No doubt, Netflix was riding the wave of a first mover advantage. Unfortunately, it didn't take long for that wave to hit shallow ground and start breaking. Blockbuster turned the tide, so to speak, against Netflix by offering an enhanced service (Total Access) of mail delivered movies via online rental, while adding the option to trade in movies for new titles in their store.
Now that Blockbuster's Total Access has a competitive edge over Netflix, growth prospects for Netflix have substantially diminished. To try and gain market share Netflix's management responded by lowering subscription prices, at the cost of lowering their revenue per subscriber. To add insult to injury, they also lowered their expected new subscriber outlook from 2 million to 1 million by end of fiscal 2007.
Though the two companies are engaging in cut throat competition over subscribers, the sad reality is that neither Blockbuster nor Netflix can win this race. The future of 'move rental' is not in distributed physical media like VHS, DVDs, or the new HD-DVD/Blu-Ray. But rather, movies will be available on-demand from the comfort of your own home. Although Netflix has realized this, and has dedicated a substantial amount of money towards setting up a download service, it no longer has the first mover advantage needed to make it a stock worth buying . Companies like Comcast (NASDAQ:CMCSA), Cablevision (NYSE:CVC), DirectTV (NASDAQ:DTV), Apple's (NASDAQ:AAPL) iTunes, Amazon (NASDAQ:AMZN)/Tivo (NASDAQ:TIVO), and Verizon (NYSE:VZ) Fios already have similar services lined up.
The race between Netflix and Blockbuster has blinded most people from the truth; Like a race between two horses who are running at the end of the pack--it doesn't matter which one comes out ahead, at the end of the race both will still lose (and so will the stake holders betting on them).