It may be a fool's errand to question the thinking of an investor who's worth $14 billion, but after listening to Bloomberg's interview with Carl Icahn yesterday (embedded below) concerning his newly disclosed 10% stake in Netflix, it's hard not to conclude his understanding of the company is a mile wide and an inch deep. Unless he has some big vision for the company up his sleeve that he's not disclosing, Icahn seems more interested in a short-term bet on driving Netflix into a larger company's arms, than in positively influencing Netflix's murky strategic direction.
In the interview, Icahn correctly observes that we're in the midst of a secular shift toward viewing on Internet-connected TVs and tablets. That's hardly a profound insight, and Icahn acknowledges its simplicity, also conceding a lot of the money he's made has been from "latching onto secular changes." Icahn says Netflix should be "consolidated" and names larger companies such as Amazon, Microsoft and Verizon in the same breadth.
Left unsaid is exactly what any of these companies would get in acquiring Netflix? No question Netflix has a powerful brand name, and has the biggest SVOD over-the-top service by far. But Amazon, for example, is proving that most of Netflix's content deals can be replicated, as long as the financial willingness is there, and any of the larger companies above have bigger brands, marketing budgets and existing customer bases through which to build their own SVOD services. So for all these big companies, it's a classic question of "buy vs. build". So far at least Amazon, Verizon, Google, Comcast and others have all opted for "build."
Icahn is most puzzling when he says Netflix "has $2.5 billion" but then interchangeably refers to this number sometimes as Netflix's cash flow, and sometimes as its revenue. Of course there's a huge difference, as Icahn knows as well as anyone. In fact, year to date 2012, Netflix has about $2.7 billion in revenue, and $9.3 million in net income. Its net cash flow for the period was negative $138 million. Netflix's financials have been hammered this year due to slowing domestic subscription additions, an expensive international expansion, and ballooning content expenses.
Icahn sees the $2.5 billion as a key Netflix advantage, saying if somebody wants to compete with Netflix "they're in the hole, because they don't have $2.5 billion." But that's a weird assertion, because all of the companies mentioned above have far deeper resources. As just one example, last week Comcast reported YTD cash flow of $6.1 billion. If anything, the correct characterization of Netflix's financial situation is that it is a minnow trying to swim competitively with the whales of the entertainment landscape. Had any of these whales prioritized SVOD in the past and then executed well on their plan, it's debatable whether Netflix would have even survived.
As I have mentioned to some VideoNuze readers, I have thought for a while now that Netflix was a prime candidate for an activist investor to help force changes needed to get the company back on track. Chief among those changes would be re-emphasizing the bundled pricing of DVDs with streaming and reigning in the costly and competitively dubious international expansion.
An activist investor who truly understands Netflix's strengths and weaknesses, along with the current state of the video market could have a huge impact. But based on Icahn's interview, he does not seem to be that activist. He concedes he doesn't have any "definite plans or proposals," only that Netflix "should be consolidated." Depending upon how aggressively he promotes his agenda, he could become a huge distraction of the company at a time when it needs to be more focused than ever. No doubt former Blockbuster executives - and lots of others who have dealt with Icahn - can attest to how distracting his involvement can be.
Regardless of all this, Icahn is in a no-lose position; his investment guarantees renewed speculative interest in Netflix that will keep the stock price up as others hope it gets acquired. So Icahn will make money in virtually any scenario; less clear is where Netflix will be a year or two from now.