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Icahn’s Move Into Netflix Fuels Buyout Speculation


Shares of Netflix (NFLX) are soft today as investors wake up to the fact that not even Carl Icahn always gets what he wants. News that the legendary corporate raider has taken a 10% stake the in movie and television streaming company had sent shares higher by nearly 14% in trading Wednesday. Icahn said he sees Netflix as an outstanding takeout target in a world going digital.

Of the potential suitors Microsoft (MSFT) is the most frequently mentioned. One reason for the MSFT speculation is Netflix CEO Reed Hastings' announcement that he would be leaving the Microsoft board in November. Microsoft would also love to have a cornerstone streaming business associated with its Xbox and Surface businesses. (See Related: Why Microsoft Should Buy Twitter Now)

For $8 billion or so Microsoft, Apple (AAPL) or Amazon (AMZN) could buy Netflix and give Mr. Icahn his premium. Upon purchase the buyer would first have to address the fact that the core business of Netflix is an eroding asset. The company's transition from DVD mail service to streaming has been stunning, but it only gave Netflix a new lease on life, not a long-term plan.

When Netflix missed their most recent quarter it blamed, in part, a "forecasting error." The error was forecasting customer's willingness to pay for Netflix service.
If the acquiring party is Microsoft they would presumably yank Netflix off iTunes or give Xbox eco-system customers access to exclusive content. There would be a certain big brand appeal to the strategy but nothing to back it up. Customers trust the Netflix brand, but they pay for content.

It's the content aspect of this that makes a Netflix deal illogical. After writing the $8 billion check, Microsoft would still need to pay the content providers for everything they wanted to show through a Netflix branded window. HBO has their own streaming as do most cable systems. If Netflix wants content they have to pay up. That fact doesn't change regardless of who owns the Netflix brand.

Netflix knows content is king. That's why the company tried to build its own studio. But content is hard and streaming is easy. Netflix has an increasingly apathetic user base and a great brand. In fine Hollywood tradition the brand is like a movie set where there's nothing inside the front door.

For $8 billion Microsoft, Apple or anyone else could sign content deals that would put Netflix out of business. The stock is best viewed as a curiosity, not an investment.