So here is my take on Carl Icahn buying 10% of Netflix.

This is a company that is, in terms of its high-flying history, in trouble. Expansion is a good idea, but Europe and South America are already more advanced than the United States in the streaming categories without Netflix in play. The universe for home content is narrower and often more tightly controlled by national governments. It’s not that there isn’t a business outside of the US… it’s that the business they are pushing for is more like what the US business is turning into and not like the ubiquitous business that Netflix was once in and hoping to grow.

That said, Icahn is right (based on his few comments). Netflix is a better company to sell right this minute, week, or year than it is a business that moves forward independently. There is ton going for the business. But it is flying in the face of the very concept that grew it to where it is today. We have reached a technological cul-de-sac. Netflix has nowhere to go.

However, they do have a technological infrastructure that actually works. And i am not talking about the system that guesses what you might like to watch. I am talking about the basic infrastructure of streaming to homes and tablets and phones in a pretty consistent, reliable manner.

I cannot tell you why, because I don’t know. I have asked studio heads why, and they don’t really know. But the studios have not done a good job developing competing technology that allows them to cut out the middle man. They all want to… and no one has really made it work. Ultraviolet is a car wreck so far. Warner Bros, the smartest and most aggressive studio in this space finally gave in and did a deal with Netflix. And yet, Time-Warner’s HBO Go works beautifully. (Hulu works too.) It doesn’t make sense. But it seems to be the reality, however illogical it may seem.

So there is a big need for a turnkey solution. And Netflix is the clear leader in a working, consistent solution to this technological need.

How does this work?

You develop a system with one or more studios “powered by Netflix,” so they can pay Netflix a residual instead of the other way around. Perhaps you work with one studio that is willing to pay many billions for the entire enchilada and they eat it all, though it wouldn’t make a ton of sense to eliminate Netflix as a working business right now.

Say it is Warner Bros. You know how Netflix now offers Netflix For Kids or Netflix: Everything? Well, the third channel is Warner Bros. $8 a month becomes $13 a month and you have everything in the WB library catalog (that they can offer you at any time in light of competing contracts) at your beck & call for that extra $5. (And eventually $7 and then $9.)

Channel Four is Lionsgate. Channel Five is Sony. Etc.

Of course, there is ego involved at each studio. So perhaps “Powered by Netflix” is separately branded sites, all under the Netflix infrastructure so each sign-up feels separate, but really isn’t. Those details are for those who know every angle on what they need to be offering.

But whatever Netflix is doing, in terms of the delivery technology, seems scalable. Scale it.

The only thing keeping Netflix in the business its in now is ego. The content offering becomes less and less dependable, consistent, and competitive. There is no stopping that slide. Netflix raised the bar on streaming content prices and is now bleeding to death under the weight of said largess.

Netflix was first built on the idea that with a little patience and $12 a month, you could watch film you wanted and get a new one within days of watching the last one, with 2 or 3 or 4 discs in play to keep it all smooth. It was never everything, but it was almost everything… a vast, high-percentage library. Streaming Netflix was a combination of that library as a back-up and then the Netflix Experience of easy home streaming. But the glory and horror of the streaming business is that it at least seems to have a low bar for entry. Competition heated up quickly, not only from direct competitors, but from the cable operators and entertainment divisions of bigger content provides like HBO.

And in an instant—my theories have been mentioned before, so I won’t right now—it became a very expensive acquisitions business, for content high profile enough to, in theory, grow the business. But the cap on acquisitions caused by the high prices meant that there was never going to be enough high profile content to dominate the market as it grew out of its infancy.

Still, no one company has come along to match or crush Netflix. Why? I guess quality streaming just isn’t that easy.

But that’s just a matter of time. I have been able to watch any baseball game being broadcast in the US on my phone for 3 years now. Same with football. The size of these libraries may be an issue. But faster and faster, smaller and smaller, more powerful and more powerful we continue to go.

To survive at a high level, Netflix needs to get out of the content acquisition trap and re-focus on what it does best… content delivery.

And that is what I expect Icahn will be trying to make happen.

The hardest part for Icahn when he owned a chunk of Lionsgate is that the leadership there felt there was a much more lucrative future for them in not letting him chop the company up and sell it for parts. The hardest part here will be the reality that Netflix is a very strong, market-dominant business right now. I believe that the top people at Netflix know the trouble they are in… they signal it all the time. But you don’t want to kill the goose that lays the golden eggs—even if you know that it will drop dead one day with little warning—before you know that there is a lot more money in silver eggs if you change the goose’s feed to change the composition of the eggs. You can have it both ways for a little while, but there is no point in starting down the road without a very good idea of where you are headed.

And so the real drama at Netflix begins.

One thing about Icahn is, he will make you define our company is sharp relief, whether you embrace him or reject him. So I think this is a good day for Netflix any way you slice it.

But it may be the end of some delusions of grandeur… which for a company that is one of the great business success stories of the post-manufacturing age is too bad. This has been a sensational run. But the market that defined the company has changed so much that it’s time for a bigger change in thinking, not a quarterly fight to try to keep people feeling positive at the cost of making that game-changing push.

Be Sociable, Share!

• 
•