Some restless shareholders are cheering the news, while others are concerned that now’s the exact wrong time to undergo an overhaul. Both camps can certainly agree on one thing, though: Billionaire investor Carl Icahn’s new interest in Netflix (NASDAQ:NFLX) is going to keep things interesting through Sept. 4, 2014.
Why that date? Because that’s when Icahn’s options to buy nearly 10% of the entire Netflix corporation expire.
Of course, it’s all academic at this point. The next question shareholders and onlookers need to ask is “Why does Carl Icahn really want control of Netflix?” Said more bluntly, what does Icahn think he can do for Netflix that wasn’t going to happen anyway?
Or, to ask the question in a really nasty way … does Carl Icahn really even know what he’s getting himself into?
What’s Really Ailing Netflix?
Based on his history, Carl Icahn most likely is aiming to take an active role in the day-to-day operations of Netflix to squeeze more value out of it. That’s what transpired when he started to accumulate shares of “loose cannon” natural gas outfit Chesapeake Energy (NYSE:CHK) in May of this year, anyway.
That’s also how things unfolded when he started to accumulate shares of Motorola back in 2008. His goal from the beginning was to split Motorola into two pieces and sell off the mobile phone division, which it finally did — to Google (NASDAQ:GOOG) — earlier in the year.
Not everything Mr. Icahn touches turns to gold, however … a reality that is often overlooked. Remember, this is the same Carl Icahn that joined the Yahoo! (NASDAQ:YHOO) board of directors in early 2008 with the goal of either getting the company sold to Microsoft (NASDAQ:MSFT), or at least inspiring some change for the better. He had done neither by the time he resigned as a board member a year-and-a-half later; YHOO shares even lost value during that time.
As for why Icahn might not get the traction he’s specifically expecting with Netflix, however, there are trio of burdens weighing down NFLX that are completely out of any CEO or board member’s control.
- The cost of digital content is rising: Back in 2008 — before Netflix started to get serious traction and was more of a content experiment than a threat to content distributors and studios — companies like Liberty Media (Starz) (NASDAQ:LSTZA) and Sony (NYSE:SNE) didn’t mind letting Netflix have access to their content libraries. After all, Netflix wasn’t perceived as being a threat then; why wouldn’t a studio or distributor want to make a few extra bucks off content that was gathering dust? Once Netflix started generating annual revenue of around $3 billion in early 2011, though, the cat was out of the bag, and the studios started to demand more money. Problem is, they’re not going to want less money for the same content just because Carl Icahn’s on the board.
- The number of competing venues is growing: In 2008, online streaming content was a novelty (YouTube doesn’t count), and still not the focal point of the Netflix business model. DVD rentals were the core business up until then. Now that the idea of selling online streaming content has been proven, though, competitors are coming out of the woodwork; and enough of them are undercutting Netflix’s already-low price. Amazon (NASDAQ:AMZN) is one of them. Already with a wide reach stemming from its popular online shopping business, Amazon is finding that it’s fairly easy to convert many shoppers into digital content customers.
- Excessive hope surrounding expansion overseas: To give credit where it’s due, Netflix is making a dent with its expansion into foreign markets. But movies and television aren’t a way of life overseas like they are in the United States. Oh, there’s a market, but not a rabid one like the one U.S. consumers see every day.
None of this is to say Carl Icahn can’t get more value from Netflix than is currently being realized. But he can’t do it by squeezing blood from a turnip. He’s going to have to do it by lowering costs and increasing revenue despite these three hurdles.
Either way, this might end up being the final chapter in Netflix’s survival saga.
If it’s going to happen — if Netflix is going to be acquired by an outfit that can streamline and augment the revenue-generation process — then Icahn is the company’s best shot at survival. If he can’t get a deal done, then expenses are going to keep rising for Netflix faster than sales are, which isn’t a viable long-term business model.
Thing is, while Icahn might have enough call options to buy 10% of Netflix, until he actually buys shares of the stock, he won’t even be able to wedge his way onto the board. That means we could see at least a little lift for NFLX in the meantime if Icahn truly wants some control of the company.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.