consider the following trades:

• This could be another growth driver for Amazon, as it seeks to take away market share from Netflix. Traders could add to existing positions, or initiate new ones in Amazon.

• Other beneficiaries might be content delivery networks, such as Akamai AKAM and Limelight Networks, Inc. LLNW.

Bearish:
If this deal happens, it is certainly bearish for Netflix. With shares well off their highs, Netflix will have to spend more on content to keep its subscribers, or risk losing them. This will eat at margins, and overall profitability. Consider shorting the stock.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.