Netflix Death Watch (Part 2)

On March 17th I wrote a post for the HuffPo called "Netflix Death Watch" in which I claimed that slippage in customer service would cause problems for the company. On that date their stock was $32. It ran to $40 that month, and now hovers in the mid-$20's. Markets will fluctuate.

Netflix has larger problems than customer service, however. Internet delivery of movies is becoming an acceptable alternative to Netflix quicker than most imagined. Apple is selling/renting 50,000 movies and TV shows per day, many in hi-def. Sony's PS3 will is a fine set-top box for media delivery, as is the XBox 360. My Comcast box has 30 high-def movies available for free on demand, along with their PPV offerings.

Netflix has rolled out a set-top device manufactured by Roku to combat these players, and it has generally gotten good reviews. The problem is that this device is just another set-top box. It streams, and does not store media, so watching a film becomes a function of good bandwidth. With cable companies threatening to meter bandwidth, this type of delivery may become more expensive for all players.

The main problem is that there is just nothing special about the Netflix box. Netflix basically owns the DVD rental by mail business, but in the realm of digital delivery it is just one player amongst others. The only possible advantage it could have is exclusives on content. But why would Sony/Universal/etc. allow this to occur? They wouldn't of course.

So it's hard to see how Netflix's set-top device will be an engine for growth. It may have good conversion amongst current Netflix subscribers, but why would anyone else get this box? Most folks already have at least 2 set-top devices, their cable box and their videogame console. Add a DVD player and that's 3 items they already plug into the back of their TV. Feel like another remote?

That leaves DVD rental by mail. Subscriber growth has decelerated as the business has matured, so Netflix's only options to extract more revenue from their 7.5 million current customers would seem to lie in either raising prices, or in gaming the timing in the delivery of DVD's to customers to decrease their postage costs. Do they do this now? You might very well think that. I couldn't possible comment.

I am neither long nor short this stock, but the life cycles of companies, particularly technology companies, fascinate me. Place a historical stock chart of Blockbuster over one of Netflix and the similarities in their growth stages are striking. Blockbuster was essentially felled by Netflix, who displaced their media delivery system. What is the future for Netflix? Look at the chart.

Comments

[krayyy]

what a poor analysis. let's look at this again and see what path makes more sense, from a usability and financial standpoint.

apple has a pay per view system anywhere from 3-$5 per movie. you must pay $230-$330 for the ability to buy movies from apple. waching one movie per week will end up to be a yearly average cost...da da daaa... $488. how many movies are there, i can't find the number easily, but i did find only 100 HD movies in february 08.

on the other hand netflix player is $100 upfront, with a monthly plan of as little as $10 per month, including 2 dvds at home and the ability to stream an unlimited number of instant movies, from a library of over 10,000 movies and growing. With netflix we incur a yearly cost of $220 while i have the ability to watch more total movies, from a library that has many more options.

recap:

Apple Rentals = $488 first year cost with less movies, $208 per year after the first year
Netflix = $220 first year cost with unlimited viewing and more movies, $120 per year after the first year

You are attempting to write an obituary for a product that is new and hasn't even had time to walk yet. This thing will start walking soon, running then right over apple. I got mine the day they came out, and then bought one for my parents who absolutely love it.

[jeannekhan]

i recently returned to Netflix. Enjoy the Play on computer movies in addition to nine+ per
month for 9.73 and consider it top value at that price. Am blessed with fast mail in as my PO
carrier collects the return which arrives at Netflix the next weekday. Noted that Netflix is working
faster and their site has been energized. I vote for excellence with my money. Netflix ups and
downs over time have me stop and start for years. But they are right-tracked now. Yeah, Netflix!

[MagisterLudi]

What is this capitalistic preoccupation with non-ending growth?
If I had a business with 6 million customers I'd be very happy and do the best to keep them happy.
Not to risk my meat-and-potatoes core in search of half-baked solutions like watching movies on a low res. LCD screen.

[nanoscare]

They watch the price of the stock not the amount of the dividend. Dividends? Do people even remember what those were?

[kestrel9000]

Good. Maybe now I won't get their pop up ads every damn where.

[jmpurser]

Dude! Go Firefox!

[jacqmac]

I am sooooooo 'old fashioned'!! I use Dial-Up! OMG! i also get Netflix! OMG! I don't OWN an IPod! OMG! I don't even really WANT TV on my Computer! OMG! I even TRY to stay away from the Blogosphere on everything including Netflix, politics (it's hard lately) and articles like this one! However-I am a stockholder in Netflix and would like for the company to thrive a while longer! I LIKE my Netflix and will NOT be 'forced' to get 'stuff' that I don't need--PERIOD!

[nanoscare]

Throttling is something that Netflix admitted to long ago. At first, they throttled the users who watched their movies and sent them back quickly. Now they are moving to throttle everyone. Just like the Telecoms current plans to meter access, first they will go after the big users, eventually they will give you a bill for every piece of spam that arrives in your inbox.

[bija]

Last night on the news, there was a piece about Netflix signing up thousands of customers recently, so it doesn't sound to me they are dying. I hope not. Personally, I prefer getting the DVDs in the mail--higher quality and I can watch them on any TV with a DVD player.

[sfbayani]

Same here.
I prefer dvds by mail, not that I may want the other options in the future.
But then, I do want dvds in the mail.