The Future of Movie Rentals

Includes: DISH, NFLX, T
by: Brian Nichols
The new fees at Netflix (NASDAQ:NFLX) have made a lot of people angry, so much that many of them will go somewhere else and pay a higher premium for the same experience. Netflix charges $8 per month and customers can stream movies or pay $16 for both streaming and movie rentals one at a time. These prices are still what I consider to be cheap. I remember paying $4 for a movie and getting to keep it for five days. This was Blockbuster’s (OTC:BLOAQ) business plan that later ran the company into financial hardships.
Blockbuster is trying to evolve as it offers movie rentals one at a time for a price of $9.99.
As you look at the service and the monthly plan, you should see that Netflix is the better deal. On April 26, Blockbuster announced its acquisition by Dish Network (NASDAQ:DISH). New Dish CEO Joseph Clayton has spent a lot of time speaking with networks like Bloomberg about the company's new promotion.
In an interview with Fox Business, Clayton spoke of the acquisition, the new business plan, and the company’s new promotion to take some angry Netflix customers. After Netflix announced its new pricing, Blockbuster immediately offered a promotion: One month for free. Clayton did not deny that this offer was a result of an increase in Netflix prices. The interviewer explained to Clayton that while this deal was good and may take advantage of angry Netflix customers, Blockbuster’s price is still higher. Blockbuster is $9.99 per month while Netflix is $7.99 per month, meaning if Netflix customers were to switch, after the promotion, they would be paying a higher premium. Clayton responded to the point by saying, “Blockbuster is family.”
This response, which was followed by details of how Blockbuster "is family," provided no answer to the question. Blockbuster is no longer in the position where it can charge $4 a movie and still make a profit. Blockbuster no longer has the name power that it once had; Netflix is the new Blockbuster. I do expect some of the angry Netflix customers to switch over to Blockbuster, but I am sure Netflix took this into consideration when making the change.
Netflix can afford to lose a portion of customers and still report the same level of revenue because of higher prices. The company has spent a lot of money on mail-order DVDs. Postage is expensive, labor is expensive, and I am sure there are losses of product quite often. By cutting into these expenses and forcing customers to consider streaming movies, you can have a higher net income. In 2010, the total revenue for the company was $2,162.62 million and the total operating expense was $1,878.98 million. Every year, Netflix sees revenues increase by a large amount but also sees expenses go up just as much. Streaming does not carry the costs of renting and is much easier for both the company and the consumer. I expect Netflix to post record EPS in the next year, as revenue may slightly decrease but costs will be cut in half. As a result of the new prices Netflix will lose customers, but for the most part people are reasonable, and will realize that the increase in price is fair and affordable.
I am more curious to see what happens with Blockbuster and what plans Dish has for it in the future. Dish already streams movies online with its video-on-demand but may want to incorporate movie rentals as part of its services. It would be unique as DirecTV (DTV) does not offer this service, nor do any of Dish’s other competitors. Dish would offer its customers DVD movie rentals for $9.99 a month through Blockbuster, which would give Dish an advantage in a competitive market.
This could bring Blockbuster out of retirement to make an impact or become relevant once again. Blockbuster is trading at only $0.06 a share with a cap of $13.58 million. It is a sad sight for a company that was at one time so powerful in the world of entertainment. Dish would not have bought Blockbuster if it had no plan, and while that plan is unclear, everyone would agree there will be changes. I am not asking people to consider purchasing this stock, as I would not consider this stock for a long time. I would simply listen to earnings and pay attention to company developments. I will be curious to see how much the company benefits from Netflix customers and I will follow the company to see how Dish incorporates Blockbuster into its business. I don’t see this company as a buy, but I could see it as a future competitor to Netflix if Dish and Blockbuster make good business decisions over the next eight months, which would make this stock rise very quickly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.