Bye Bye Blockbuster, Not So Fast Netflix

by: Wall Street Strategies

by David Urani

The final credits began rolling on Blockbuster (BBI) on Thursday when it filed for Chapter 11, effectively ending its legacy. It's kind of saddening really; I can remember walking through those stores thumbing through VHS tapes when I was younger and who would have thought that Blockbuster, which seemingly had a monopoly on the movie rental business, would ever become obsolete. Well, that is in fact the case and the business that seemingly toppled Blockbuster singlehandedly is Netflix (NASDAQ:NFLX). So now Netflix is free and clear to rule the movie rental monarchy once held by Blockbuster, right? I beg to differ.

A New Hope

Blockbuster never seemed to have trouble making the switch from VHS to DVD, but where Netflix really got its foot in the door was through its mail-in system. While you had to go to Blockbuster stores and pick up movies, Netflix allowed you the luxury of renting multiple movies at once through the mail, with the option of sending them back an unlimited amount of times per month for a new batch; and at a very decent price. $8.99 a month for unlimited movies is a sweet deal. Nevertheless, Blockbuster was able to hang in for a while; if you are the kind of person that rents just one or two movies a month going to the store isn't such a big deal, especially since you could get the movie without having to wait for the mail. Ever since 2005, Blockbuster sales have been declining.

Back to the Future

What really flipped the rental game on its head was the onset of internet streaming and Netflix was more than prepared for it. As long as you have a high speed internet connection, which most of us do now, all of a sudden you have the ability to play movies at the touch of a button, with a modified subscription model. What's more, Netflix, knowing that not everybody wants to watch movies on their computers, made every effort to make itself available on the TV set, making deals with electronics makers to make its service accessible on everything from an Xbox360 to a Blu-Ray player to an internet ready television. By the time Blockbuster caught on, it was too late.

Gone With the Wind

It's easy to get whisked away in cyber space. Now that movies have entered the digital age that means they are easily within reach of anyone with the internet. These days, computers have come far enough that it's becoming more and more difficult to discern the difference between a computer, a television, and even a mobile phone. Not only that, but each of the aforementioned is internet ready and capable of handling streaming video. Listening on Netflix' earnings conference calls, one hears clearly that the brunt of its growth is coming from streaming video, which is becoming an increasingly high percentage of its sales. The point I'm getting at is now that movies have entered the cyber-world there is already a wealth of competition. Two companies are currently moving aggressively into the television and movie business and they might just literally be the two companies that I would least want to find myself competing with: Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL).

The Right Stuff

With respect to Google, they hold the internet's biggest video Mecca in YouTube. Not only can you watch cat bloopers and music videos, but since Google took over the business, movies have quietly been making their way into the database. Actually, there are several free movies on YouTube with ads on the webpage, although obscure sci-fi movies seem to be just about the best you can get that way. Make no mistake though, they are also rolling out new releases for a $3 or $4 rental fee and that system is only in its infancy. In 2006, Google bought YouTube for $1.65 billion, and it is only just now expected to turn a small profit this year on revenue of roughly $450 million. Google won't stop until YouTube becomes a sales generating powerhouse.

And what else can be said about Apple (AAPL), which has been transforming computing and media as we know it for the past few years. Not only has it jumpstarted hand held music and video usage, but it has also made substantial headway in procuring revenue from the media itself through iTunes which already offers everything from music to movies to TV shows at the touch of a button to the people who buy their electronics.

I have heard arguments for Netflix being an acquisition target but with the way the industry is evolving, I don't quite see that happening, at least not without Netflix losing some value first. With the move to digital media, less and less infrastructure is necessary and, in fact getting the licenses to distribute the movies appears to be the biggest hurdle. For Google and Apple, all of the infrastructure is already in place for digital streaming. Not to mention, there are several others that have movie streaming capabilities, including Amazon (NASDAQ:AMZN),, and the ill-fated Blockbuster. Heck, I wouldn't be surprised if Facebook started offering movies to rent. Any one of these businesses, if nothing else, can put a dent in Netflix's market share.

In the immediate future, Netflix seems to hold an edge as customers demand the highest quality picture through their living room sets, where Netflix has made an excellent effort to position itself. However, the internet and electronics are constantly adapting – and rapidly. Netflix can enjoy its victory for now, but I do not see it as a reliable long term investment. I see a big fin moving through the water... dun dun... dun dun...