Netflix Finally Lives Up to Its Name

It's about time, Netflix (Nasdaq: NFLX  ) . You are now officially an online company. This morning's news that the company will begin allowing subscribers to stream flicks and television shows through cyberspace isn't much of a surprise. The company has been pointing to a January announcement for months now, and I snuck an inadvertent peek back in September. So even if crystallizing the speculation winds up being little more than a non-news event, at least Netflix is finally giving writers and analysts the ability to call Netflix an "online movie rental company" without scrambling for an asterisk.

Until now, Netflix has really been little more than a mail-order DVD rental company. Sure, it has taken advantage of the Internet superbly. The entire queue-management interface, and a platform that gets smarter with every recommendation you make, has made the service sticky to 5.7 million subscribers. But the gratification is ultimately at the mercy of how quickly the postman can get to your mailbox.

The company's new digital approach will give subscribers the ability to stream between six and 18 hours of video content a month, depending on their subscription plan. Recent offerings by Amazon.com (Nasdaq: AMZN  ) and Apple (Nasdaq: AAPL  ) have focused on selling actual digital downloads, but that's not the market that Netflix is gunning for initially. In terms of mobility, Netflix is more of a pocket passer. Consumers will have to watch their streams on their computer screens, even though the company hopes to eventually drum up cell phone and television-based functionality.

Lights! Camera! Traction!
Like most introductions, this will be a gradual rollout. The company offers a catalog of more than 70,000 titles by mail, but this new service will debut with just 1,000 films and television shows. It will also be opening up the service to a few subscribers at a time, with the entire Netflix community aboard by June.

It's a free service, so beggars can't necessarily be choosers regarding the lack of title portability or the limited number of hours. The new offering serves to arm Netflix in its battle against Blockbuster (NYSE: BBI  ) .

Blockbuster had an amazing fourth quarter in migrating its bricks-and-mortar customers to its Total Access online platform. As Netflix's nearest rival, Blockbuster now has more than 2 million paying subscribers. Blockbuster's latest ads also belittle Netflix by promoting the instant gratification of being able to deliver a rented disc to a participating store to get a free DVD rental right away. It's an effective pitch, and it's working. Blockbuster's stock has more than doubled since bottoming out back in March.

The new Netflix service may be limited, but at least it is arming itself with the ammunition to attack Blockbuster's latest marketing campaign. Instant gratification is now quicker than a family sitting on a couch, gearing up to drive out to the nearest store.

Sure, Blockbuster can battle back. You won't find too many families cramping together around the home computer to catch a two-hour flick. It's a clumsy visual image just dying to be fleshed out in a marketing campaign, if Netflix doesn't expand its offering quickly.

Where's the Biff?
Ultimately, this is the first digital step for a company walking a treacherous tightrope. If it makes online delivery too popular, Netflix will erode the real-world competitive advantage it derives from its regional distribution centers and proven interface. There are just too many cable providers and online juggernauts jockeying for position in digital delivery.

However, it's a race in which Netflix needs to participate, because the company can't ignore the future. No, streaming costs aren't cheap. Netflix has to hope that the customer freebie helps acquire new subs cheaply while whittling down churn rates via patrons pleased to get more bang for their buck.

It's a shame to see that Netflix has nothing to say on the possibility of downloading films through its buddy TiVo's (Nasdaq: TIVO  ) digital recorders. Unlike others proposing set-top solutions, Netflix would have an established, installed base with TiVo. However, every step forward for TiVo in its digital future is guarded by competitive threats that smell opportunity in the convergence process.

In short, one can applaud today's move, but check those rose-colored glasses at the door. Tomorrow will be both exciting and challenging for Netflix.

If only Doc could fire up the DeLorean and send Netflix back to 2002. Life was so easier then when the competition was little more than a McFly on the windscreen.

Netflix, TiVo, and Amazon have all been recommended to Motley Fool Stock Advisor newsletter subscribers.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He also owns shares in TiVo. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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