- MSFT Can Fight GoogleTV and AppleTV
- Netflix Can Expand Beyond the US
- Hastings Can Be Groomed As Next CEO Of MSFT
The Door Has Been Blown Open: With the recent retirement [firing?] of long time Microsofty, Robbie Bach, as President of Microsoft’s Entertainment & Devices Division, CEO Steve Ballmer has made it clear that business as usual – with less than stellar performance in revenue, margins and market share – just doesn’t cut it. MSFT wants to move back into a dominating position in the mind of the average consumer. With Apple surpassing MSFT value and GoogleTV getting all the press attention, Ballmer needs to take some drastic action. And there’s no better place to get the attention of the consumer than in their living room. “Take it to ‘em where they live!”
Building the Netflix Empire: So just how would Netflix fit into the grand scheme of MSFT world domination? It turns out that Reed Hastings, CEO and Founder of Netflix, has created a well oiled machine for delivering entertainment to US households on a scale that may rival any of the traditional network, cable or satellite broadcasters today. Starting with snail mail delivery of actual DVDs the value of brick and mortar BlockBuster or Hollywood Video stores came into question. Netflix subs make their video selections on their computer and their movies will be delivered to their mailbox the next day. By charging a flat rate per month, no matter how many movies you wanted to watch, and removing the stress of late fees, Hastings built a growing subscriber base which now stands at approximately 14 million. Better than that, Netflix has changed the business model; moving from the one time rental fee to a monthly subscription with recurring revenue (bean counters like that).
Move to Streaming: With Over The Top (OTT) video gaining in popularity, people were not happy with just seeing YouTube on their computer screen. They wanted to view their videos on their TV. Moving to the next phase of online streaming of movies was an easier transition for Netflix subscribers. They were already conditioned to queue up their selections on their computers’. Now it was just a matter of providing them with a small box to connect the TV to a broadband stream.
The Netflix [Roku] Box is Built: After his in-house engineers failed to pull the trigger on a box design, Hastings slyly hired Anthony Wood, CEO of Roku, as a ‘consultant’ to kick-start his complacent engineers. Having a successful line of digital signage boxes under their belts, Wood’s Roku team quickly designed a small box to meet the Netflix demand.
Not wanting to have the cost of manufacturing and inventory bog down his bottom line, Hastings wisely agreed to outsource all box manufacturing to Roku under the Netflix label. Roku could also sell the same box under its own name, and private labels for other OTT broadcasters. As an added bonus, Netflix was saving the postage costs for delivery and return of those DVDs. Truly, a ‘Win-Win’ strategy.
The Connected TV: TV manufacturers have jumped into the OTT space as a way to stay relevant and to perhaps get a rev-share with bundled software (just like MSFT?). They were more than happy to introduce LAN connected sets which could be linked directly to the Net, without the need for a set top box.
Hastings’ software engineers wasted no time creating widgets and home screen UI applications for those connected TVs, iPhones, Blu-Ray players and gaming consoles (Xbox360). So even if you never heard of Netflix before, if you bought the latest Blu-Ray player to hook up to your new LED TV, you were presented with the Netflix logo and a one month free trial for online movies.
Gates and Ballmer Have Been Listening: None of this activity has escaped Mr. Ballmer. As a matter of fact, Reed Hastings has been a member of the MSFT Board of Directors since March of 2007. In the announcement to his appointment, in a prepared statement, Microsoft Chairman Bill Gates said: “Reed’s track record for delivering innovative and disruptive technologies to the market is very impressive.”
Hastings’ Track Record: What’s even more impressive is how Wall Street has valued the Netflix brand. Since March 2007 when Hastings was named to the MSFT Board, Netflix stock has shot up from just over $23 to its current quote of over $100, an increase of over 4x. And in the same time-frame, MSFT has gone from $27.87 to its current quote of $23.00. Yes, the capitalization of the companies are substantially different; MSFT at $208B and NFLX at $5.7B. However, most investors are looking ‘for the action’ and want a stock that moves.
Nowhere But Up If Bill Gates and Steve Ballmer want to remain in the mainstream of current and future digital asset delivery they need to show they’re still able to make bold moves in the marketplace. They already include Netflix in Windows7 Premium and Xbox360 platforms. Why not get the revenue their own products create for Netflix and take advantage of the rapid growth of web-enabled CE devices, which market research firm, In-Stat, projects will be 83.4 million by 2014. Why sit back and let GoogleTV and the rumored re-birth of AppleTV seize this space? And who do they have on their current roster with the vision and industry experience to pull this off? Time to bring in the outsider.
Hastings as Ballmer’s Heir Apparent Would Ballmer like to move on? Who knows? But with MSFT loosing its luster of late, he may be ready to at least consider moving over to an emeritus position and let someone else fight the day to day battles. He’s been working at MSFT for over 30 years and has a net worth of over $14B. Who wouldn’t think about the next phase in their life? First he needs to groom his heir and be satisfied they will defend and enhance the legacy of Gates and Ballmer. Hastings would be a great candidate for that role. The position as President of Microsoft’s Entertainment & Devices Division is open and waiting. What better vehicle for a test drive of the potential new CEO of Microsoft?
Keep Pushing Forward
[Editor's Note: Frequent readers of this blog will note that almost exactly 1 year ago I dispelled rumors of a pending MSFT and NFLX deal. The timing was not right. The fundamentals, primarily for MSFT, have changed in the last 12 months. Now they NEED Netflix and should be willing to pay a decent premium (all stock swap?) for this most valuable key to their future.]
[Please contact Jeff directly regarding consulting or full time positions in the Digital TV and the Connected Home marketplace]