Why Is Reed Hastings Leaving Microsoft?

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After five years, Reed Hastings is moving on -- from Microsoft (Nasdaq: MSFT  ) .

Netflix's (Nasdaq: NFLX  ) CEO has decided not to seek re-election for his seat on the software giant's board of directors at this year's annual shareholder meeting.

It's a simple call. Board members move on all the time. However, because this is Netflix -- and Microsoft -- it's a matter that is worthy of a deeper dive. What is really going on here?

"I've decided to reduce the number of boards I serve on, so that I can focus on Netflix and on my education work," he offers up in the press release.

Really? Given Microsoft's role as the global PC operating system of choice, wouldn't sticking around make sense if he truly wanted to influence the educational market? Perhaps more importantly, Hastings also sits on the Facebook (Nasdaq: FB  ) board. Why is he only leaving one board?

There are and will be plenty of theories behind this move floated about. Let's see if I can cover them all.

1. Microsoft is trying to buy Netfix
Let's start with the sauciest possibility. Microsoft wants to buy Netflix, and Hastings is going to step down before it becomes a conflict of interest.

Microsoft is a more logical potential buyer of Netflix than you may think. It's not just about Netflix's popularity on Microsoft's Xbox or the starring role that Netflix is likely to have when Mr. Softy's Surface tablets hit the market later this month.

Microsoft's biggest competitors are emerging players in digital video. Apple (Nasdaq: AAPL  ) has been selling video downloads for years through iTunes. Microsoft is no shrinking violet here, but it can become a top dog overnight by snapping up Netflix and its more than 30 million subscribers.

Given the way that Microsoft likes to throw billions to get tech giants to champion its technology, it can spend billions here and actually buy a digital tastemaker.

Will it happen? Probably not. Hastings would've probably resigned right away than wait until next month's shareholder meeting.

2. Somebody else is trying to buy Netflix
Rumors of Netflix buyouts will never die, but what if they're finally true?

Microsoft wouldn't want Hastings on its board if suitors were approaching Netflix, especially if the buyer is a major rival of the Windows giant.

3. Hastings is no longer a rock star
Right now, Hastings serves as lead independent director. It's a very visible role, but it may not be very flattering for Microsoft.

I mean, have you seen Netflix's stock lately? The shares have shed nearly 80% of their value since peaking last year. Hastings' own reputation has taken some shots after the poorly received rate-hiking moves and the short-lived Qwikster fiasco.

Hastings is too well respected in tech circles for this to be the cause, but it's worth noting. The press release makes it seem as if its Hastings' decision, but we've seen companies give booted board members and executives a graceful way out.

4. Microsoft and Netflix are about to be more competitive
(Nasdaq: GOOG  ) and Apple were so chummy a couple of years ago that Eric Schmidt was even an Apple director. He stepped down, just as the battle between the two companies escalated. Android vs. iOS has evolved into skirmishes including iPad vs. Nexus 7 and iTunes vs. Google Play.

Is something brewing in the pipeline of either company?

The more likely play here would be that Microsoft is rolling out its own video smorgasbord to offer across Xbox, Surface, and general Windows 8 devices, but what if Netflix wants to roll out its own smartphone, tablet, or smart TV running a non-Microsoft operating system?

5. Netflix is about to snuggle up closer to the enemy
Just a few years ago, Netflix and Microsoft seemed to be inseparable. Streaming originally rolled out exclusively for Microsoft PCs. Mac users were out of luck. When it came time to offer its streams through video consoles, Microsoft's Xbox 360 had a year of exclusivity before it became available on the PS3 and Wii.

Times change. These days Netflix is a popular app on Android and iOS devices. Hastings has even appeared at Apple product rollouts.

If Netflix is planning deeper integration here -- perhaps as part of Apple's long-awaited HDTV efforts or Google's Fiber initiatives in Kansas City -- it would be too big a conflict of interest to ignore.

We won't find out right away. We may never find out, especially if the reason is as honest and simple as Hastings truly wanting to scale back his board assignments to spend more time turning Netflix around and improving California's education system.

However, the smart money has to be on a little more drama behind the decision to departure. At some point -- probably sooner rather later -- something will happen and then the market will collectively realize that that is the reason why Hastings just had to go.

Stream on
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Rick Aristotle Munarriz owns shares of Netflix. The Motley Fool owns shares of Apple, Facebook, Google, Microsoft, and Netflix and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Facebook, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On October 10, 2012, at 7:22 PM, AceInMySleeve wrote:

    I'd wager Microsoft doesn't implement his suggestions and he feels relatively useless and\or has gotten all he needed out of it.

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