Netflix Sale to Microsoft – Not Today

[Editor’s Note – On July 6, 2010, just about one full year after this posting, the market has changed.  Now, there is a place tailor made for Hastings at MSFT and MSFT needs NFLX to battle Apple and GoogleTV.  What was unrealistic a year ago seems like a good deal now.  JV]

Rumors on the net in the last few days suggest that Netflix is dusting off the “For Sale” sign and getting ready to move to Redmond.

WHY SELL ?: Why would Reed Hastings consider selling Netflix to Microsoft?  He’s already on the Microsoft Board of Directors and has created a very successful company which is now utilizing IPTV technology to cut mailing costs and provide that ‘instant video fix’ for its growing base of more than 10 million subs.

Sales of successful companies are driven by founders who are ready to say “enough” and cash in to start another dream.  Most are either sold or go public within the first five years to repay the initial VC investors.  Netflix has already rewarded its initial investors with a stock price which keeps on climbing.  So now, it would only be for a deal so sweet that only a fool would say no.

WHAT ABOUT THE MAJOR SHARE HOLDERS ?:  And why would the institutional and mutual fund investors who control 97% of the stock want to sell a rising stock in a great technology sector?  Where would they find a replacement?  Would they trade for MSFT shares?

WHAT PREMIUM COULD IT COMMAND?:  In today’s rough and tumble economy, would there be enough cash available for someone (even MSFT) to pony up 20 or 30% premium over their existing market cap of about $2.5 Billion?  Yes, MSFT is sitting on a HUGE vault of cash (about 10 x Netflix market cap) but a deal must make sense to both parties.  I hardly think a hostile takeover would even be considered.

CONFERENCE CALL: The Netflix conference call on July 23rd should put the rumors to rest.  My bet is they will show continued growth in subscribers, revenue and profits.  And, Reed will announce, at least for now, they are not for sale.

Netflix EU ?: I think the next big news from Netflix will be to take advantage of their IPTV delivery system for an international offering.  Perhaps with the BBC, another leader in online video.  BBC programming would be available for consumption to existing Netflix subs and the BBC could get a rev share from new UK Netflix subscribers.  A gambit into a new market would make sense for a company who’s Board of Directors includes representatives from 5 VC firms.

I could be dead wrong, but my tea leaves do not predict the creation of ‘MicroFlix”

Keep pushing forward

Jeff Vinson
jeff_vinson@sbcglobal.net

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One Response to “Netflix Sale to Microsoft – Not Today”

  1. Brett Cooper Says:

    Interesting posting, but I do not believe that defining the NetFlix solution as an IPTV solution correctly positions IPTV technology. From my experience working in the Internet Video and IPTV markets, NetFlix would be considered a Digital Distribution company having insourced their Content Delivery Network. NetFlix is delivering their content directly to computers and connected devices through the Internet, while an IPTV company would be more like a Teleco or a Cable provider who leverages their own head-ins, private network, and setup top box to deliver programming, a close environment. My understanding from NetFlix’s financial reports from 2008 is that they spent some $35 million to build out their content delivery capabilities and will be continually enhancing their capabilities over the coming year with additional build outs and enhancements.

    From a next steps or potential acquirer I do not believe that either Amazon, or Microsoft would be interested in NetFlix as the business is orthogonal to their chosen markets. Amazon tried feature-length digital content distribution only to shut it down a few short years later.

    What would you say to a Cisco buying NetFlix? They acquired Flip Video and I could see them adding NetFlix and integrating their technology acquired from Arroyo into a premier brand, which Cisco deeply understands the value of, into a complete offering of media and video services.

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