Bad News for Netflix and Blockbuster

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Today is not a good day to loan out DVDs.

A service outage at Netflix (Nasdaq: NFLX) and a credit downgrade at Blockbuster (NYSE: BBI) are making this a doozy of a day for an industry that should be raking it in during this staycation summer.

The Netflix downtime isn't as potentially detrimental as the worrisome downgrade at Blockbuster. A tech snafu has limited Netflix's ability to ship out DVD rentals through its distribution centers since Tuesday, even though the story is only coming to light today.  

Netflix has had outages before. Its website was down for a significant spell back in March. The company bounced back. It always does.

"Will subscribers bolt in droves?" I rhetorically asked after March's outage.

"Of course not," I answered. "History is actually kind to the purveyors of downtime. There were pronounced outages in the 1990s for Time Warner's (NYSE: TWX) AOL and for eBay (Nasdaq: EBAY). They clearly rose above it. Last year's prolific killjoys included Research In Motion's (Nasdaq: RIMM) BlackBerry in April, Sirius XM Radio's (Nasdaq: SIRI) XM in May, and yes, even Netflix, in July. All of these companies are watching over larger user bases today."

If you need any proof that Netflix will get over this week's distributory slip, just consider that Netflix had just 7.5 million subscribers at the beginning of the year, and was up to 8.4 million movie buffs by the end of June. Folks keep coming. The outages are unfortunate, but they sometimes validate the model, once subscribers realize how badly they miss the service.

Blockbuster's burden won't be so easy to fix. Credit rating agency Moody's is cutting the company's probability of default rating. Even though Blockbuster's backing away from plunging into a risky acquisition of Circuit City (NYSE: CC), it still faces model viability and refinancing challenges.

Then again, investors know that there are risks aplenty in Blockbuster. When the share price is lower then the going rate on a movie rental, it starts looking more and more like a lottery ticket.

Let's hope that "fade to black" is a better description for the conclusions of the films Netflix and Blockbuster rent than the fortunes of the companies themselves.

Be kind, rewind these earlier stories:

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Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. 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.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 14, 2008, at 2:37 PM, sickofsiribasher wrote:

    Well Rick, it seems that again you need to bash SIRI to get a click. If this is about two other companies with negative issues why is it that the SIRI chart is made the example????? It's looking more and more like aside from your eagerness to throw anyone under a bus to get a click, that you are also either a Clear Channel/NAB tool or are more intent on helping people you know with short positions than doing any real research.

  • Report this Comment On August 14, 2008, at 3:34 PM, PlusDargent wrote:

    sickofsiribasher - I wouldn't call myself a fan of Rick, but what does your comment have to do with Netflix and Blockbuster?

    Time to take personal responsibility for your losing "bet" (so far) on Sirius - which I totally agree is being manipulated by both inside and outside forces - or step up to the plate and file a lawsuit against somebody. Going after Rick each time he makes a comment about Sirius makes you come across as nothing more than a whining baby.

    Apparently you haven't learned that stocks aren't winning lottery tickets with different jackpots. And you're not going to get anywhere if your sole investment strategy is to tell journalist or bloggers to stop saying bad things about your favorite stock.

    In fact, your own "user name" could be hurting the stock because it could give others the impression that there are a lot of bad things being said about Sirius. Ever think of that? On the other hand, maybe that's really your intent and you're shorting SIRI.

  • Report this Comment On August 14, 2008, at 7:50 PM, TMFBreakerRick wrote:

    SOSB, how is this bashing Sirius?

    How is "History is actually kind to the purveyors of downtime," and then listing Sirius among companies like Research in Motion, eBay, and AOL that have risen above the temporary outages a bash?

    This doesn't mean that I haven't been hard on Sirius in the past. It doesn't mean that I won't be hard on Sirius in the future. However, you have to pick your battles. This is me mentioning SIRI in a positive light, as I do more often than most analysts out there.

  • Report this Comment On August 14, 2008, at 9:26 PM, sickofsiribasher wrote:

    Fair enough Rick, My main complaint with the article was that a SIRI chart was posted while mentioning outages. Clearly they've had a rough few quarters thanks to the goon squad at Clear Channel and the FCC and it had no relevence to being down or otherwise because of outages so when a chart is posted that shows drops it would be fair to list the players responsible for it. I've been long on SIRI for some time and am not going anywhere and will continue to be looking for bias that as you admit is the norm when reporting on SIRI by many speculative analyst opinions. Aside from the investment, something that separates SIRI as a company is that people actually love the products and are willing to take time to defend them. I doubt the same could be said for CCU.

  • Report this Comment On August 15, 2008, at 10:43 AM, Kajuboy wrote:

    Hey,

    "Bad News for Netflix and Blockbuster"

    What kind of crappy analysis is that?

    Blockbuster was UPGRADED by Moody's ... are you trying to mislead or are you just incompetent? From Moody's:

    "The two-notch upgrade of its secured bank facilities to B1 from B3, reflects the company's improved recovery prospects as a result of the company's notable operating improvements," Moody's said in a statement.

    The link:

    http://biz.yahoo.com/ap/080814/blockbuster_rating.html?.v=1

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11/6/2009 3:59 PM
BBI $0.86 Down -0.03 -3.36%
Blockbuster, Inc. CAPS Rating: *
CC $0.10 Down +0.00 +0.00%
Circuit City Store… CAPS Rating: *
NFLX $55.86 Down -0.53 -0.94%
Netflix, Inc. CAPS Rating: ***
SIRI $0.63 Down +0.00 -0.63%
Sirius XM Radio CAPS Rating: **

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