jack

Why Netflix Can't Match Blockbuster's Competitive Advantage

One last thing: in the long run, BBI is far more likely to be "doomed" than Netflix. Its brick-and-mortar stores provide a temporary advantage now, but when downloads take over, they will be nothing but a liability.

Why Netflix Can't Match Blockbuster's Competitive Advantage

Thanks for the comments. I have a couple of responses to offer. First, if you read my article again, you will see that I don't suggest that either company will be "doomed" by the rise in competition. In fact, in the case of Netflix, I specifically say I believe it will survive as a business. It is an excellent company with excellent management and an excellent brand. I simply believe that it is too expensive at its current earnings multiple.

Regarding Blockbuster, the fact that its service may not be particularly profitable is beside the point. The fact is that it is bound to eat into Netflix's market share. As I said, I don't recommend BBI as an investment. But it doesn't have to do well itself to damage Netflix's long-term prospects.

Lastly, I agree that I should have gone into more detail about Netflix's download service. I hinted at my issue with this: I am confident the service will be reasonably successful due to Netflix's fine brand -- my issue is that there are hardly any barriers to entry into this business. Prior to download services, Netflix had an impassable competive moat in the form of massive DVD warehouses and a streamlined distribution system.

This huge advantage evaporates entirely with download service. Netflix (an others) will have to compete based on other factors like brand, selection, etc. Again, I have no doubt it will be a modest success at doing so. But not enough of a success to pay 33-times earnings.