Netflix Isn't Done Giving Gifts

Instead of raising prices or scaling back perks, Netflix (Nasdaq: NFLX  ) keeps making its service more attractive.

A new policy at the leading mail-order rental service for DVDs is welcome news to its 8.7 million subscribers. Now, when the next available title in a renter's queue is being shipped from a faraway distribution center, a queue title that's locally available will also be shipped out at no additional charge. The Netflix subscriber will then have an extra flick in the mail the next day.

As Netflix grows -- now with 55 regional distribution centers as far away as Anchorage and Honolulu -- it just makes sense for the company to curb its cross-country mailings to avoid frustrating users. The new policy provides the best of both worlds, since a subscriber will get the requested film in a few days, but has a bonus DVD to watch in the meantime.

But how will it impact shareowners?

Good question. With the exception of charging customers who rent Blu-ray discs $1 more a month for access, Netflix has held its prices in check. In fact, the average customer pays just $13.60 a month these days, nearly a buck less than the monthly average a year ago. This should drive Netflix to devise new ways to improve margins -- yet its actions suggest otherwise.

Digital streaming of 12,000 of the more than 100,000 DVDs in the Netflix library is offered at no additional cost. Heck, the company actually promotes the service, which is newly available this quarter through many home-theater appliances, like LG and Samsung Blu-ray players, TiVo (Nasdaq: TIVO  ) DVRs, and Microsoft (Nasdaq: MSFT  ) Xbox 360 video game consoles.

But the customer freebies aren't free to Netflix. The company still has studio royalties to pay, as well as roundtrip postage and bandwidth overhead.

Providing all these perks at no charge may seem like an unconventional strategy, but it clearly has to help the company with customer retention. If members are happy -- and clearly, the perceived value of a Netflix subscription is greater today than it ever was -- they will not stray. Acquiring new subscribers doesn't come cheap. Gross subscriber acquisition costs clocked in at $32.21 for each new user this past quarter. Keeping churn in check frees the company to spend less to attract members through other channels.

Things can change, of course. Surely, digital video specialists like Apple (Nasdaq: AAPL  ) or Amazon.com (Nasdaq: AMZN  ) will eventually roll out an "all-you-can-stream" model. Then again, since Apple has never followed Napster or RealNetworks (Nasdaq: RNWK  ) into music subscription models, maybe Netflix can continue to grow in its niche unchecked.

Blockbuster (NYSE: BBI  ) is giving digital delivery a go with its attractively priced set-top box solution, but the video retailer would rather lure you into its stores, where it stands a better chance of snagging more of your money.

So Netflix definitely gets the concept of winning over subscribers. However, its gift-giving is not an entirely selfless act. Netflix is a business. It has subscribers to keep -- and competition that it has thus far been able to keep at a comfortable distance.

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Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. He also owns shares in TiVo. Rick is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On December 30, 2008, at 10:47 AM, BigRedFed wrote:

    I like to think about it as, the more freebies that netflix gives out, the longer users will keep a video at home. If you can watch a movie instantly online, then you won't ship it out. This means netflix requires fewer dvds, and in the long run lower postage costs per year as more dvds sit in the warehouse or at the end user's house

  • Report this Comment On December 30, 2008, at 11:09 AM, thenext44 wrote:

    The xbox feature is great! Thanks netflix.

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