Netflix Inc. (NASDAQ: NFLX) announced that it has shipped its one billionth DVD to a customer. I guess we know that their business model is working!!

Netflix estimates for 2007 call for revenues of $1.29 billion and EPS of $.79, and for 2008, revenues of $1.6 billion and EPS of $1.06. It is a simple, neat and clean story. Or is it?

As I wrote a few weeks back, the battle lines with Blockbuster Inc. (NYSE: BBI) have been drawn. Blockbuster is offering the competitive advantage of allowing mail-customers to either mail back the rented DVDs or simply exchange them for new ones at their local Blockbuster store. The question is will Blockbuster be cannibalizing one customer base or the other. Time and same store sales reports for the first quarter will tell.

The longer term issue for both Blockbuster and Netflix, and the issue that is causing investor caution, is what the eventual pricing model will look like. If movies will be provided to customers with a simple download to their computers, the gross margin will be in 95-98% neighborhood. The question is at what price does the movie sell? Neither Blockbuster or Netflix have publicly addressed the question. Reed Hastings, CEO of Netflix thinks mass adoption of this delivery method is perhaps a bit farther out than the pundits are predicting.

The eventual delivery method will be digital download but consumer and technical migration will evolve over a few years. In the meantime, Netflix is maintaining the right strategy of building and servicing its customer base. At the end of the day, as consumers begin to download movies, he who has the most customers wins. Stay tuned as this competition between Blockbuster and Netflix should be interesting and fun to watch. Oh yeah, then there is this other little fly in the ointment . . . some little company named Wal-Mart Stores, Inc. (NYSE:WMT) is also in the game . . .

Georges Yared is the author of recently released books "Baby Boomer Investing...Where do we go from here?" and "Stop Losing Money Today." Please visit http://www.georgesyared.com.