Tough Times for Netflix - Barron's

Ask anyone what's the latest trend in the video rental business and they'd likely say digital, as giants Netflix (NFLX) and Blockbuster (BBI) scramble to beef up their online rental and streaming services.

Well, according to Barron's Tech Trader Eric Savitz, they're wrong. The hottest idea in home video now? Dollar-a-day vending machines.

While online-video streaming certainly is the industry's future, video-rental vending machines are the hot trend of the economically depressed present.

King of the kiosk hill is Redbox, a unit of Coinstar (CSTR), which owns about 15,000 kiosks in supermarkets, drug and convenience stores, and Wal-Marts (WMT). In an effort to fight back, Blockbuster (BBI) has partnered with NCR (NCR) to acquire 2,200 MovieCube kiosks, and separately has started offering customers movies at the same dollar-a-day kiosk rate - moves that could boost sales but impact BBI's bottom line.

Meanwhile studios aren't happy. GE's (GE) Universal Studios recently demanded Redbox stop renting titles for the first 45 days after release; destroy used DVDs; and it wants 40% of gross revenue. Redbox turned around and sued Universal for anti-competitive behavior.

If Universal wins, the kiosk business is history - which would be good news for studios, and Blockbuster and Netflix. But analyst Jason Helfstein thinks it won't, and suggests studios will be forced to impose a rental-only exclusivity period for new DVD releases in an effort to lift initial prices for rentals, which would force Blockbuster and Netflix to either raise prices or accept smaller margins.

Helfstein also thinks studios will seek more favorable terms from renters, while at the same time leveraging their ties with online content providers like Hulu. Tough times for Netflix.

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In an article today, author VFC's Stock House notes Blockbuster could potentially steal market share from Redbox if it leverages its business ties to roll out kiosk rentals of new releases before Redbox, which tends to lag.

Comments

[robert99:]

Meh. Both will prosper - Redbox as the quick and easy DVD stop on your way out of Wal-Mart (and likely many other stores eventually); Netflix as the go-to provider for online releases streamed directly to your television. I'm looking to buy NFLX, provided I can get it with a P/E around 15. Haven't thought about CSTR, but maybe I should...

May 17 02:06 PM

[Moral Hazar...:]

Until you put a Redbox right next to my mailbox I won't be interested. The value that Netflix adds to the customer is that we don't have to burn gas and time returning the disks. Also, I doubt that Redbox has a million selections in their kiosks.

Not a significant threat to Netflix, imho.

May 18 10:36 AM

[chleoku:]

What about Gaming titles? I think Netflix has a pretty good momentum in the gaming rental?

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May 18 11:33 AM

[svosavvy:]

My local redbox is usually surrounded by woodchucks and techneandrethals. That population is contracting from what I can see. Nflx is a solid performer, imho there are still new subscribers (growth) to be had. Those subscribers may just cost more to get. nflx has already threatened share buyback with some of that 6$ a share in cash if they get cheap again. A real headwind from what I can see is the broadband cable putting a squeeze on bandwidth users to fund their lagging cable unit. I doubt you will see nflx at a 15 multiple anytime soon. This is a growth player and definitely not a value play, be careful when you fly with Icaurus.

May 18 12:25 PM

[svosavvy:]

Oh yeah, and using nflx and bbi in the same sentence isn't cool. nflx is a stock, bbi is something that should be put in a paper bag, lit on fire, and put on someones doorstep.

May 18 12:38 PM

[JamesD:]

Barron's is making a habit of bashing NFLX. (Weak arguments that they'd never trot out under any other circumstances seem to be good enough when it comes to NFLX.)
Redbox and BBI can slug it out for the kiosk business all they like; it doesn't affect NFLX. Different business, different market. As NFLX moves to online distribution, the kiosks will become even less relevant.

BTW, the 'saving gas' argument is a bit bogus: nobody is expected to hop into the car for a 5-mile expedition to the nearest kiosk. The whole idea behind a kiosk is to snag the consumer while (s)he's already out of the house ... that's why they're located in malls and retail stores. And they're counting on impulse rentals ("Hey, look! Star Trek LXVII is out ... let's watch it tonight!"), a type of demand that NFLX can't meet. I think there's room for kiosks and for NFLX to make money in parallel. There will be some competition, but they won't need to be at each other's throats.

May 18 02:02 PM

[Moral Hazar...:]

Grabbing a disk from a kiosk on a Friday while you're in Wal-Mart shopping for pet food is convenient and easy. Returning it back on a Monday when you have a million other things you need to do is often a significant investment of resources and a pain for many of us.
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"BTW, the 'saving gas' argument is a bit bogus: nobody is expected to hop into the car for a 5-mile expedition to the nearest kiosk. The whole idea behind a kiosk is to snag the consumer while (s)he's already out of the house ... that's why they're located in malls and retail stores..."

May 18 07:55 PM

[geo689:]

Maybe when you rented at the kiosk you were already out of the house........now you have to bring the dvd back, and you did your shopping yesterday. I admit that Redbox is hot, but it can't replace the selection and affordability of Netflix.


On May 18 02:02 PM JamesD wrote:

> Barron's is making a habit of bashing NFLX. (Weak arguments that
> they'd never trot out under any other circumstances seem to be good
> enough when it comes to NFLX.)
> Redbox and BBI can slug it out for the kiosk business all they like;
> it doesn't affect NFLX. Different business, different market. As
> NFLX moves to online distribution, the kiosks will become even less
> relevant.
>
> BTW, the 'saving gas' argument is a bit bogus: nobody is expected
> to hop into the car for a 5-mile expedition to the nearest kiosk.
> The whole idea behind a kiosk is to snag the consumer while (s)he's
> already out of the house ... that's why they're located in malls
> and retail stores. And they're counting on impulse rentals ("Hey,
> look! Star Trek LXVII is out ... let's watch it tonight!"), a type
> of demand that NFLX can't meet. I think there's room for kiosks and
> for NFLX to make money in parallel. There will be some competition,
> but they won't need to be at each other's throats.

May 28 05:31 PM

[Mitt Persons:]

More netflix bashing on seeking alpha, what a surprise. Does anyone know why they are going to such lengths to destroy this company? Are they connected in any way to the very large short position there? Something is fishy to me. They consistently produce laughable negative arguments against netflix and these days one has to wonder.

May 31 08:16 AM