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.
Posted July 3, 2008 | 10:10 AM (EST)