As part of my 2009 Digital Media Predictions series, I said that Amazon should acquire or merge with eBay and/or Netflix. Both perspectives are coming… but first, Netflix:

Movie ticket sales are down. DVD and Blu Ray sales are down.

It’s indicative of the changing form of entertainment consumption (torrents, youtube, etc) and of the recession (why buy a $30 movie? Will you ever get $30 of value from it?). And it’s more than just movies – it’s music, newspapers and any other form of entertainment or consumption where the audience must ask, “is this worth paying for when there are so many other alternatives”?

And that’s where Netflix makes total sense to Amazon.

First, if you are going to buy a movie, you have two options: Amazon and iTunes. No other store should be visited because the pricing is unbeatable and search experience is perfectly simple.

But what happens if you no longer have an appetite for buying movies? Or if those movies – even at Amazon’s unbeatable price point – are just too expensive to justify one or two viewings (a question brought into focus thanks to the economy)?

What happens is that you find other alternatives - free and cheaper alternatives.

For those seeking free alternatives, there are countless torrent sites, hulu, and so forth. Not Amazon’s space (nor should it be). For those seeking cheaper alternatives, there is Netflix: unlimited movie rentals for less than the price of a single DVD. For around $15 a month, Anette and I receive 8-16 Blu Ray movies each month from Netflix (depending on what we are watching).

So why does Amazon + Netflix make sense? A few reasons:

1. In economic hardship or not, Netflix offers an alternative to movie purchasing… which I believe, over time, is eroding (just like music). Offering consumers the ability to either purchase a movie at a flat rate (ie $14.99) or renting it within a monthly subscription (ie $14.99) provides choice while still keeping buyers on Amazon.

2. I love Netflix’s service… but I despise and the site experience which, as I’ve written before, hasn’t changed for years. Amazon would immediately fix this by leveraging their best-in-class search and site experience – and integrating that into the core Amazon platform.

3. Amazon is the king of cross merchandising (except here!). With Netflix, Amazon would be able to bundle all sorts of other products, services and goodies that Netflix simply cannot. Renting National Lampoon’s Vacation? Why not buy the entire bundle for $24.99. Or why not keep the DVD for a reduced cost?

4. Amazon is also the king of inventory control and harnessing consumer demand / interest – and that plays into both sides with Netflix. Amazon is able to determine what inventory on Netflix’s or their side should, based on shifting user demand, be moved into sales or rentals. For instance, in six months, the gazillion copies of IronMan that Netflix had stocked are going to be far less valuable than they were at movie release… those copies are more valuable on Amazon than anywhere else (except perhaps eBay). Amazon could create their own media marketplace and sell the used goods after having already made money on those units via the subscription service.

5. Amazon’s Unbox service is cooler than it is successful. Netflix has their own streaming product service / box as well. Neither has made a big dent into Apple’s iTunes, Mac Mini and Apple TV market… but combined, they have greater leverage and flexibility. Perhaps Netflix + Unbox reaches the tipping point that Amazon has been missing. I would be willing to bet that an Amazon “On Demand” product hooked into my TV would be terrific and worth the money. Also creates a new avenue for Amazon to package its digital music offering.

6. A few other random thoughts / possibilities: - Both Netflix and Amazon are masters of shipping… might their be efficiencies or negotiating leverage in pricing? - Both companies spend a great deal on online marketing for media products… there are certainly efficiencies to be gained as a combined entity - Finally, does the combination of Amazon + Netflix allow for movement into new areas like Video Game rentals?