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Rumors of a potential acquisition of Netflix by Amazon appeared to be moving the markets Dec. 22, 2009, and the move appears strategically related to upcoming moves by Apple (News - Alert) into the subscription streaming media business. Rumors of an Amazon acquisition have swirled before, but there are new competitive reasons such a move might make excellent sense.

 

For starters, Amazon and Apple are going to be head to head competitors in the multimedia reader business. Apple's new “tablet” device, expected to launch in 2010, is a multimedia device positioned between the iPod and the low end of the MacBook product line. The Apple tablet is said to be a color device capable of displaying video as well as other downloaded content. Hence the potential for new and direct competition with the Amazon Kindle.

 

In fact, some observers say the device might be described as a “Kindle killer.”

 

Also, though it has been committed to building a subscription-based video business, Amazon has not gained outstanding traction, and Apple is perhaps the most-formidable potential competitor in the whole space. Netflix, on the other hand, already is a big player in the physical media end of the video rentail business, and appears poised to be a significant competitor in the online delivery space as well.

 

Apple is expected by some analysts to start production of a 10.1" screen tablet in February, says Oppenheimer analyst Yair Reiner.

 

The tablet should launch in late March or early April, says Reiner, and Apple appears to be sizing its supply chain to support production of as many as one million units a month. Given that Amazon sold something on the order of a million units in its first year, that's aggressive.

 

While the product will not be a netbook and will not be marketed as a netbook, Piper Jaffray analyst Gene Munster believes the product would be geared towards users who want convenient, inexpensive computers for simple tasks like Web browsing, checking e-mail and media consumption.

 

Apple has not shied away from creating new product categories, so we might have to wait and see how the market receives the new device, which Munster suspects would be sold in the $500 to $700 range and would not be precisely a “netbook” or an e-book reader but something else.

 

Apple apparently wants to “lead” with subscription video and other content, so it is something more than an e-book reader, and suitable for Web browsing, but not a general replacement for a netbook or notebook. Apple also appears to be offering a more-favorable revenue split than Amazon offers for Kindle content sales.

 

Where the Kindle split is 50 percent for the content owner, Apple reportedly is offering 70 percent of revenue, on the model of its iPhone (News - Alert) App Store, and apparently is not asking for exclusivity of content rights.

 

The Apple device apparently also will allow display of advertising, which the Kindle does not support, as well as multiple digital storefronts, so partners can create their own branded distribution sites.

 

Any Amazon purchase of Netflix, in other words, acquires new strategic significance given the coming challenge from Apple.