Rebuttal to LezLi Logan letter to Times Observer

As far as I know, the membership of the Los Gatos Citizens for Responsible Development has not been published, so LezLi Logan may or may not be correct in her assumption that the group filing the lawsuit is “small.”  But I wonder how she concludes that the group is “fringe.”  She also tarred (by implication) Councilmembers Leonardis and Spector with this derogatory “fringe” label.  This is an unjustified attack.

 

Based on the over 24,000 comments on Netflix’s CEO’s blog site, I’d say that the overwhelming pubic opinion of Netflix is pretty low.  Investors and Wall Street analysts have piled-on, causing Netflix’s stock price to drop by more than almost 55% since its high in July including a 40% drop from just September to now.  One analyst today predicted an additional 50% downside noting that:

 

1. Michael Pachter, analyst at Wedbush, predicts Netflix’s streaming content licensing costs will rise from $180 million in 2010 to a whopping $1.98 billion in 2012. If this is the case then Netflix could actually start generating a loss. A hefty streaming fee like this would make it difficult for the company to survive.
2. The biggest reason Netflix will fall is the simplest. The valuation of Netflix is priced for growth, which will most likely not come to fruition. The forward P/E is 19 and based on the loss of subscribers, this will probably continued to be revised downward.

 

Netflix has lost large numbers of subscribers following its ill-advised unbundling of streaming from DVD rentals accompanied by a stiff price increase.  Warren Buffett once said, “It takes 20 years to build a reputation ad five minutes to ruin it.  If you think about that, you’ll do things differently.” Netflix has ruined its reputation with its recent actions. Reed Hasting’s September 19 letter to subscribers did nothing to restore that. His message was simply put: I’m sorry.  Get used to it.

 

Regarding the lawsuit, the only published information about that appeared in the Weekly Times/Mercury News.

 

“According to attorney Rachel Mansfield-Howlett, who is representing the citizens’ group, the suit challenges the town’s contention that the development would not have an adverse impact on the environment. “In this case, there’s abundant evidence that there may be impacts and we’re confident the court will require an Environmental Impact Report,” Howlett said. “It’s important for people to understand the citizens’ group does not wish to stop the project. We’re just seeking environmental review.”

Howlett cited “traffic, the removal of more than 300 protected trees and construction impacts that would continue over a long period of time” as the basis for the suit.

The town signed a 20-year development agreement with developer John Shenk, which means he has that amount of time to complete the project.

 

Howlett cited “traffic, the removal of more than 300 protected trees and construction impacts that would continue over a long period of time” as the basis for the suit.

The town signed a 20-year development agreement with developer John Shenk, which means he has that amount of time to complete the project.”

 

This is the essence of the lawsuit.  The town ignored its own rules by not requiring an Environmental Impact Report (EIR) and caved-in to Netflix on many related issues.

 

The proposed height of the five story office buildings at 85 feet exceeds the height of the current Netflix building and the Town Code. No story poles have been erected to demonstrate the impact of this height (as previously noted by the Council). Both the Planning Commission and the Town Council expressed concerns about the proposed height.  Mr. Shenk, Netflix’s CFO has stated that the fifth floor “is very important.” Yet many successful Valley companies are quite content with fewer floors.  The Town went along.

Although the proposed campus will generate 3,000 vehicle trips additional to the surrounding area, the Town concluded that that traffic impact could be mitigated by adding two new traffic lights and timing them.  This doesn’t pass anybody’s smell test.  Imagine Lark Avenue to the Highway 17 entrance with all these new vehicles waiting for metering lights.

The current proposal calls for the elimination of 384 mature, beautiful trees on the site. Replacing them with trees which will need another thirty or forty years to reach full growth is NOT an effective mitigation.

 

The most significant problem is that everyone tacitly assumes that Netflix will occupy the campus when it is built.  I think that this is unlikely.

As nearly as I can determine, Netflix has not yet signed a binding, board-approved lease agreement with the developer.  I think, that in the light of recent Netflix business developments, Netflix may not ever occupy this campus.

 

Netflix’s business has recently suffered several serious setbacks.  First, its price increase has caused many previous users of its Streaming and DVD services to cancel those services.

 

Second, Starz Entertainment announced that it will no longer discuss contract renewal with Netflix.  Netflix stock lost close to ten percent of its value following this announcement  Previously, Sony abruptly pulled its content from Netflix.  Netflix characterized both of these actions as “temporary.”  But, Programmers recognize that they must balance the potential long-term damage of dilution with the need for near-term revenue boosts.

 

Third, the competitive landscape for streaming services has shifted.  Hulu has so far been Netflix’s sole competitor in the video-streaming side of its business.  But now Amazon and WalMart are jumping into the video streaming race.  Coinstar, Redbox and the revived Blockbuster (now owned by Dish Network) compete in the DVD rental arena. Netflix’s recent price increase for its service bundle from $9.99 to $15.99 helps these competitors more than it helps Netflix itself.

 

The bottom line is that Netflix’s problems aren’t confined to content — they extend to competition.  The company sells somebody else’s content using a public network (that is about to get more expensive to use), with a technology that isn’t proprietary.  It’s a matter of time before its business model is squeezed from all directions.  There has never been a good reason for studios to license content to Netflix.

 

If Netflix’s board of directors concludes that Netflix should reduce its space costs by leasing less expensive space elsewhere in Silicon Valley (as it should); and if the Town prematurely demolishes the buildings and trees, (as was approved by Town Council) we may find ourselves holding the bag with an eyesore where previously stood commercial buildings and beautiful trees.  The developer would have 20 years to build the campus!

 

Lezi Logan is counting on up to $1 Million annually for our schools from Netflix (quoting the Town Manager).  I believe that the $1 Million figure came from a spreadsheet produced by Town staff and represented a one-time payment, not an annual fee.  Don’t count your chickens Ms. Logan before they’re hatched.  Look how easily Netflix moved its DVD division to San Jose.

 

I am all for Netflix having a campus in Los Gatos, however unlikely that is.  But it should not damage our environment.  An Environment Impact report is a necessity.  This lawsuit asks only for that.

 

Richard Allen

A Los Gatos resident for many years and a member of the Los Gatos Community Alliance