I'm back, this time tackling the online video rental market. We all know the Netflix (Nasdaq: NFLX ) story. Blockbuster (NYSE: BBI ) has come along and raised the stakes with its Total Access service. Now Amazon.com (Nasdaq: AMZN ) is making waves in the nascent digital rental market, with plans to beam movies directly into your TiVo (Nasdaq: TIVO ) box.
Unfortunately, playing this "date, marry, kill" game means that I can't fall in love with all three players. I have to tag one -- and only one -- as a long-term investment. Of the other two, one gets the nod as a short-term trade, while the other gets dumped on my list of shorts.
I'm making few friends with this week's series, but who said there's no joy in being provocative?
As a Netflix investor, you would expect me to choose the pioneer as my fiancee, but I'm concerned about the company's long-term prospects. It's only looking to add between 1.7 million to 2.1 million new subscribers this year, a decline from its additions last year.
The future of digital delivery is more of a threat than an opportunity, because it levels the playing field. Netflix has a huge advantage, with 6.3 million subscribers, but it's going to be hard to stand out in a crowd. It will be going up against local cable providers and companies like Amazon and Apple (Nasdaq: AAPL ) , which are already selling full-length flicks online.
In the company's defense, churn clocked in at a record low this past quarter. The company is also refreshingly profitable. Netflix is offering online streaming on some of its titles, though the process feels more like a bookmark than a genuine effort to master the market. Maybe it, too, realizes that it's shuffling towards the inevitable commoditization of digital delivery.
However, it will be years before broadband-fueled flicks rule the mainstream living room. Netflix will be able to fatten its subscriber count to arm itself for the war. Maybe it will beat Blockbuster and copy Gamefly, using its network of regional distribution centers to start renting video games. I can't give up on Netflix now. The near term should be solid. I just don't know where Netflix will be in five to seven years.
You may not see Amazon as a major player in the video rental market, but its rivals know better. Netflix and Blockbuster entered into a painful pricing war two years ago on the merest whiff that Amazon might enter the market. Wisely, Amazon let the other two poke at each other in the United States, launching its DVD rental service in the United Kingdom instead.
But now that the game has gone digital, Amazon has the best view. Teaming up with TiVo to send rentals and purchases directly into WiFi-enabled TiVo boxes is perfect.
Amazon is also a seasoned veteran in the cutthroat realm of online retail. It perpetually battles comparison-shopping sites, and acknowledges the reality that every competitor is a single click away. More importantly, Amazon makes e-commerce work seamlessly and profitably.
Sure, Amazon will be shackled to low margins for life. It could be worse. Thankfully, the leading e-tailer is becoming more powerful with every passing quarter. Top-line growth is even accelerating at Amazon these days.
I've been kicking the tires of Blockbuster's Total Access service for two months now. It's a worthy competitor to Netflix. The company has just 2.2 million subscribers at the moment, but expects to add 1.8 million more net members by the end of the year. In other words, Blockbuster will start off the year with a third of the Netflix base, but wrap things up with nearly half of the Netflix population.
However, I haven't felt the overwhelming desire to drive over to my neighborhood Blockbuster store. I've let both of my freebie coupons expire. I only went in once to exchange a disc, and I didn't like the available selection of new releases. And those who have let me know that they love the service -- and the in-store exchanges -- don't seem to be forking over any more on incremental rentals or items. So before you write me a scathing email, preface it by letting me know the last time that you actually opened your wallet -- beyond reaching for your membership card -- at a store.
In short, Total Access is a winner in theory, but it's going to maul the company's income statement. Netflix estimates that Blockbuster will lose between $150 million and $250 million this year as a result of operating and marketing Total Access. Sure, Netflix is biased, but Blockbuster has yet to prove that this model will be a moneymaker.
This will end ugly. I'm taking Scarface's-Tony-Montana-bullet-riddled-body ugly. However, at least it tried. It went out with a bang. The same can't be said for rival Movie Gallery (Nasdaq: MOVI ) , which may be content to simply fade away in irrelevancy over time.
Good luck either way, Blockbuster. I hope to be humbled by the sight of money exchanging hands the next time I walk into one of your stores. Assuming I actually do walk into one.
Check out the rest of the "date, marry, kill" series:
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Longtime Fool contributor Rick Munarriz does own shares in TiVo and Netflix. He recognizes that nearly all of the 50 states ban marriage between a man and a stock. 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.