Netflix Turns Sour Grapes Into Fine Wine

Last week, millions of Netflix (Nasdaq: NFLX  ) DVDs were delayed by a couple of days. Rumor has it that a database upgrade went astray, so the company couldn't track incoming and outgoing shipments properly for a day or three. Bummer, right?

Not so fast. The rentals-by-mail veteran stepped up to the plate with a classy response, turning what could have been a PR disaster into arguably good news instead.

What's up?
Affected subscribers (me included) got a quick e-mail apologizing for the delays and letting us know that a 15% credit will be posted to our accounts next month. No need to ask for that, it's all automatic. "We pride ourselves in delighting you, and we've let you down," the e-mail said. These guys take customer service seriously, and judging by user responses at the generally harsh Consumerist blog, many of us are getting something for nothing, since the outage went unnoticed in many cases.

Netflix today isn't all about profits or cash flows. If that were the case, the company could reduce its advertising budget today and start collecting coin by the boatload, and it would probably have done its best to sweep this incident under the rug. Over the past four quarters, Netflix spent $195.8 million on marketing while collecting just $71.6 million of net income and $74.2 million of free cash. Stop the ad blitz and instantly quadruple the earnings -- but also stop growing? Not today, Zurg!

Blockbuster (Nasdaq: BBI  ) was the Joker to Netflix's Batman in early 2007, but the bricks-and-mortar chain has refocused on a more diverse business plan under CEO Jim Keyes. If you want a nemesis for Netflix today, it's a mix of Amazon.com's (Nasdaq: AMZN  ) Unbox, Apple's (Nasdaq: AAPL  ) iTunes movies, and video on demand from the likes of Comcast (Nasdaq: CMCSA  ) and Verizon (NYSE: VZ  ) . But none of them do exactly what Netflix does, and there are a few years of life left in those shiny, easily mailed discs before the truly digital era in entertainment comes storming in.

The pudding
Oh, you want proof? Fine.

Apple is the leading music distributor today, ahead of all the physical stores out there, and woe betide anyone who dares to get into the physical CD business. But the compact disc was introduced in 1982, fully 26 years ago. Lots of people still use their Walkman players today, and the next car you buy will almost certainly come with a CD player or multi-disc changer. That format is far from dead, nearly three decades after its introduction. The DVD is only 11 years old, and Sony (NYSE: SNE  ) won the next-generation battle with its Blu-Ray format this year. Physical media will appeal to many consumers for another decade, if not more.

The Foolish future
Aiming to delight customers and grow as quickly as possible still looks like the best strategy for Netflix, which is why its top-notch management team responds in such an efficient and customer-friendly manner to veritable disasters like this outage. One day, many years from now, everybody will want a download rather than a disc. Until then, Netflix will continue to build its reputation, its technology, and knowledge on how to get us the movies we want before we even know that we want them.

When the revolution comes, much of what the company learned in the disc-based business will translate into the new digital reality, and I believe that Netflix will be a true contender in that massive space too. Long-term buy and hold, baby. Loooong term.

Further Foolishness:

Netflix, Amazon.com, and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns stock in Netflix but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure will challenge Netflix to a customer-satisfaction cage match any day of the week.


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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 18, 2008, at 2:48 PM, joerosenberg wrote:

    Running the systems for DVD rentals is complex and NFLX is solid! I know, I run the software for SugarDVD.com, the largest rental by mail for Adult DVDs online. Hats off to NFLX for addressing this publically and quickly. Anyone who gets upset at their delay can drive to the video store or use video-on-demand!

  • Report this Comment On August 22, 2008, at 10:43 PM, The903Breeze wrote:

    I came home to a new movie in my mail box today..I love that feeling. You hit the nail on the head, slapped the gorilla in chute, and poked that stick right in Tom's eye fella!

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