Netflix's move to separate their DVD by mail and internet streaming plans was generally cheered by financial media and jeered by consumers. The verdict is still out, and the success or failure of this strategy will likely depend on the behavior of its consumers.
Netflix's move is a gift to these companies
In the meantime, this is effectively an increase in the cost to consumers, the degree of which is solely dependent on subscribers' cross use of the two Netflix rental delivery methods. As such, this is a gift to competitors like Coinstar (CSTR) and Dish Networks (DISH). If these companies choose to simply absorb former Netflix subscribers priced out by the effective price increase, RedBox and Blockbuster rentals can do so with their current pricing. If these companies wants to use Netflix's move to flex their own pricing power, they can confidently raise prices without fear of a lower cost competitor.
Coinstar Inc (CSTR) - The company's exposure to the Netflix news comes through its 30,200 Redbox DVD rental kiosks as of December 31, 2010. The company has grown its video rental business aggressively and impressively over the years. In 2010 alone, DVD revenues grew 50% as a result of both the 35% increase in kiosks as well as a 13% growth in same store sales. Coinstar's large and growing network could easily accommodate any defections from Netflix.
Investors may be surprised to know that since 2006, Coinstar has grown its revenues 611% compared to Netflix's still impressive 217% over the same period. While we understand that investors are drawn to Netflix because of the potential reach and supposed scalability, it is worth mentioning the revenue growth data to remind market watchers that Coinstar is a very impressive company in its own right.
Dish Networks (DISH) - The company's satellite television business was already indirectly exposed to the video rental business. But now it is right in the thick of things following its $320 million purchase of Blockbuster's (OTC:BLOAQ) assets. While Coinstar may be an obvious winner from the Netflix move, Dish could turn out to the biggest beneficiary because its Blockbuster brand has the other mainstream DVD-by-mail operation in this country. For the same price, Blockbuster offers Blu-Ray and game rentals. And as we previously discussed, Dish Networks may want to expand the Blockbuster business model of stores, self-serve kiosks and DVD by mail rentals.
Dish has long lagged behind Netflix, but it could gain Netflix subscribers, which in turn could ameliorate some of the risk from its Blockbuster acquisition. Dish may even benefit by underpricing on the DVD rental by mail segment in order to build its subscriber base. Down the line, this could either benefit its eventual move towards video streaming or it could benefit Dish's underlying satellite television operation. Either way, Netflix may have unintentionally given momentum to a long shot competitor.
DirecTV (DTV) - The company is a minor loser from the Netflix subscription change, not necessarily because of any direct consequence, but rather because the Netflix headline has the potential to strengthen Dish Networks, DirecTV's main competitor in the satellite television market. Still, any negative effect should be minimal. The company is clearly the dominant player in the industry. With an average revenue per user ("ARPU") of $89.71 per month in 2010, DirecTV's ARPU far exceeds DISH's ARPU of $73.32 per month.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSTR, NFLX, DISH over the next 72 hours.