November 14, 2012
Corporate raider Carl Icahn called Netflix Inc. Chief Executive Reed Hastings on Halloween with a message that no executive wants to hear: His company was about to be put in play. During the brief call, Mr. Icahn told Mr. Hastings that he stood to become one of Netflix's largest shareholders after acquiring a nearly 10% stake. The two agreed to meet in New York.
Messrs. Hastings and Icahn are squaring off over the future of Netflix, a pioneering video-streaming company whose business is under attack by Amazon.com Inc. Within two days, Mr. Hastings, 52, rallied Netflix's six other directors behind a "poison pill" to prevent Mr. Icahn from acquiring any more stock. The Los Gatos, Calif., company lined up investment banks Goldman Sachs Group Inc. and Morgan Stanley, law firm Wilson Sonsini Goodrich & Rosati, and public relations firm Sard Verbinnen & Co. for advice on what promises to be a fight for its independence. Meantime, Mr. Icahn cranked up his criticism, calling Netflix's poison pill "an example of poor corporate governance" in a Nov. 5 securities filing. "I guess they decided to go to battle," said the 76-year-old investor, who is famous for taking large stakes in companies including Clorox Co., Motorola Inc., and Lions Gate Entertainment and pushing for changes in strategy or a sale.
At the heart of the looming clash is whether Netflix, which has a market capitalization of about $4.42 billion, is more valuable alone or as part of a bigger company. Mr. Icahn said Netflix has achieved all it can on its own and should be sold to a cash-rich company, like Google Inc., Amazon or Microsoft Corp. "There is a very good argument that, at the right premium, somebody should buy Netflix," said Mr. Icahn. He is pursuing shareholders to support a sale to a company that could exploit Netflix's distribution. "They've got a great platform," he said. "That is also why it is such a great acquisition candidate for someone," he said. "Most of the shareholders would like to see the company sold at a big premium," he adds.
Top Netflix investors Capital Group Co., Davis Selected Advisers LP and Vanguard Group declined to comment. T. Rowe Price Group was unavailable to comment. Whitney Tilson, who holds Netflix shares through his T2 Partners' hedge and mutual funds, said in an email to clients this month he would be "very disappointed" if the company, whose shares closed Tuesday at $79.61, were sold for $100 a share. "It would have to be a much higher price for me to be happy about giving up this stock," Mr. Tilson wrote, noting it would be a "bite-size" acquisition for many larger tech companies to buy Netflix.
Mr. Hastings has argued that Netflix, which he co-founded in 1997 as a DVD-by-mail company, is in the early stages of a multiyear growth strategy that it hopes would lure millions of new customers, particularly overseas. Its operates in Norway, Brazil and Ireland, and is developing original content to draw new subscribers. The strategy is expensive and has hurt profits and Netflix's share price over the past year. In the first nine months of the year, Netflix's international push brought in $186.1 million in revenue, but led to a $284.5 million loss in the period. The domestic streaming business meanwhile turned a $240.6 million profit on $1.6 billion in revenue. Mr. Hastings has asked investors to be patient. In an email response to questions, he said Netflix is focused on daily operations, not Mr. Icahn. "Next steps: grow membership, increase content, repeat," he wrote.
As Messrs. Hastings and Icahn circle one another, bankers have contacted big media, technology, telecommunications and cable companies to gauge their interest in a Netflix bid. Netflix spokesman Jonathan Friedland said the company's board would consider any bid. He added that Netflix board members and Mr. Hastings weren't available for additional comment. The fight between Messrs. Icahn and Hastings spotlights just how far Netflix has fallen. The company's stock hit an all-time high of around $300 just 16 months ago, then tumbled after Netflix raised its consumer-subscription prices last year and disclosed an ill-fated plan to split the business into separate DVD and streaming-content companies.
In the aftermath, Netflix lost nearly a million consumer accounts last year. Today, its more profitable DVD-by-mail business is losing hundreds of thousands of customers a quarter, while the company continues to cut expensive region-by-region content deals to expand overseas. Competition also is intensifying from rivals including Amazon and Hulu LLC. Amazon is aggressively adding streaming content as part of its annual $79 Prime membership program.
Netflix has conceded it will likely miss a projection from early this year by Mr. Hastings to add 7 million streaming customers in its U.S. market. It had 21.7 million U.S. streaming subscribers at the end of 2011. Still, Netflix's Mr. Friedland said a recent survey by Sandvine Inc. showing the company was responsible for 29% of Internet streaming traffic in North America, more than double Google's YouTube. He said a plan to release original content next year, such as cult hit "Arrested Development," would drive new $8-a-month memberships. Mr. Icahn, who is a Netflix customer and favors History Channel documentaries, said the company has a leg up on competitors in streaming content and is poised to take advantage of "a secular change" in how consumers view media. "They have a big advantage if they are run correctly," he said. Mr. Icahn didn't say whether Mr. Hastings should stay or go, saying he doesn't "micromanage" the companies he invests in.
Mr. Icahn faces challenges in taking on Netflix. Only a portion of the company's board stands for election in a given year-the next annual meeting isn't expect to be called until mid-2013-meaning it would take several years for an outsider to unseat a meaningful number of directors. And Mr. Icahn's record in taking on tech companies is mixed, said Ryan Jacob, chairman of mutual-fund firm Jacob Funds in Manhattan Beach, Calif., which previously owned Netflix stock. Mr. Icahn successfully broke up Motorola Inc., for instance, but wasn't able to get Yahoo Inc. to sell itself to Microsoft after acquiring a stake and forcing himself and two others onto the board in 2008. And as a director for five years at Netflix rival Blockbuster Inc., Mr. Icahn couldn't prevent the video-rental company from slipping into bankruptcy in 2010. "Netflix pretty much cleaned their clock," said Mr. Jacob. Mr. Icahn said he is prepared for a lengthy fight with Netflix if necessary. "If they want to go to war," he said," then we'll go to war." Wall Street Journal
Around the corner from an antiques district here, a group of entrepreneurs and computer programmers are trying to spawn a six-block Silicon Valley in a quiet, residential area that on Tuesday began boasting the world's fastest residential Internet service. Google Inc. chose Spring Valley and Hanover Heights, a strip of homes just south of the University of Kansas Medical Center, as the first neighborhoods to receive a fiber-optic broadband network that boasts speeds up to 150 times as fast as the average online feed in the U.S.
Since the September announcement, a handful of players from the local technology scene have come together to turn the old antique district into Kansas City's "startup village." By the time Google began installing its Fiber service on Tuesday, nearly a dozen startups had moved into a six-block radius-about half packed into two houses-including companies building a search engine for social-network data and security software for smartphones that identifies users by vein patterns in their eyes. "There was already a movement," said Adam Arredondo, a shaggy-haired 28-year-old who runs a website for local events out of one of the house's basements. Google Fiber "was the accelerant," he said.
Over the past two decades, a handful of cities have become hubs of startup activity, from Seattle to Boston to Austin, Texas. Now, in the nation's heartland, entrepreneurs are building what they call the Silicon Prairie in three cities better known for their agrarian roots: Omaha, Neb.; Des Moines, Iowa; and Kansas City, which the mayors of Kansas City, Mo., and neighboring Kansas City, Kan., have vowed to make "America's most entrepreneurial city." Part of the organizers' strategy in these cities is to create clusters of tech startups with the idea that their density will, in turn, attract more entrepreneurs and help them flourish-a concept gathering steam in business circles.
In New York City, the neighborhood around Manhattan's Union Square has emerged as a nexus for new ventures. In Boston and Cambridge, Mass., startups trail the Red Line of the cities' subway system, which passes Harvard University and the Massachusetts Institute of Technology. And Chicago's largest building, the 1930 Merchandise Mart, is teeming with tech ventures. "Entrepreneurial density is super-important," said Brad Feld, a venture capitalist who wrote a book about creating startup communities. In Des Moines, dozens of startups have set up shop on what is known locally as Silicon Sixth Avenue. In downtown Omaha, startups line the corridors of a 140,000-square-foot building called The Mastercraft. Here in Kansas City, men and women armed with laptops and Mr. Feld's book are now testing the theory with one important variable: ultrafast Internet that enables in just minutes the transfer of huge volumes of data, like high-definition movies, that would take hours with most connections.
In September, local Web developer Ben Barreth set up a website to connect computer programmers with free places to stay in Kansas City, to ensure the community capitalized on Google Fiber. Then Google announced the service wouldn't reach much of the city until 2013. "So I said to my wife, 'What if we just bought a house in Hanover Heights?' We both laughed, thought it was ridiculous," said Mr. Barreth. "That was Wednesday morning. Sunday, we put in an offer." The 34-year-old liquidated his retirement account to buy a slightly rundown four-bedroom house for $50,000 in an attempt to attract fledgling operations. Programmers can live and build a Web-based company with ultrafast Internet, rent-free. "I genuinely believe this is what I'm supposed to do," said Mr. Barreth, who understands he will lose money on the plan but sees the venture as philanthropic. "It might seem a little crazy to other people, but I see extreme value in this."
Quickly, Mr. Barreth discovered that six doors down, startups were moving into another house. Matthew Marcus had transformed his late mother's antique shop into a home for three new ventures, including Local Ruckus, the website he founded with Mr. Arredondo. Across the street, another office space has two more startups and plans for a third. Sensing a unique opportunity amid the backdrop of the first Fiber connection, the ragtag group teamed up with one of the Ewing Marion Kauffman Foundation, a wealthy entrepreneurial foundation based two miles away, and set off to create the city's first startup village.
The group has been meeting weekly, including with representatives from Google and local government, and pinpointing available space in the neighborhood for other startups. Late last month, the group made the pitch to more than 100 people at a Kauffman event, telling the tech-centric crowd, "If you're going to launch a startup, please start it in Hanover Heights." The idea was well received; now they're trying to find space in the neighborhood for nearly a dozen more startups. Mr. Barreth is mulling inquiries from startups across the nation that want to move into his house. Mike Demarais, a 20-year-old from Boston, moved in last month and is working on building a software platform to design products for three-dimensional printers. "Silicon Valley and Boston are getting saturated," he said. Many young entrepreneurs can't afford to live in those cities, he said, but they can start their own Web-based companies with a few hundred dollars. "And this seems like a cool place to do it," he said. Wall Street Journal; see article on Google Fiber customers' sneak peek in Kansas City Star
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