Blockbuster, Netflix: Competing For a Losing Spot

I remember the day I first heard about Netflix (NFLX)--it was one evening when I was driving towards Blockbuster (BBI). I remember that ride rather well because a friend of mine rode shotgun and chastised me for not signing up with Netflix. I never did sign up, mainly due to my whimsical renting style and the inability for snail mail to meet my needs for instant gratification. Nevertheless, much like my friend, almost 7 million people found this service advantageous in price and convenience over the traditional movie rental scheme. And in no time at all, Netflix $4/share became $40/share.

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 (CMCSA), Cablevision (CVC), DirectTV (DTV), Apple's (AAPL) iTunes, Amazon (AMZN)/Tivo (TIVO), and Verizon (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).

Disclosure: Author has a long position in VZ

Comments

[Sol Rosenberg:]

"Companies ... already have similar services lined up."

You forgot to mention Peekvid, TV Links, etc. But they're not publicly traded (yet?).

2007 Jul 27 06:45 PM

[wkisse:]

All is not rosy in their neighborhood.

Blockbuster countered with a mailer return in their stores with a free in-store rental for every mailer turned in.

Obviously they found out that too many people were taking advantage of this "marketing edge" and curtailed it to a maximum of five returns/free-rentals per month.

When will Blockbuster just decide to do a "burn on demand" at the store that can be ordered online and picked up at the neighborhood store.

This could also be expanded to a service like "Take-Out Taxi".

Can you imagine ordering an obsure video (or a popular one that is frequently out of stock) and have it delivered within a few hours to your home?

A good idea that would certainly allow Blockbuster to keep its head above water until Netflix takes its last dive.

Comments?

2007 Jul 28 02:18 PM