Next for Netflix: Xbox 360?

It's been rumored before, but Wedbush Morgan analyst Michael Pachter is more and more confident that Microsoft will team with Netflix

Following a Netflix analyst event in San Francisco, Wedbush Morgan Securities' Michael Pachter has reiterated his belief that the popular rental company will partner with Microsoft to offer a new streaming service over Xbox Live.

"The company is investing heavily in building its online streaming capability, to the point where it is a market leader, and a desirable partner for consumer electronics companies that hope to participate in digital media convergence in the near term. As we have speculated in the past, we believe that one of Netflix's partners is Microsoft. We arrive at this conclusion based upon Netflix management repeatedly mentioning 'Internet enabled video game consoles.' While there are three such consoles, only one (Microsoft's Xbox 360) has a sufficiently large installed base to make sense from a streaming partnership with Netflix," Pachter stated in his latest research note.

He continued, "The competitive advantage of such an alliance is clear: Netflix customers who are Xbox Live members will have the ability to stream online content through their Xbox 360s directly to their televisions. The ability to do so is available without the Xbox 360, but requires a measure of technological sophistication and a high tolerance for failure."

That's all well and good for Netflix, but in a sense Netflix on Xbox Live would potentially hurt Microsoft's own Video Marketplace business. And how would the business model shake out? Would the two companies split revenues on subscriptions? We followed up with Pachter to get his take on the business model and why Microsoft should ultimately take the Netflix plunge.

"It strikes me that the right business model for Microsoft and Netflix is that they both participate for free, and I think the idea is that Netflix has 8 million subs in the U.S. and Microsoft has probably pretty close to that many Xbox Live members in the U.S., and there's probably not 100 percent overlap – my guess is there's a couple million of overlap, but there's 5-6 million Xbox Live subscribers that Netflix would love to have join Netflix service and there's probably 5-6 million Netflix subscribers that Microsoft would love to sell an Xbox 360 to," Pachter told us.

"So by buying an Xbox 360 you get a game device and you get this portal to the Internet where you can download movies and watch them; I think that's a pretty compelling value proposition for Microsoft to offer to Netflix subscribers. And it at least makes it a more compelling offer relative to the PS3. So my guess is nobody's charging anybody anything. Microsoft's looking for greater content on its Xbox Live Marketplace and they'd be very happy if people suddenly started thinking of Xbox Live Marketplace as a place to download entertainment content, because then Microsoft could theoretically offer movies to own and movies to rent side-by-side with Netflix free streaming, and why not get those people used to it? I think that's actually pretty smart."

Before it's here, it's on the Bloomberg Terminal.