Isn't it funny how different analysts will interpret a story in entirely different ways?
A pair of unrelated news stories have resulted in investing implications for Netflix (Nasdaq: NFLX ) , but I don't agree with either one.
Last week, the story was Comcast's (Nasdaq: CMCSA ) controversial move to cap residential broadband Internet usage at 250 gigabytes a month. Some wondered if Comcast has an ulterior motive, since the move will hurt companies like Netflix and Amazon.com (Nasdaq: AMZN ) that are making strides in digital video delivery, which have been eating into the cable giant's pay-per-view business. Some see this as a negative for Netflix. I don't.
This week, the story is the rollout of a DVD-ripping program by RealNetworks (Nasdaq: RNWK ) . Unlike more nefarious piracy apps, RealDVD actually retains copy-protection features. The software allows you to make an archival copy of a DVD to watch on your computer, but you can't pass it on to a buddy or burn fresh DVDs. Silicon Alley Insider sees this as a major win for Netflix. I don't.
To RealDVD or not to RealDVD
I have a one-word response to the notion that RealNetworks' $30 program will be a Netflix ally: Blockbuster (NYSE: BBI ) . If I can have two more words: Total Access.
Blockbuster's Total Access is probably the best thing that ever happened to Netflix. When Blockbuster clenched its dagger between its teeth and jumped into a brutal pricing war with Netflix two years ago, the one thing it swiped from Netflix was its most active users.
It did Netflix a favor. The Total Access pitch of returning DVDs to a physical store to get an immediate follow-up was like honey to DVD-ripping bees. Internet boards lit up with folks who were now going through dozens of Blockbuster rentals a month, making copies of the DVDs before going back for more.
Netflix promises unlimited rentals, but it's really a model that works only if the average customer rents no more than six to eight titles a month. Since Netflix packages each new rental, pays shipping both ways, and has revenue-sharing agreements with Hollywood studios, its "unlimited" model is a loss leader for consumers who go through a ton of movies every month.
Blockbuster learned its lesson. It adjusted its prices to make sure that hyperactive store-based renters pay more than casual mail-based ones.
Now do you see why I disagree with this week's Silicon Alley Insider conclusion? If RealDVD buyers join up with Netflix, it will be to milk the company dry as they turn over their rentals a few hours after they get them. Even if Netflix has safeguards in place to slow down these whirlwinds, it's not a positive for Netflix on the bottom line.
It's Comcastic, baby
Cutting against the grain on the pro-Netflix side, I think Comcast capping its broadband usage will be great for Netflix.
Netflix is doing some pretty neat things with digital delivery. Those include streaming a reasonable chunk of its library at no additional costs to its subscribers. It may have been an infrequently used service when it was limited to PCs, but now the content Netflix streams can be seen on television through devices like Roku boxes, LG electronics, and Microsoft's (Nasdaq: MSFT ) Xbox 360s.
Is capping usage a threat to digital delivery? For active consumers of high-def celluloid, sure. However, this is going to be a cutthroat industry. Microsoft is already battling companies like Apple (Nasdaq: AAPL ) and Amazon.com, but others are likely to come, and that includes movie studios who may want to bypass the middlemen entirely and deliver digitally directly to the end user.
Netflix has some amazing advantages. It knows its movie fans. It can turn a profit. However, if digital delivery becomes cost-prohibitive, it really pushes consumers back to DVD rentals. Who owns that space? Netflix, baby. With as many as 9.7 million subscribers by the end of this year, no one can compete with Netflix when it comes to physical home delivery of DVD rentals. If Comcast forces other broadband providers to begin metering usage, it will just drive digital Amazon and Apple customers back to Netflix.
So am I wrong? Are the others right? We're all entitled to our opinions, so I just had to go on the record with mine. Time will determine the visionaries. It always does.
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