Home Theater of the Absurd: What’s Behind Carl Icahn’s Netflix Play?

carlicahn Home Theater of the Absurd: Whats Behind Carl Icahns Netflix Play?

Icahn.

Sometimes, sheer absurdity can be a beautiful thing to watch. Like Karl Rove on Fox News on election night. Or Will Arnett in pretty much any role he’s ever played. Or the behavior of Netflix stock over the past few weeks. After a year in which NFLX has Ping-Ponged between $53 and $133, it was suddenly—and absurdly—a safe haven in the midst of a post-Obama-re-election market meltdown. Apple may be taking over the world, but Netflix stock rose 2.5 percent to $78 last week while that of the Cupertino juggernaut fell by more than 5 percent. In hopes of getting by email spam filters and pesky copy editors, I will pose the resultant question as simply and cleanly as I can: WTF?

It’s been quite a month for shareholders of the DVD rental and online video streaming service. In late October, Netflix reported an 88 percent decline in third-quarter net income along with hefty international expansion costs. The shares nose-dived as a result, falling 16 percent to $57.35 on the day of the news. That fall completed a one-year round-trip from the $50s to the $130s and back to the $50s again. A year ago, you may recall, Netflix was pilloried for thinking that investors might cough up a mere $6 more a month for unlimited video rentals online. (Yes, the selection could be improved. But you can still watch all of Arrested Development, which includes Will Arnett at his most appealingly preposterous. What else do you need?)

I wrote about the subscriber/shareholder revolt at the time, saying that subscribers were being babies and shareholders shortsighted. People pay $150 a month for their cellphones and another $150 for cable and internet. And $16 a month for free video streaming (plus DVD rentals) was a bill too far? I suggested people get a grip. I say so again today.

When the stock rebounded to more than $130 a few months later, I felt like a genius. (This is not an unusual occurrence, but it seemed particularly acute in this instance.) But 2012 has been a tough year for the company, with disappointing subscriber growth, worries about the rising cost of content, and the renewed focus of a deep-pocketed competition—I’m talking about Apple and Amazon here—all against a backdrop of general market malaise. So the stock didn’t stay up for long, and has been all over the place through the summer and fall. Which brings us to the present. How the hell does Netflix become one of the only stocks to hold its value with the terrible—unthinkable!—news that Obama was re-elected and will soon put into motion his plans to destroy capitalism, job creation and bottle service in Manhattan? Answer: Carl Icahn, with a Hurricane Sandy chaser.

Let’s deal with the Sandy part first. Remember before the power went off, when everyone was stuck inside for two days, waiting for and then riding out the hurricane? Well, it turns out that a lot more people than me got sick of watching CNN’s Ali Velshi standing in that intersection in Atlantic City and decided to watch a thing or two on Netflix. When word of this got out, the stock popped a little. Let’s set aside the fact that the reaction was backward—all other things being equal, if current Netflix subscribers watch more online video, the company’s costs rise with no increase in revenues—and stipulate instead that upon hearing said news, maybe a few folks who had been living under a rock actually discovered Netflix and decided that when the next hurricane comes, they, too, would like to be able to watch streaming video as the wind howls outside. Maybe. But banking on that is like projecting CNN’s own prospects based on the network’s viewership during a hurricane. It might make for a nice-looking chart, but not one to bet on.

On to the more salient news, then: the arrival of the old dog himself, Carl Icahn, who revealed in an October Securities & Exchange Commission filing that he had quietly amassed a position equal to nearly 10 percent of Netflix, at an average cost of $58 a share. When is this guy going to retire? I guess never. And why would he? Call him an “activist investor” or a corporate raider or just a pain in the ass, I don’t care. But legalized extortion—and let’s not quibble, that’s precisely what he does—must be pretty fun, if you think about it. Wake up, go into the office, find some new company (deserving or not) to pick on, make your play, and then sit back and wait for the financial press (including yours truly) to come along with pens out, ready to amplify your latest impassioned argument on behalf of the little guy, yourself. It’s worked again, if you consider a 35 percent gain in just a few weeks a nice payday. As I said, Mr. Icahn picked up his Netflix shares for an average of $58. Today, it’s pushing $80.

Although, truth be told, even Mr. Icahn seems like he’s getting a little bored of his own game. When CNBC brought him on last Thursday to let him talk up his position after Netflix responded to his takeover bid by instituting a shareholder rights plan—the so-called poison pill—he told them that the move was “a travesty of corporate governance” and “really reprehensible.” And legal, Carl. And totally predictable. Why so surprised? Oh, right, you’re not. The man was going through motions he’s gone through so many times that he’s worn a groove beneath his wingtips.

And he dutifully kept at it when asked about the possibility of a hostile takeover. “The thought has certainly crossed my mind,” he said, in a statement of the obvious so painful one wonders why he felt the need to say it at all. “It certainly is one alternative, but I have to say we haven’t made that decision yet.” Again, obvious: it’s quite clear he hasn’t made the decision, as there’s no hostile bid in play. But Mr. Icahn, ever the crafty old coot, says it’s “an alternative.” So is everything else, Carl. The gist of it all: won’t someone come buy it from him and his fellow shareholders?

It’s doubtful. I once put Netflix on a list of companies that I’m glad the market has funded—but that I personally wouldn’t touch with a 10-foot portfolio. I didn’t actually stay true to that claim—I did buy it last fall, and rode it all the way up to $130, before selling half of it (again, I’m a genius), but even though I’m a gigantic fan of Netflix the service, I don’t think anyone is buying it at these levels. Plus, those who might buy Netflix certainly didn’t need Carl Icahn’s help to make them aware of the idea, and they certainly aren’t going to cash him out at a 35 percent gain for the non-favor of alerting them to the opportunity. (On that note, if Mr. Icahn had bought when I told him to last year, he would have doubled his money. Just saying.)

Amazon, for one, is going to employ its usual modus operandi, aiming to steamroll Netflix with lower pricing and more choice. The online retailer just made a change in its Amazon Prime pricing last week, offering subscribers a $7.99-a-month deal—the same as a streaming subscription on Netflix—for free streaming of its video library, with the added bonus of free two-day shipping on all Amazon orders. Amazon is taking dead aim at Netflix. But it’s not looking to buy it; it’s looking to kill it. (Of course, Amazon did buy Zappos.com after being thoroughly outflanked by the quirky online shoe retailer. So stranger things have happened.)

Apple? It’s got other fish to fry. And even if Netflix could make for a great fit with iTunes, the people holding the purse strings at Apple aren’t dumb enough to buy at Icahn-inflated levels. Facebook? Netflix CEO Reed Hastings sits on the board of the social network, as well as that of Microsoft. Won’t either of those two step in and save the day? Again, doubtful. Netflix, a true trailblazer in online video, is nevertheless the kind of company that you cripple before you buy it. And Icahn knows that. You want my opinion? He’s probably  already selling his shares as we speak.

Duff McDonald is the author of Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase. Follow him at @duffmcdonald.