Real Reason Amazon Should Acquire Netflix

by Ric Merrifield

Amazon and Netflix might be great together, but not for the reasons you might think.

The way I see this, it's a little bit like peanut butter and chocolate, two great tastes you might not expect to go well together. People are talking about the possible acquisition of video company Netflix by Amazon, and they are speculating that it has to do with movies and streaming media. Maybe, but I don't think that's why this acquisition would be so powerful, and I am frankly surprised I haven't heard more people talking about this.

Here's why.

One of the biggest mistakes I think Amazon has been making all along is ignoring the buying history of customers. They never recommend anything to me based on my buying history. They tell me what other people have bought when I buy a certain book or a tent or a squash racket, but they don't seem to really pay attention to what I buy and what I like. And I buy a LOT on Amazon. They are crazy to have ignored this for so long.

By contrast, Netflix has the most incredible recommendation process ever. While I do have to make the effort to rate movies I have watched (irrespective of whether I watched them through Netflix) based on what I have liked and what I haven't liked, they have the ability to say, for example, that for a movie like Pulp Fiction, while the average viewer gave it three and a half stars out of five, based on my history and preferences, they think I would like it much more, on the order of four and a half stars. What's amazing to me is that they are always right, and I have really unusual taste in movies.

Back to peanut butter and chocolate - if Amazon could use the Netflix recommendation engine innovations to do a better job of tracking my purchases and preferences and recommending everything from books to movies to music to running shoes, it would be amazing.

Is it worth it? Well as of today, Netflix is worth about $3.22 billion, according to Wall Street, and Amazon is about 16 times bigger at $52 billion and to have this incredible way to connect with customers and help them find what they will really like even before they know about it, that would be a huge, much needed, boost for Amazon. The lift in revenue would be significant - just ask anyone in retail about how much upselling is done at the point of purchase.

Overdue rethinking at Amazon, but a great match. I really hope it happens.

P.S. It makes for an interesting side note that if Amazon does buy Netflix, that would probably put founder and CEO Reed Hastings on the board, and he's already on the board of Microsoft. Would he stay on the board of Microsoft?


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Ric Merrifield is known at the "Business Scientist" at Microsoft Corporation in Redmond, WA and is the author of "Rethink". He blogs about ways to rethink through getting out of what he calls "the 'how' trap".

Innovation Perspectives - 911 Call for Innovation and Revolution

This is the fourth of several 'Innovation Perspectives' articles we will publish this week from multiple authors to get different perspectives on 'What product or sector is in desperate need of innovation?'. Here is the next perspective in the series:

by Ric Merrifield

I define innovation as figuring out a way to accomplish the same outcome, the "what" we do, in a way that doesn't resemble "how" we used to do it. Flight check-in over the web doesn't resemble the experience of talking to the airline employee at the counter, but it accomplishes the same three outcomes (confirming a reservation, conducting a survey, and managing logistics when there is luggage). A revolution, by contrast, I would define as an innovation that results in a dramatically different, or richer experience. E-mail and text messaging haven't just replaced prior forms of communication, they have revolutionized the way we communicate in ways we couldn't imagine 20 years ago.

Right now, I see very distinct places where innovation is desperately needed, and at the same time, I see a place where a revolution isn't quite overdue, but it's getting there.

The most urgent innovation needs are in U.S. health care and energy. People in Washington are chipping away at ways to improve the administration of health care and the role of insurers and doctor incentives, and while I will grant that those are all big messes that need cleaning up, that's not where the greatest need is. The greatest need is to stop people from needing to see the doctor in the first place and the way to do that is managing wellness in a structured, disciplined way. People get there insurance through their work in the US, and the companies should mandate regular checkups and the insurers should provide statistics (not at the individual level - for obvious privacy reasons) as to where the risks are and then invest in wellness programs accordingly.

Just at Microsoft alone, if they don't take action on diabetes and obesity alone, in less than six years they will have to spend about $70 million more each year - and most of that will be avoided if the high risk employees lose just six pounds before they turn 46 (source: The American Diabetes Association, and Microsoft Corporation). People ask about the return on investment from wellness programs - there it is. Energy - this one is harder but more obvious. The car replaced the horse, we need something to replace our dependency on petrochemicals. I don't know where it will come from, waves, wind, cold fusion, whatever, but we need it soon.

As for where the revolution is needed, or why, I would say we need it because we are in a new era - the era I will call post-decentralization.

We grew up in a world of a finite number of TV stations, the record labels decided what music we would listen to, and we all got newspapers (all very centralized sources of news, entertainment, music, and information). Now, we are in a very different world that includes social networking, YouTube, blogs, iTunes, and the iPhone. Most of the sources information, music and content have become almost cartoonishly decentralized.

That's great from a control perspective, but except for those who are really on top of it all, it's hard for people to feel comfortable that they are getting connected to the right stuff that's most aligned with their needs and interests. We need innovations to do better match making between consumers and all of these decentralized sources of apps and content. I shouldn't have to find the best news articles, blogs, video clips, and music, they should find me based on who I am and what I am interested in. I happen to have some ideas on how that will happen - but that is going to allow us to really fulfill the potential of the internet, and it will be awesome.


You can check out all of the 'Innovation Perspectives' articles from the different contributing authors on 'What product or sector is in desperate need of innovation?' by clicking the link in this sentence.

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Ric Merrifield is known at the "Business Scientist" at Microsoft Corporation in Redmond, WA and is the author of "Rethink". He blogs about ways to rethink through getting out of what he calls "the 'how' trap".

Innovation Perspectives - Cash, Plastic or Free?

This is the first of several 'Innovation Perspectives' articles we will publish this week from multiple authors to get different perspectives on 'What product or sector is in desperate need of innovation?'. So to kick it off, here is my perspective:

by Braden Kelley

There are lots of industries that are desperate for innovation, especially in this recession, but my choice is the publishing industry. First let me say that far too often the publishing industry is too narrowly defined as relating to the publishing of books. Or, if it is thought of in a more holistic manner, then it is still spoken about in terms of its isolated silos - books, magazines, newspapers, music, software, etc.

Yet what is the publishing industry but a group of businesses that make their living distributing the work of "artists" to the masses. And no matter which of these silos you choose to read about, you'll come across stories of their pending demise (even software). Taken at face value, the publishing industries are facing an apocalypse and should be desperate for innovation - and they are...

Recently I came across an article talking about how now instead of paying 99 cents a song as on iTunes, users will be able to download and listen to the music they want for free after watching a 15- to 30-second advertisement at sites like FreeAllMusic.com. As a concept, advertising-supported music you can share is not new. It used to be done with the radio and a cassette recorder, but now it is possible for downloads and sharing and social media to all be combined together. For a music industry struggling against piracy, it needs to innovate further in areas like this.

The magazine industry is shrinking at an accelerating rate with magazines like Business 2.0 (one of my favorites) closing up shop, and rumors swirling about Newsweek possibly disappearing as well. Two newspaper towns are becoming one newspaper towns and the art of the newspaper business (feature stories and investigative journalism) is quickly being replaced in the dailies by more stories off the wire.

Both newspapers and magazines are hoping that devices like the Amazon Kindle, Barnes and Noble's Nook, and their own e-reader creations will save them. Some magazines are getting a little more creative. National Geographic is offering their entire archive on a portable hard disk, and Sports Illustrated is preparing for the new generation of rumored slate computers with a new interactive format.

The book industry is coping with the fact that on Christmas Day, for the first time in history, Amazon sold more digital books than paper books, and also with Google's designs on digitizing every book they legally can. So, as you can see all of the silos in the publishing industry are desperate for innovation.

But what does the future hold for the publishing industry?

If you watch the embedded video in my Apple Tablet Sneak Preview article, or if you watch the embedded video of Coursesmart's offering in my Microsoft-Apple-Google in Tablet Battle article, I think you'll get a sense of where things are going and the kinds of innovation that the publishing industry silos will need to consider.

The bottom line is that when people start carrying around high-definition multimedia devices with them that are always connected to the Internet, then the boundaries between different media types are going to feel artificial. Customers will flock to more integrated content.

This will require companies delivering information or entertainment solutions to customers to innovate new partnerships and deal structures, new business models, and new product and service offerings to better meet customers' quickly evolving entertainment and education expectations. Industry structures and silos are about to be transformed.

So, what kind of publishing industry innovations can you imagine in this new world?


You can check out all of the 'Innovation Perspectives' articles from the different contributing authors on 'What product or sector is in desperate need of innovation?' by clicking the link in this sentence.

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Braden Kelley is the editor of Blogging Innovation and founder of Business Strategy Innovation, a consultancy focusing on innovation and marketing strategy. Braden is also @innovate on Twitter.