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Netflix
Deconstructing Mr. Naraghi

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By AceInMySleeve
May 2, 2006

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Between the tepid reaction to a blowout earnings report, and then a disastrous 75% decay in my May call option value today, I've been in a bit of a haze. Out of the myriad of possibilities for Netflix to spend cash on, it wasn't until HowardRoark on Liquid Lounge pointed out the obvious that I regained a touch of focus.

Netflix has made quite clear their disinterest in international expansion, game rentals, and brick and mortar. I think we can lay those aside. However, with growing intensity, they have been focusing on the acquisition of independent long-tail content. Netflix has long maintained their unique role in the marketplace for connecting movie fans to non-mainstream films via their web software and convenient, non-shelf space limited, rental model. In a VOD context, Netflix may not have the rights to deliver X-Men 3 via the web, but they are certainly likely to obtain rights for their independent inventory such as Born into Brothels or Cowboy Del Amor. Hastings has long pointed to HBO as a model for a value-added subscription business with its own signature content. I'm not sure we need to make things any more complicated than this.

So, enter Bahman Naraghi less than 2 weeks ago as "vice president and head of original content". He will work under Ted Sarandos in Netflix's Beverly Hills office. Netflix says "Mr. Naraghi will lead all aspects of the company's push into the acquisition and distribution of original content, primarily independently produced movie and television properties".

Bahman comes from Intermedia Films where he was the COO for the last three years.
Website, IMDB, Annual Report

Intermedia is based in Munich, with offices in London and LA. The list of films for which they have production or distribution credits is impressive. Their focus going forward appears to be on horror and action genre films in the 10-20M Euro range, and television programming for international distribution. Intermedia is public, listed principally on the Frankfurt exchange, slightly profitable and has a market capitalization of 53M USD. Not saying anything, just saying. ;)

I don't think it's necessary to debate whether Naraghi's ex-employer is the focus of an acquisition. I think it's more relevant that they have recently hired a man with a length of experience in film production, and now have a lot of extra cash on their hands.

As for the question about why Netflix would dilute rather than select debt, I still don't have an answer. From my reading, most CFOs consider that to be the last choice because the market usually interprets management to be saying their shares are overvalued. Since I don't believe that Reed and Barry feel that way, I am left wondering what esoteric or arbitrary reason pushed them in this direction. Perhaps they wanted to expand the share float, since insiders and institutions have locked up a pretty large percentage of shares. Who knows?

With my long-term shareholder cap on, I have no concern about Netflix swapping equity for cash. After 3 years, I trust management and am excited about them expanding in new directions. What should not be lost in the fog is the outstanding results reported in Q1, and the contrast to the miserable performance of BB Online.

With my short-term gambling hat on I'm a little angry at lady luck, but that's my own fault.


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