Potential Buyers for Netflix's DVD Division

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The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- On Wednesday, I wrote an article for TheStreet advocating that Netflix needs to -- and will -- sell its DVD division in a bid to not only fund its streaming operation, but for survival. Hastings will likely spin it as part of his vision for the future, but the truth is the company will need the cash to fund that vision. As I wrote in that article:

One way or the other the DVD will help keep Netflix alive. The company will either need to flip-flop again and place a renewed focus on the service or sell it for what will amount to another bailout.

If Netflix wants to unload the DVD business -- and at least one source familiar with the company's operations told me that I am not crazy for thinking they will -- it needs to find a buyer. On the surface, this seems like an impossible task.

Even as a NFLX bear, I have loads of respect for Reed Hastings. He's a big-picture thinker. A visionary. I love people like that. He is correct when he classifies streaming as the future; however, he's too quick to give up on the DVD.

DVD has lots of life left in it, plus, as noted, it can provide much-needed revenue to fuel streaming and international expansion. It can also make movie studios, who do not want to see the DVD die just yet, happy -- possibly prompting them to give Netflix better deals for digital licensing rights.

But, for one reason or another, Hastings is in the process of spurning the girl that brought his company to the dance. Ironically, the DVD business he neglects could save his company, at least for the time being.

Tony Wible of Janney Montgomery told me via email, and in a note released Thursday morning, he estimates Netflix's DVD segment could fetch somewhere between 8 to 10 times earnings, however he said those numbers "could be a bit generous if DVD is rolling off faster." With all of this in mind, who could step to the table, take DVD off of Netflix's hands and provide what I think is a much-needed lifeline to Hastings and his crew?

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You have to consider the movie studios. Of course, they do not need the actual DVDs, but the customer base and fulfillment infrastructure would come in handy. If I am a company like Time Warner or Disney , I could keep the DVD alive by properly marketing and positioning the service, but with value-added features such as an HBO GO subscription or multi-platform access to ESPN thrown in to sweeten the pot.

As I order the possibilities, that's a relative pipe dream. There's little reason for a giant like TWX to make such a move because, as I have argued, Netflix does not pose much of a threat to them. Coinstar , on the other hand, makes more sense.

As Coinstar prepares to enter the streaming market in a joint venture with Verizon , it seems to me that Netflix's DVD business would fit right in. Coinstar holds just a 35% stake in the partnership with Verizon. The two could team up again, with Coinstar taking the lead, still buoyed by Verizon's backing, to roll out the hybrid DVD/streaming service Netflix effectively killed last year.

Synergistic opportunities even exist between DVD-by-mail and Redbox rental kiosks. From a marketing perspective, the company can float the image that it's repairing the damage Netflix inflicted on consumers last year, returning the service to its proper form.

DISH Network owns Blockbuster. And the satellite television provider could make a play for Netflix's DVD business not only to operate it to its fullest potential, but to leverage other assets. The company already provides DISH Network sign-ups with special Blockbuster-branded access to DVDs, video games and streaming content across devices in addition to its standard DVD-by-mail scheme available to the general public.

The way DISH describes the Blockbuster integration in its annual report makes it sound like the DVD side of Netflix could be a fit:

On April 26, 2011, we completed the Blockbuster Acquisition. We acquired Blockbuster operations in the United States and in certain foreign countries. Blockbuster primarily offers movies and video games for sale and rental through multiple distribution channels such as retail stores, by-mail, digital devices, the blockbuster.com website and the BLOCKBUSTER On Demand service. The Blockbuster acquisition complements our core business of delivering high-quality video entertainment to consumers. We are promoting our new Blockbuster offerings including Blockbuster@Home which provides movies, games and TV shows through Internet streaming, mail and in-store exchanges and online. This offering is only available to DISH subscribers.

If a major movie studio and multi-billion dollar powerhouse snagged Netflix's DVD operations, the move would probably not change my opinion of the company's stock. That type of acquisition simply would not add enough to the bottom line at a TWX or DIS to make much of a difference, thus my thought is that neither will make the move.

That said, from a strategic perspective, as well as a revenue standpoint, Netflix's DVD business - rejuvenated - could take Coinstar or DISH to the next level. It might even turn both stocks, particularly the latter, into strong buys.

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