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Last Wednesday, NetFlix Inc. (NASDAQ: NFLX), the leader in mail-service DVD rentals, reported first-quarter earnings that missed analysts' expectations. Citing increased competitive pressure from Blockbuster (NYSE: BBI), the company reduced its outlook for subscriber growth, calling earlier hopes for 20 million subscribers by 2012 "unattainable" if BBI maintains its current pricing structure. NFLX failed to adjust its earnings guidance, but said revenue could hit $1.26 billion, down slightly from an earlier target of $1.3 billion. Obviously self-satisfied, a spokesman for BBI was quoted on Bloomberg as noting that, "NetFlix obviously sees us as a formidable competitor because of the superiority of our offering." BBI expects its subscriber base to rise by more than a third, to three million customers.
NFLX shares gapped nearly 10% lower on the heels of this news and have not yet begun to recover, in terms of price action, though the stock is still hovering above chart support at the $20 level.
The choice between NFLX and BBI is a constant source of debate in our household. My husband and I signed up with NFLX in early 2004 and our queue contains close to 400 movies and TV series. We are synced up with a dozen or so of our friends, enabling us to see one another's rentals (Supernatural is a really entertaining show, I promise!) and read brief reviews. We can rely on quick turnaround time and excellent customer service for our $17.99 per month, which buys unlimited three-at-a-time rentals. BBI provides the same service, however, at the same price, with the option to visit their brick-and-mortar locations for instant gratification. Do we trade the convenience of our already-created queue and the added fun of networking with friends for this perk? I say no; my husband thinks otherwise.
I would hate to see NFLX become the Betamax of the video-rental world, falling to the larger competitor despite being an innovator in the field. To keep afloat, the company will need to separate itself from BBI. It has already announced a bare-bones plan that, at $4.99, is cheaper than anything BBI offers. The company is also hard at work on streaming-video capabilities that would offer titles for web download.
Beth Gaston Moon is an analyst at Schaeffer's Investment Research.
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Reader Comments (Page 1 of 1)
5-21-2007 @ 5:17PM
Douglas Kirkwood said...
I don't care if BBI gives the DVD rentals for free, I will never give them another dime. The total frustration I got from their late fees despite midnight drives to their stores, is the last straw. The option to get "instant gratification" is worthless as BBI rarely has any popular movie in stock, so it gives you a free rental. Big deal, if I am an online subscriber then I am already not paying for the movies that I rent. Instant gratification turns to instant disappointment as I realize that I have driven to the store and can only choose between lousy movie A or lousy movie B.
Netflix is fast, easy, and convenient. With three movies available, I always have one or two to watch. If I need more movies than that, I need to find a more useful way to spend my life.