Icahn Has Special Plans for Netflix
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The team at Netflix (NASDAQ: NFLX) has its eye fixed on operational success and increased profits:
“Next steps: grow membership, increase content, repeat,” said Netflix CEO Reed Hastings.
But Netflix has another problem it cannot ignore: Carl Icahn. Icahn cannot seem to shake himself from the company that doomed his prior investment in Blockbuster, which declared bankruptcy when it could not keep pace with Netflix’s service.
What does Icahn see in Netflix? The potential for a huge sale.
What Icahn Sees
Competition from Amazon
Icahn sees Amazon (NASDAQ: AMZN) as major threat to Netflix’s streaming business. Amazon sought to boost sales of its $79 Amazon Prime membership, which offers free two-day shipping on Amazon products. To force the increase, Amazon includes unlimited free streaming of digital content, and Amazon is also adding additional movies and TV shows to its list of offerings.
Even though Netflix offers users more content, customers who want bare-bones prices can opt for Amazon Prime, which averages out to just $6.58 per month.
Weak Share Price
Netflix’s share price has been crashing to earth from its high of over $300. In July 2011, Netflix hit its all-time high, only to watch the stock price erode as Netflix botched its attempted split into Netflix and Quikster.
Huge Sale Premium
Icahn purchased his shares at an average price of $58. Netflix’s content selection and massive distribution could be worth a great deal to a large media company, a tech giant, or to a cable or telecom company like Comcast (NASDAQ: CMCSA), for instance.
For Comcast, Netflix's business model could provide a hedge against the potential for the slow eroding of subscribers. Comcast already has pricing in place that dissuades users from dropping its service, such as charging customers more for internet than cable and internet combined.
However, Comcast’s strategy, and thus the strategy of this industry, is trying to delay the inevitable – a secular trend of customers gravitating from TV to internet streaming. Live sports contests are one of the few shows left that encourage live TV, a trend that has upped advertising dollars for sports programming, but limited advertising dollars for other types of TV shows.
Also, Icahn believes that Netflix is an excellent property for a “cash-rich” tech company like Google (NASDAQ: GOOG) or Microsoft (NASDAQ: MSFT). Google had $44.6 billion in cash when it last reported, and Microsoft had $66.1 in cash.
Netflix’s digital distribution would benefit either company. For example, Netflix’s wide distribution would give Google a major distribution advantage when combined with its YouTube property. Google would then have major properties in both professional and user-generated content.
Like Google, Microsoft could include Netflix within its portfolio of businesses. On the positive side, Microsoft could benefit from having a media distribution property that would fit nicely alongside its Skype and Xbox businesses. The business would also complement its new hardware – the Surface tablet, which could easily promote Netflix content subscriptions.
On the downside, buying Netflix could derail Microsoft from its core businesses, an issue that could cause a loss of focus.
Failure: Not an Option
Netflix’s “poison pill” measures, designed to dilute Mr. Icahn’s ownership interests, could prove to only infuriate the 76-year old investor. “If they want to go to war, then we’ll go to war,” said Icahn.
Icahn does have two opportunities in his favor. First, a broad market correction could sink Netflix’s share price further, giving him the opportunity to purchase more shares. Second, Netflix could fail to meet Hastings’ forecast of adding 7 million new U.S. streaming customers by the end of 2012. Such an increase represents a 33% increase from Netflix’s 21.7 million at the end of 2011.
Again, missing expectations could drive down Netflix’s stock further, a boon to Icahn. Yes, in addition to subscriber growth and increased profits, Netflix’s management does have a lot to worry about.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Google, Microsoft, and Netflix. Motley Fool newsletter services recommend Amazon.com, Google, Microsoft, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!