Netflix ($NFLX): Reed, NOW You Have Some Really Tough Questions to Answer

The Fundamental Problems Facing Netflix Are Known
In fact, this blog has listed many of them here. As a business model, Netflix controls few, if any, of the inputs that would determine its success or failure. That is a big problemo, but this blog has already pointed them out, before the warnings made by the company. It could be said, if you were a fan of management, that Netflix filled a void that existed between suppliers of content (studios) and delivery mechanisms (cable, tv, etc). No need to rehash that here.

Wasn't the Loss of Subcribers a Material Fact?
The troubling thing at this point, and perhaps most damaging, is the fact that management has held onto its business model for too long, without selling itself, and without putting itself in the monopolist position. Perhaps it could never put itself in the monopolist position in the US because the studios and the cable systems would never allow it. Fair enough.
However, given that the stock price was predicated on the growth of subscribers, and that Netflix would have had knowledge of the loss of subscribers, the fact that they have revealed this just now, without more clarity during the quarter is shocking, and will subject Netflix' management to class action lawsuits by investors who will claim, perhaps rightfully so, that Netflix management was negligent by not reporting an obviously material fact. This will weigh on the upside potential should a potential bidder emerge.

Who Would Buy Netflix? Ignore the Rumors
Much like $RIMM, there will be some speculation regarding Netflix as a takeover play. Unfortunately, given the fact that most of the weakness are known, and that those weaknesses are turning into a negative growth rate, enormous (insurmountable) barriers exist to repel any potential bidders. Just who would buy Netflix and why? Apple or Amazon could potentially buy, but to what end? Both have substantial cloud presences. Both have superior relationships with suppliers of media content. Maybe, one or the other would buy Netflix' portfolio of existing contracts to obtain exclusivity. Pixar has just signed with Netflix, and that could potentially be a jewel. The foreign expansion plans are still in their infancy, so that is still a wait-and-see proposition. In short, we are back to salvage value here: the value of the existing contracts could be sold to whom? A consortium made up of competitors? Unlikely. A buyer of existing subscriber base, who can change loyalties with a single click? Unlikely. This is probably not new news to Netflix' management, which has flip-flopped over the past couple of months over these problems. Unfortunately, the problems cannot be solved without selling itself to the highest remaining bidder, who would now face anger from existing shareholders. Still a sell. Even here.