Netflix's shares rallied amid Monday's market sell-off as investors reacted to speculation that Verizon may try to buy the video subscription company instead of building a rival service.
THE SPARK: The DealReporter got tongues wagging with a story reporting Verizon's potential interest in buying Netflix Inc. The prospect of a takeover bid surfaced less than a week after word leaked out that Verizon Communications Inc. has been talking to television networks and movie studios about licensing content for an Internet video service similar to Netflix's.
Verizon declined comment Monday. Its CEO, Lowell McAdam, acknowledged last week that his company considered making a bid for another Internet video service, Hulu.com, when it was soliciting offers earlier this year. Hulu has since been pulled off the auction block by its owners, which include Walt Disney Co., News Corp. and Comcast Corp.
Netflix, which is based in Los Gatos, Calif., also declined to comment.
THE BIG PICTURE: An attempted takeover of Netflix isn't far-fetched because of how far the company's stock has plunged in the past five months. Netflix's market value is now hovering around $4 billion, down about 75 percent from a peak of $16 billion in mid-July. The steep decline coincided with a customer backlash triggered by Netflix's decision to raise its U.S. prices by as much as 60 percent.
Other deep-pocketed companies who could emerge as Netflix suitors include: Amazon.com Inc., which unveiled its own Internet streaming service for customers who pay a $79 annual fee for free shipping from its e-commerce site; Microsoft Corp., which already offers access to Netflix's streaming service through its Xbox 360 video game console and is trying to add more programming to the device; and Apple Inc., which is believed to be developing an Internet-connected TV that could hit the market next year or in 2013.
THE ANALYSIS: Verizon appears serious about offering an Internet video service.
The planned Verizon service would stream video over high-speed Internet connections in markets where it doesn't already sell FIOS, a technology that's similar to cable TV, according to people familiar with the matter. The people requested anonymity because they haven't been authorized to discuss them publicly.
Based on talks that have been held with television networks and movie studios, Verizon's Internet video service would have more than 3,000 titles and cost $5 to $10 per month. Netflix charges $8 per month for a streaming library with more than 30,000 selections, which mostly consist of old TV series and movies that left the theaters several years ago.
If Verizon decides to build its own Internet video service, it may team up with DVD-rental vendor Redbox, according to a report last week on the technology news site TechCrunch. Redbox, which rents DVDs for a $1.20 per day from in-store kiosks, has already said it wants to expand into Internet video streaming, too.
SHARE ACTION: Netflix shares surged $3.07, or 5.6 percent, to $74.83 in Monday's afternoon trading.
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AP Business Writer Ryan Nakashima in Los Angeles contributed to this story.