Netflix (NASDAQ: NFLX) will begin offering a new box built by LG Electronics to allow subscribers to download movies over the internet. Indeed, as Doug McIntyre wrote, "The big hurdle is that video content delivery over the internet has become such a crowded industry that it is difficult to imagine how one company will stand out. Cable VOD is so easy to use that there does not seem to be a compelling reason to turn to an alternative."
And therein lies the problem with Netflix the stock and Netflix the company. In a March interview with the Wall Street Journal, Netflix CEO Reed Hastings talked about his awareness that the company's business model of offering DVDs by mail is not sustainable:
We're sure that we're going to be buying cars in 25 years, whereas renting DVDs through the mail in 25 years? For sure that's not going to exist. [...] If one thinks of Netflix as a DVD rental business, one is right to be scared. If one thinks of Netflix as an online movie service with multiple different delivery models, then one's a lot less scared. We're only now starting to deliver the proof points behind that second vision.
Hastings' awareness that the company needs to adapt is good. It's better than having a CEO who is convinced that the current business model will continue to generate income forever. But the problem is that Netflix does not have a particularly clear competitive advantage in anything other than renting DVDs by mail. That's probably part of the reason the market didn't react to the VOD news.
At more than 25 times earnings with margins under pressure from a pricewar with Blockbuster (NYSE: BBI) and a CEO admitting that the business model does not have lasting appeal, it's hard to see why anyone would buy Netflix stock as a long-term investment.
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Reader Comments (Page 1 of 1)
1-03-2008 @ 2:37PM
Betsy Bowen said...
No advantages? Netflix has an astonishing selection, a terrific website, all-round wonderful service, and we consider them a major enhancement to our quality of life. We don't even bother subscribing to cable. If Netflix offered movie downloads, we'd use it gladly. I can't help feeling that the poo-pooers of Netflix are jealous.
1-05-2008 @ 12:15PM
Tom said...
I have tried the "Watch Now" feature on Netflix and it works very well. Have not used it too much however since I prefer the tv screen. Having gotten used to the 80,000 title selection from Netflix and the better time planning available by having one or two selections always available (Four Out Plan) I'm not that excited by the ability to have a transfer directly to the tv, although somewhere down the road I'll probably use it especially if Netflix and others expand the offerings from 5/6000 programs.
From Netflix standpoint this introduction should prove to be a bonanza since after two/four months going direct to tv will be fun, it like having a great view from your living room or den, after a period of time, you no longer get excited about it.
The same will probably happen with the new devices. Since the user has to program his tv from his computer, he'll suddenly realize that the greater selection available by mail is a better deal overall and will probably gravitate to it.
1-05-2008 @ 12:26PM
Tom said...
Simply forgot that you cannot use the new devices unless you are a member of Netflix so my comment on a Bonanza for Netflix is not correct.
If the user does anything, it will be to expand the service from possibly a 4.99 plan to 16.99 to take advantage of the large number of titles (80,000).
I guess the net of my comments is, that I like the mail in plan and somewhere down the road I might make use of the direct tv plan on those times when I get the Netflix movie and it turns our to be a two star or less film.