Blockbuster vs. Netflix: Five Rounds, No Mercy

You've been coming back to your local Blockbuster (NYSE:BBI) video store for years, maybe even decades, and you've at least seen the TV commercials for Netflix (NASDAQ:NFLX) where the company promises to ship you DVDs by mail. Oh, and now Blockbuster does that, too. So the movie renter has a couple of choices, even while Movie Gallery (NASDAQ:MOVI) moves toward the edge of oblivion, followed by the mom 'n' pop video stores.

But what you really want to know is which of these businesses would make the better investment. What makes them different, and how are they the same? Let's take a moment to compare and contrast, Fool style and gloves off.

Round 1: End-user value
There's no question that Blockbuster's Total Access subscription plan has delivered great value to customers over the past couple of quarters. The ability to pretty much double the rental count without raising the subscription cost much at all was an insanely awesome value proposition, but those days are over.

That plan now costs $25 a month rather than the $17 you'll pay for a mailer plan without in-store privileges. Both Netflix and Blockbuster now have lots of service levels tailored to various needs, at comparable price points between the two operators, and the choice comes down to details such as whether you have a Blockbuster store close by or want everything done online, and which website makes it easier to find the movies you want to see.

So from the pure value standpoint, this is now a toss-up. I much prefer the Netflix online tools, though your mileage may vary, and not everyone has my 20-minute drive to the nearest blue-and-yellow brick pile. Call this a tie.

Round 2: Customer base
That said, Netflix got a head start by a couple of years on building a subscriber base. The Californians have 6.7 million subscribers today, versus Blockbuster's 3.6 million. On the other hand, the recent Total Access value brought in 600,000 new subscribers last quarter, while Netflix lost more customers than it found. It remains to be seen how the growth trends shape up from here, given the changes to Total Access and a new growth strategy from Netflix with less marketing and lower prices to match its Dallas-based rival. A strict customer count would give Netflix this trophy, but Blockbuster wins on recent improvements. Another tie.

Round 3: Distribution details
There are two very different distribution models at play here, as superficially similar as they might seem. Netflix runs dozens of regional distribution hubs across the country, with plans to open 10 more this year. Most movies you're likely to want are within one-day postal delivery distance -- the company says that 90% or more of all requests get filled from a local center -- and if you want anything really obscure, the Los Angeles centerpoint holds all 80,000 library titles. Maybe not the ideal location for reaching the East Coast, but it's close to company headquarters.

A fledgling all-digital service is now available, too, with 2,000 movies available to watch anytime, at no extra cost to the subscriber. That digital library is expected to grow quickly, and if the future of video is digital, Netflix will be there.

Blockbuster Online has its own distribution centers, although not as many as Netflix. Then there's the store network, which is shrinking a bit with every store closure but still larger than anything the competition has to show. You can drop your mailers off at the store for those Total Access freebies, or else for $1.99 in-store rentals. Some stores also help in shipping out movies rented online, but it's unclear which ones do and how it all works.

The total library here is smaller, with 70,000 titles, and each store location typically holds far fewer than 10,000 different movies. But some people like to browse the shelves and have a store close enough to add significant value to the subscription without much extra effort or cost. Balanced against the larger selection and more advanced digital distribution plans at Netflix, this is yet another draw, depending on your preferences. Geez, already, where's the winner?

Round 4: Who's in charge here?
Well, we have one more undecided round to deal with first. I'm talking about management quality.

Had you asked me a couple of months ago, this would have been a hands-down Netflix victory. CEO Reed Hastings thinks about business like the trained engineer that he is, and he works hard to squeeze every possible ounce of efficiency and user-friendliness out of his business model. His efforts have been successful enough to land him a board seat on Microsoft (NASDAQ:MSFT), a high honor for the leader of such a small and relatively young company.

But the ineffectual ways of former Blockbuster CEO John Antioco and the accompanying bluster brought by activist investor Carl Icahn recently got thrown out in favor of new CEO Jim Keyes. The former CEO of 7-Eleven is still an unproven commodity in this sector, but he's got impeccable credentials and talks the talk of a customer-focused visionary.

In time, the question of leadership quality will be answered, but we just don't know enough to call it either way today. Tie!

Round 5: Show me the money!
That brings us to the one field where there is a very clear winner: financial strength.

Blockbuster may have attracted a lot of new customers with the Total Access promotion, but they didn't come cheap. The company is bleeding red ink from both the income and cash flow statements, and the balance sheet is in no better shape. Meanwhile, Netflix is profitable, debt-free, and cash-rich, with the financial leeway to experiment and take chances that Blockbuster just can't afford, lest its creditors turn sour. No contest -- this one goes to the Hastings gang.

Foolish roundup
To summarize, there's the lowdown breakdown in an easy-to-use format.

There you have it, folks -- Netflix wins on technical knockout in the financial round, although it's far from the death blow it looked like only a scant few weeks ago. Keyes has hardly broken in his office chair yet, and he's already making a real difference.

All in all, I'm a very happy Netflix owner, but Blockbuster's recent improvement has me casting adulterous glances at the other side of the ring. No longer does the company appear headed for an inevitable flame-out bankruptcy, but the current share price certainly accounts for that possibility. Thanks to our Foolish disclosure rules, I can't actually do anything about it for 10 days now, so there'll be time to think this over. Playing both sides of the field could be fun, though.

You may have a different point of view that changes the picture entirely. If you do, please feel free to click on over to our CAPS community to share your thoughts with the rest of us.

Netflix is a Motley Fool Stock Advisor pick, and Microsoft is a Motley Fool Inside Value selection. Just like Netflix and Blockbuster, the Fool offers a free trial of our newsletters. Check out any of them for 30 days at no cost and make it a Motley Fool night.

Fool contributor Anders Bylund is a Netflix shareholder and once made some money shorting a few Movie Gallery shares. That was a fun summer. It was years ago, though, and he holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like. Foolish disclosure is your best ringside companion.