Amazon Should Buy CBS to Compete With Netflix, Analyst Argues

"Despite all of Amazon's many accomplishments, Prime Video appears to be lagging in both usage and reach," wrote Michael Nathanson of MoffettNathanson.

Amazon should buy CBS so that its Prime Video subscription service can give Netflix a run for its money, an analyst said in a research note he distributed to clients this week.

"Despite all of Amazon's many accomplishments, Prime Video appears to be lagging in both usage and reach," wrote Michael Nathanson of MoffettNathanson, an independent research boutique firm.

Rather than build out the service over time, Amazon, led by CEO Jeff Bezos, should embrace a "buy-it model," and the company that makes the most sense is CBS, which sports about a $21 billion valuation on Wall Street.

Such a strategy would be similar to Amazon's $13 billion purchase of Whole Foods. "When it was time to move into multichannel grocery, they didn't go for the largest traditional grocer [Kroger], they went for something large enough to matter, but small enough that they could build it out their own way," the analyst writes.

Of course, CBS is in a legal dispute with National Amusements, which controls CBS through voting shares, and that matter — which pits CBS CEO Leslie Moonves against Shari and Sumner Redstone — won't resolve itself for several months.

Nathanson argues that should CBS prevail against National Amusements, its stock would climb rapidly as the Moonves-run company would be perceived as a takeover target and Amazon should jump at the chance to acquire it ahead of others.

The analyst also said Amazon has done remarkably well in every business it enters, always striking fear into incumbent competitors, but streaming media is a "glaring exception" because "Netflix has been able to thrive despite the competition from Amazon Prime Video."

Nathanson notes that the primary feature of Prime is free shipping on goods purchased at Amazon.com and that one-third of Prime subscribers don't even use the video service. In a survey, 37 percent of those who don't use Prime for video say it's because their needs are satisfied by Netflix, as well as Hulu and others.

Those who do watch Amazon Prime Video do so for 14 hours per month, compared with 20 hours for Netflix and 25 hours for Hulu and YouTube, says Nathanson.

"Amazon Prime Video has both content and marketing problems," says Nathanson.

"While Amazon won multiple Emmy awards for Transparent, we would argue that Amazon, up to this point, has not lived up to the hype and promise of category disruption," he writes. "In our conversations with industry contacts, much of that blame was placed on Amazon's creative leadership in Hollywood."

Nathanson notes that former NBCUniversal executive Jen Salke was recently hired to replace ousted Roy Price as head of the Prime studio and adds: "Perhaps her hiring will be the turning point for the service."

On the library side, Amazon gets half its content from just two sources, CBS and HBO, and it will likely lose the latter at the end of the year when its current deal runs out.

Amazon intends to make up some ground in sports, where Netflix isn't a player. It has streaming rights to Thursday Night Football and 20 English Premier League soccer matches, but sports leagues crave broadcast-like ratings, the likes of which Amazon Prime cannot yet deliver, so future deals could be problematic, says Nathanson,

But with CBS, Amazon "would be able to jointly bid on linear-digital packages," says the analyst.