SAN FRANCISCO--Netflix is banking on the belief that streaming movies to people's living rooms is the future.
CEO Reed Hastings said during Netflix's investor day here that he expects the business of renting physical DVDs to peak within the next five years. However, Netflix representatives later said they forecast that DVDs will remain strong for at least a decade.
The company also plans to experiment with pricing, including both increases and decreases.
Netflix, however, is already moving beyond DVDs. Its $99 set-top box for streaming movies came out earlier this month, generally to positive reviews.
Hastings said that through streaming, Netflix could grow to 20 million subscribers worldwide. But the company cautioned that it will be some time before its streaming-movie service, which is offered free to consumers, will pay off big.
Some of the hurdles Netflix faces in Web delivery are competition from video-on-demand providers, as well as Internet services such as those from Apple and Amazon.com. The number of rival VOD players will likely grow, according to Netflix executives.
Netflix's streaming-video service will be frequently blocked from getting access to newly released films because the flicks might be locked up in exclusive agreements the studios have with pay channels such as HBO or other outlets.
It's important to note that Apple has cut deals that allows iTunes to rent movies from the top Hollywood studios without worrying about these exclusive deals. But it's early yet, and Netflix hopes that it can establish a foothold in the still-untested streaming-movie sector. To do this, Barry McCarthy, Netflix's chief financial officer, says the company is uniquely positioned to help movie enthusiasts transfer their rental dollars toward Web services.
It's going to be hard for "a free-standing service to compete until it has enough content," McCarthy told the crowd. The sector is in transition, and "Netflix is betting that during this time, we can establish ourselves as a leader in the space," he said.
Another interesting tidbit from Netflix's investor day: Blu-ray Discs are more fragile than standard DVDs, according to Andy Rendich, Netflix's vice president of operations. The next-generation movie discs are still a small part of Netflix's business, Rendich said, but so far, the "break rates" are higher.
He said the company is working with the disc makers to help make improvements.
Carl Icahn is still dogging Motorola. On Monday, the billionaire investor said his investment company, the Icahn Group, filed a lawsuit intended to force Motorola to hand over documents related to its mobile devices business and use of corporate aircraft by senior managers, board members, and their families, Reuters and other news agencies reported.
Saying the information will help him determine what Motorola's board should have done to help the company right its ailing handset business, Icahn added that he intends to share it with shareholders, who recently have seen the departure of former CEO Ed Zander, the appointment of Greg Brown to the top spot, and several other excutive-level changes. The suit also is aimed at encouraging investors to elect Icahn's slate of candidates to the Motorola board.
"Over the past 12 months, the statements and predictions of Motorola's management and the board about mobile devices business have too often proven to be wrong," Icahn wrote in a note to investors. "We want to ascertain what the board could have done in the exercise of its fiduciary duty to assure Motorola stockholders that Motorola's statements and predictions were not incorrect."
"We demanded these materials," he added, "for the purposes of enabling us to investigate whether and to what extent the board of directors of Motorola failed in their duties as directors in supervising management and setting policy and direction of Motorola."
Motorola has attempted at least a partial dodge of Icahn's advances. The Wall Street Journal, in a story published Tuesday, says that Motorola offered him two board seats--a gesture Icahn rejected.
Given Icahn's persistence, his rationale for making the company's handset division independent, and his growing clout with shareholders, the WSJ story points out, it's increasingly likely he'll realize his ambition to win four seats on Motorola's board.
This post was last updated at 7:37 AM PT.
Claiming that it is both undervalued and underappreciated, Yahoo has fired some key financial forecasts over the bow of an acquisitive Microsoft.
On Tuesday, Yahoo reported the contents of a presentation to investors detailing the company's strategy for the next three years, as seen in a filing with the Securities and Exchange Commission.
The presentation was first shown to investors in December 2007, prior to Microsoft's announcement that it planned to acquire Yahoo. But on Tuesday, Yahoo underscored the contents of the presentation as evidence that Microsoft's unsolicited takeover bid, issued January 31, "substantially undervalues" the company.
In its new broadside, Yahoo said it hopes to double its operating cash flow from $1.9 billion to $3.7 billion over the next three years, and in 2010 aims to pull in $8.8 billion in revenue excluding traffic acquisition costs. The company is also sticking to the first-quarter outlook that it issued in January.
One presentation slide sums it up bluntly: "We believe our growth and profitability prospects are not fully appreciated by the public market." A ballsy assertion for a company that laid off 1,100 less than two months ago.
Anticipating that its growth will outpace the rest of the market, Yahoo projected $1.9 billion in added revenue (excluding traffic acquisition costs) from display and video advertising over the three-year period. In the search advertising sector, Yahoo expected that its growth would parallel the market and result in $1.4 billion in added revenue.
It's an optimistic outlook, and Yahoo is clearly banking on strong conditions in 2009 and 2010, something that recent economic news may render less likely. And Yahoo's presentation does cite global home-page figures for January, an area where Yahoo has been lagging significantly behind Google, with 425 million unique users versus 305 million for Yahoo. Yahoo search, too, has long operated in Google's shadow, with global query figures for the last quarter of 2007 showing Yahoo search with a 27 percent share, Google with 53 percent.
Perhaps with the gloomy U.S. economic forecast in mind, Yahoo's presentation highlighted the company's strategic position in Asian markets, citing the dominance of Yahoo Japan, in which it holds a 33 percent stake; and the success of business-to-business site Alibaba, in which it holds a 28 percent stake. According to the details of the presentation, these heavy investments in Asian dot-coms typically are not taken into account nearly enough in assessments of Yahoo's value.
Heavy emphasis is also placed on Yahoo's freshest social-media projects, like social news site Yahoo Buzz and the yet-to-launch mobile service, Yahoo OneConnect. They're both innovative projects and initial analysis of Buzz seems to indicate early success, but Yahoo's track record in the social media space has been spotty. Yahoo Groups are a longtime staple, but the Yahoo Mash social network, launched in September, failed to get much traction.
Somewhat ironically, the presentation also details a strategic initiative on Yahoo's part called Must Buy. It's referring to ad inventory and making it easier for advertisers and publishers to work with Yahoo, but given Microsoft's bid, "Must Buy" has some snicker-inducing connotations that Yahoo might not want.
It can happen at any time: market bubbles burst, companies crash and burn, investment portfolios become worthless overnight. The common denominator in these events is overconfidence, irrational exuberance, call it what you want, it all comes down to lots and lots of people taking risks they shouldn't take.
Why do we do this to ourselves, in spite of all logic to the contrary?
We even have age-old sayings we choose to ignore all the time: What goes up, must come down; the bigger they are, the harder they fall; don't put all your eggs in one basket. Jerry Garcia of The Grateful Dead sang, "'Cause when life looks like easy street there is danger at your door."
Do we listen? Nope. ... Read more
Note: I wrote this on Thursday before Microsoft's latest bid for Yahoo; it's a follow-up to a post I wrote six months ago. I have two comments on Microsoft's offer: 1) It's aggressive and it's a sweetheart deal for Yahoo's shareholders; I think Yahoo's board will accept it; and 2) nevertheless, the issues I present are the same; it just becomes Microsoft's problem.
It's been seven months or so since Yahoo chief and co-founder Jerry Yang replaced Terry Semel at the helm of the ailing internet giant. At the time, I pondered the obvious question: Can Yang fix Yahoo?
For the record, I thought the board acted rashly in appointing Yang--a relatively inexperienced executive--to perform what would clearly be a challenging turnaround. I didn't think he had the experience to pull it off.
At the time, I thought that Yang--a visionary--wasn't what Yahoo needed. I thought Yahoo's problem was largely failed execution and missed opportunities in search advertising that allowed Google to leapfrog its more mature rival.
At this point, I'm even more convinced that Yang was the wrong choice. But I think the problem is bigger than missed opportunity and failed execution. The company does indeed need a new vision. And it needs a CEO who's capable of articulating and selling that vision down through the ranks and ensuring everybody's goals are aligned.
That's a tall order, but it can be done. Lou Gerstner did it at IBM, and that was no walk in the park. But Jerry Yang is no Lou Gerstner. ... Read more
On March 21, 1983, AMD went public. Adjusted for splits, the stock closed at $9.00 that day. Today, shares of AMD closed at $7.95. That means if you invested $10,000.00 in AMD's IPO, today you'd have $8,833.33. Adjusted for 25 years of inflation, that would be about a buck and a half.
Just to calibrate that, the same investment in Intel would have gotten you about a half a million dollars, Texas Instruments about $150,000, both the NASDAQ and S&P 500 about $100,000; even National Semiconductor and LSI beat AMD, although not by much.
Of course, some investors have figured out that you can make a fortune playing the AMD roller coaster. Except for the tech bubble and a brief spike two years ago, the stock has traded in a relatively narrow range. Seems like a nerve-wracking way to invest, but I know people who swear by it. ... Read more
Mergers and acquisitions, M&A, business development, strategic development, corporate development, there are lots of names for the business of acquiring companies. They all sound important, even exciting. But whoever said, "may you live in exciting times," didn't necessarily mean that to be a prophecy of good things to come.
On the contrary, if you're like most investors, employees or executives, it's more of a curse. You see, in the corporate world, exciting usually means risky. And there's probably nothing riskier or more prone to failure than merging with another company.
I can cite lots of studies, but anyone in the business knows that most big mergers fail. Moreover, companies that have demonstrated a competency for acquiring companies--like Cisco and Broadcom, for example--are few and far between.
Just to be clear, for purposes of this post, we'll use the terms merger and acquisition interchangeably. The difference is primarily related to accounting, and nobody gives two beans about that...except the accountants.
So, what exactly is a failed merger? I define it two ways. Qualitatively, whatever the companies had in mind that caused them to merge in the first place doesn't work out that way in the end. Quantitatively, shareholders suffer because operating results deteriorate instead of improve.
Here's a list of 10 notorious failed mergers that I've evaluated in one way or another: AOL/Time Warner, HP/Compaq, Alcatel/Lucent, Daimler Benz/Chrysler, Excite/@Home, JDS Uniphase/SDL, Mattel/The Learning Company, Borland/Ashton Tate, Novell/WordPerfect, and National Semiconductor/Fairchild Semiconductor.
Some failed so spectacularly that the combined company went down the tubes, others resulted in the demise of the executive(s) that masterminded them, some later reversed themselves, and others were just plain dumb ideas that were doomed from the start.
In my mind, the two big questions are: Why merge to begin with? Why do mergers fail?
Companies merge when, for one reason or another, their strategic plans indicate they should. I know that sounds trite, but there are too many permutations to go any deeper.
That being the case, there must also be operating synergies between the two companies. In a nutshell, that means the whole will be financially healthier than the sum of the parts. Said differently, at some point after the merger is complete and the companies are integrated with redundant functions eliminated, shareholder value should increase. It's as simple as that...theoretically.
I experienced one merger firsthand: National Semiconductor's acquisition of Cyrix. On the surface, the deal seemed to make sense. National needed Cyrix's microprocessor technology to realize its strategic vision of becoming a system-on-a-chip company. Cyrix needed National's manufacturing technology to effectively compete with Intel.
However, once you got down beneath the surface, well, let's just say there were holes in the strategy so big you could drive a truckload of MBAs through them. This is in hindsight, mind you. Some of it I saw coming, some of it I didn't.
First, National's own strategy was flawed, merger or not. The market for its Cyrix-based system-on-a-chip products never really materialized.
Second, National didn't anticipate what competing head-on with Intel would do to its own operating results.
Third, when Cyrix's designs were produced in National's fabs, the chips didn't perform as hoped. That's about the most even-handed way I can put it.
As if that wasn't enough, National was probably too heavy-handed with its integration strategy. The two companies were culturally incompatible, and most of Cyrix's top engineers quit when their retention agreements expired.
The result was ugly. National's operating results went from black to red immediately following the merger, and the combined company continued to hemorrhage red ink until National sold most of Cyrix. A year and a half and more than $1 billion in cumulative losses and write-offs later, National was back to normal.
It's important to note that the usual three-month due diligence process didn't uncover any of the potential flaws in the deal. That's because merger due diligence processes typically have only one goal--to shield executives and directors from shareholder litigation. That, the companies did successfully. Shareholders lost their class action suit.
In summary, the planets have to align for a merger to be successful. In other words, for every way to do a merger right, there are probably 10 ways to do it wrong.
Here are my top 10 most common, preventable merger failure modes. One is enough to spell doom, but the more the merrier the train wreck:
1. Flawed corporate strategy for either or both companies
2. One company sugarcoats the truth, the other buys a PowerPoint pitch
3. Sub-optimum integration strategy for the situation
4. Cultural misfit, loss of key employees after retention agreements are up
5. Acquiring company's management team inexperienced at M&A
6. Flawed assumptions in synergies calculation
7. Ineffective corporate governance, plain and simple
8. Two desperate companies merge to form one big desperate company
9. CEO of one or both companies sells board and shareholders a bill of goods
10. An impulse buy or panic sell gets shoved down the board's throat
Last word
From a corporate governance standpoint, all significant mergers should be scrutinized by some really smart, experienced and disinterested (and therefore objective--this is key) people. Why boards don't do that as a matter of course I have no idea.
The burden of proof for mergers to make sense should be as high as their risk, their failure rate and the pain they inevitably cost shareholders.
Sprint Nextel said Monday that CEO Gary Forsee has stepped down as chairman and chief executive officer effective immediately.
(Credit:
Sprint Nextel)
Forsee's departure comes as investors, upset over the company's poor performance, have put pressure on the board of directors to make a change at the top.
The company said Chief Financial Officer Paul Saleh will become acting CEO until the board is able to find a replacement for Forsee. And board member James Hance, Jr., will assume the role as a non-executive chairman of the board, the company said.
Board member Irvine Hockaday said the company is focusing its search on candidates outside the company.
"We fully expect that the search will be concluded in a timely manner and we are focused on selecting the right candidate to guide the company to achieve its full potential," Hockaday said in a statement. "Sprint Nextel has the assets, spectrum, customer base and technology to be the leader in wireless mobility services."
In the same press release Sprint also revealed more subscribers losses for the third quarter. The company expects to report that it has lost about 337,000 post paid subscribers when it reports third quarter earnings on November 1. Post paid customers are ones who sign up for annual contracts and are billed monthly. The company also lowered its financial guidance for 2007.
Pressure has been building for months to replace Forsee as investors are becoming increasingly more agitated at Sprint's poor performance. Since Sprint acquired Nextel in 2005, making it the third largest cell phone provider in the U.S., the company's stock has declined roughly 27 percent.
Last week, activist investor Ralph Whitworth, who owns about 2 percent of Sprint's outstanding stock, told the Wall Street Journal that he had lost confidence in Forsee and expected to board to take action.
Among Whitworth's biggest concerns is Sprint's focus on building a next generation wireless network using a technology called WiMax. The company has committed itself to spending $5 billion by 2010 to build the network. Whitworth is concerned the company is not focusing enough on its core cell phone business, which has been steadily losing customers over the past few quarters.
Earlier this year, Sprint signed a deal to partner with a company called Clearwire to bring WiMax to even more cities. The two companies predict that together, by the end of 2008, they will offer mobile WiMax network access to about 100 million people.
How the management change will impact the nationwide WiMax network is still uncertain. But it's certainly possible that a new CEO could significantly scale back the aggressive plans.
A Sprint representative was unavailable for comment.
EarthLink, which is also struggling to sign up new customers for its Internet services, had a change of heart with regard to its Wi-Fi network plans when a new CEO came on board and assessed the situation.
I'll be taking a closer look at this issue in a follow-up story. So stay tuned.
It looks like Sprint Nextel's CEO Gary Forsee will soon get the boot, which could spell trouble for the company's WiMax network.
Sprint Nextel CEO, Gary Forsee
(Credit: Sprint Nextel)According to a story published by The Wall Street Journal late Thursday, the company's board of directors is fed up with Sprint's poor performance and they're laying the blame on Forsee and company.
The story didn't identify sources by name, but referred to "informed people" who said the board of directors had already launched a search for a new CEO in August. Several high-profile candidates have been approached for the job, the story said. And at least one has declined the offer. The board hopes to announce a new CEO by December, the story said.
CNET News.com contacted a Sprint representative, who declined to comment on the story or rumors that Forsee is being forced out.
Pressure has been mounting for months as investors become increasingly more agitated at Sprint's poor performance. Since Sprint acquired Nextel in 2005, making it the third largest cell phone provider in the U.S., the company's stock has declined roughly 27 percent.
Earlier Thursday, The Wall Street Journal reported that activist investor Ralph Whitworth said he had lost confidence in Forsee and was prepared to launch a proxy fight unless Sprint's board of directors did something. Whitworth owns about 2 percent of the company's outstanding stock.
Whitworth and others are disappointed with Sprint's inability to increase its subscriber base as fast as its competitors Verizon Wireless and AT&T.
One of Whitworth's biggest beefs with the company is its plan to build a nationwide high-speed wireless network using technology called WiMax. Whitworth told the WSJ that he felt this plan detracted attention from Sprint's issues in its core business.
Sprint has already committed to spending $5 billion by 2010 to build the network. And it's signed a deal to partner with a company called Clearwire to bring WiMax to even more cities. The two companies predict that together, by the end of 2008, they will offer mobile WiMax network access to about 100 million people.
But what happens if the new CEO pulls the plug on the Wimax plans? It's certainly a possibility. Just look at EarthLink. When the company's new CEO took the helm earlier this year, he wasted little time abandoning the company's ambitious citywide Wi-Fi plans. Within months, the company started backing out of its contracts.
While the issues surrounding Sprint are different, it will be interesting to see what becomes of Sprint's WiMax strategy when the leadership eventually changes. Will it survive, or will it wither and die as the company attempts to focus on its core business?
Activist investor Ralph Whitworth is continuing to put pressure on Sprint Nextel CEO Gary Forsee, according to the Wall Street Journal.
Whitworth, who owns about 2 percent of Sprint's outstanding stock, told the WSJ that he has lost confidence in Forsee. While he stopped short of asking for Forsee's resignation, he said he'd like to see the company's board of directors make some management changes to get the company back on track.
Whitworth is most concerned about Sprint's investment in WiMax, a wireless-broadband technology that would greatly increase data speeds. The company has committed itself to spending $5 billion by 2010 to build the network. Sprint said in August that it hopes it can also generate between $2 billion and $2.5 billion in annual revenue during this time. But Whitworth is concerned the company is not focusing enough on its core cell phone business, which has been steadily losing customers over the past few quarters.
While Sprint saw some improvement in the second quarter for attracting post-paid subscribers, overall the company has been struggling ever since its 2005 acquisition of Nextel communications. As a result, Sprint's stock has dipped 27 percent since the acquisition, the WSJ reported.
Whitworth has quietly been growing his stake in Sprint for months. In April, the WSJ reported he had about a 1 percent stake in the company. Now he has nearly 2 percent. Whitworth is seeking a seat on Sprint's board of directors.
Whitworth has seen success in pushing for change at other companies. He helped bring about Robert Nardelli's departure from Home Depot and helped push out Sovereign Bancorp CEO Jay Sidhu, the WSJ said.
