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Is Netflix being disruptive?

|Includes: Netflix, Inc. (NFLX)

The people at Netflix are geniuses.   They’ve been the first mover to two different business models in ten years and profited handsomely each time.  There hasn’t been a misstep yet and it shows in the stock price.

NetFlix’ Two Shots Across the Bow!

First, they crumbled the brick and mortar DVD business by making it extremely cheap to rent new releases.  In the old days, you had to go to the store, drop $4, and then return it the next day.  Now, you pay between $1 and $1.50 per DVD, depending on how quickly you watch and how many you subscribe to, and you don’t have to go further than your mailbox.  I don’t even know where to find a video rental store now.  The combination of DVD by mail subscriptions and DVD kiosks has rendered DVD rental retail completely obsolete.

Secondly, they EFFECTIVELY were first movers in the business of monetizing old movies and TV content.  The old methods of watching old content were widely varied and or extremely difficult.  You could wait for reruns and watch ads.  You could go to the video store and rent it for $1.  You could subscribe to a pay movie channel at a premium and have access to some subset of the old content you were looking for.  You could buy it on eBay?  Now for the low price of $7.95, you can stream straight to your TV all the old content that Netflix can get their hands on.  It’s not just a single channel’s worth, but a wide swatch of content.  Even better is the fact that Netflix will tell you what you will enjoy.

Netflix’ Strategy

The question here is, “What business model did they disrupt with streaming old content?”  “Whose carcasses will be lying on the ground in another five to ten years?”  To answer this question, I ask myself these questions; “How did I satisfy my penchant for old content before?” AND “How much old content can I take before I get bored of the older content?”

Truthfully, I never cared about old content myself.  I gave Netflix a whirl and I was happy watching old content for about two months.  Then I found myself lukewarm about the old content for one month.  Then I found myself watching horrible old content and quitting shortly after.  For someone who used to watch old content as it came on some random TV channel (ie no real interest), it took me three months from first trying to quitting.  During that time, I was getting one DVD at a time and liking that much better than the streaming content.

As more and more new subscribers are exploring what the next hottest thing is, I’m afraid Netflix will see more and more people like me and churn numbers may rise dramatically.  I would love to see a breakout of churn between streaming only plans and non-streaming plans.  Alas, that will never happen.

Returning from that short commercial interruption, the question again is what and whose business model did they disrupt.  My answer is none.  They have created value where there was none.  They have taken all the reruns that you wanted to see and made them easily accessible so that you can consume them at an incredible pace (or a leisurely pace if that’s your desire).  Netflix created revenue streams for both themselves and content providers.  However my argument is that revenue streams will be short-lived as EVERYBODY has their limit on the amount of old content they can watch.

Anecdotally, I have heard that people will keep using Netflix streaming consistently for three things; Independent Movies, Documentaries, and Toddler/Kid programming.  I can’t say whether this is true or not, but I consider myself to be mainstream America and I have no interest in any of these categories.

The ‘other’ crowd consists of total TV replacement.   These are the people who just subscribe to the internet and use Netflix DVDs for new content and DVDs/Streaming for old content.  Again, I consider myself mainstream and I can’t imagine myself doing this either.  There have been fabulous stories about people saving boatloads of money, but those people are in fact getting less for less money.

Conclusion

I believe that the DVD business, especially for Netflix, will be alive and well for a good, long time and NO business will die in the wake of Netflix’ value creation.  We are riding the crest of a 6-12 month period where everybody is trying it out, but once that crest subsides, it will come down to, once again, how many people are subscribing for the DVDs.  Sure, I’ll watch some free streaming if I ever subscribe to a DVD plan, but I will NEVER subscribe to online streaming only.  I like new entertainment too much.



Disclosure: I am short NFLX.

Additional disclosure: I have long term puts both in 2012 and 2013.