Netflix in 2012

A headline in Saturday's Wall Street Journal aims to strike doubts about the viability of Netflix's (Nasdaq: NFLX  ) business model: "Netflix Could Get Snagged in Move to Net"

If you follow the thesis, digital delivery could be the end of the company's market dominance in loaning out celluloid.

"In the DVD world, Netflix's efficient and inexpensive service has helped it triple its subscriber base to nine million since 2005," claims the article. "But in the world of digital delivery, whatever competitive edge it enjoys is dulled."

This isn't the first time that someone has waxed pessimistically about the company's Web-tethered prospects.

"The future will be challenging to both the optical disc as a medium and the company's ability to compete in the cutthroat realm of digital delivery," I wrote this past summer.

"It's unlikely to be a leader in digital delivery," I wrote two years ago. "Yes, it's there already, but it has every incentive to lay a box of nails on the migratory road that will level the playing field, if not hand the leadership to online portals and cable providers."

DVD rentals have been very good to Netflix, with only Blockbuster (NYSE: BBI  ) stepping up to the challenge of building out the network of distribution centers necessary to compete, providing overnight delivery for the postage cost of first-class mail.

The same can't be said for broadband-delivered content. Between cable providers with video on demand and giants like Amazon.com (Nasdaq: AMZN  ) and Apple (Nasdaq: AAPL  ) serving up video streaming and/or downloads, it's a crowded space.

I believe Netflix will make it out just fine. However, let me make my argument from a perspective that is beaming to you from three years in the future.

Party like it's 2012
Last January I took a look at what several actively traded companies may look like in 2010. Rather than come back this year with some 2011 prognostications, I'm going to go all the way out to 2012 in my time travel reports this month.

I didn't plan on kicking things off with Netflix, but the pessimism raised by the Journal piece over the weekend makes it a logical starting point.

Why should Netflix fear digital delivery? It has already set itself apart with its smorgasbord model. With nearly every major player going for a la carte pricing deals, Netflix stands out by including unlimited streaming, and at no additional cost to existing subscribers.

Is the offering sustainable? Netflix has just 12,000 of its more than 100,000 DVD titles available through online streaming. Every licensing deal is different. Some involve Netflix paying a flat fee regardless of viewership, while others follow the more conventional royalty schedules. Either way, this is obviously going to get more expensive to offer as the company widens its online title availability and more subscribers warm up to digital delivery.

Should Netflix worry? Let's take a step into the theoretical future and find out.

Three years hence
Netflix in 2012 isn't all that different from 2009. It is still a force in delivering video entertainment to end users. Online delivery is a major part of the company's model, though it still thrives on sending out optical discs in DVD and Blu-ray formats. Even though Wi-Fi connectivity is pervasive and most new television sets come with built-in connectivity, there is still demand for discs from folks who crave the special features, online games, and 100% uptime convenience.

Netflix will have made it through the digital migration by sticking to its knitting. Remember the 2008 deals to allow owners of TiVo (Nasdaq: TIVO  ) DVRs and Microsoft's (Nasdaq: MSFT  ) Xbox 360 access to Netflix's streaming service through their televisions? Well, Netflix will be available through nearly every broadband-enabled home theater device (yes, even Apple TV -- which finally became a market hit after some serious tweaks in 2010).

The all-encompassing Netflix service has become a popular complement to the more ruthless rivals in premium piecemeal streams. Those who figured that Netflix wouldn't have a digital advantage ultimately had to eat crow, because the Netflix recommendations engine that knows movie buffs better than they know themselves made it even more appealing. Netflix subscribers get superior custom-tailored film suggestions and even Amazon can't touch that, despite its pioneering ways in collecting customer preference data points.

People were paying an average of $13.60 a month toward the end of 2008. Four years later, they are paying closer to $20. The prices went up, with Netflix simply following the two leaders of 2012 DVD rentals -- Blockbuster and McDonald's (NYSE: MCD  ) -- higher.

Netflix is also making more than just subscription revenue. Some of the catalysts in 2012 include:

  • Healthier growth in mailer-based advertising, offsetting fulfillment costs with more ads, promotions, couponing, and even demo discs.
  • Shaking its recommendations engine moneymaker, Netflix partners with retailers to offer products like "DVD of the Month" services that are customized to subscriber preferences.
  • Yes, Netflix finally got into video game rentals, though it is an exclusive deal with Microsoft for Xbox and Windows discs.

Don't fear the future. Embrace it.

I'll be back over the next few days with a glimpse at what other companies might look like come 2012.

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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.


Read/Post Comments (7) | Recommend This Article (12)

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 January 12, 2009, at 3:03 PM, ITVGuy wrote:

    I suspect the content providers are going to cut out the middlemen and stream video content directly to subscribers with Internet enabled TV sets.

  • Report this Comment On January 12, 2009, at 6:52 PM, mattack2 wrote:

    I haven't used the Netflix streaming yet (I have a Series 3 Tivo and a TivoHD). The "all you can eat" feature of their streaming is what intrigues me though, especially since I'm already a Netflix customer (currently my account is 'on hold' as I catch up with already-Tivoed material).

  • Report this Comment On January 14, 2009, at 11:52 PM, commentguy wrote:

    I hate being restricted all this false technology. I would rather watch TV channels around the world and movies in 1080p Blu-ray on my PC and set top box on MyTVPAL ( http://www.mytvpal.com ) that’s made using Matrixstream ( http://www.matrixstream.com ) IPTV platform.

  • Report this Comment On January 27, 2009, at 1:08 PM, MADACASTO wrote:

    This one has been predictable, considering the dominance of the retail players, primarily Blockbuster. It's now "gentlemen start your engines" in the digital distribution race. Good start by Netflix by nailing video player collaborations to streamline the service-to-television approach, especially with gaming devices - to harness the youth segment relationship.

    If the Netflix empire can employee their marketing expertise and efficiencies in the digital distribution as effectively as they have the disc driven media market, they will become an absolute goliath that will make a 15-16% day seem miniscule by comparison. This is a "google" sized growth prospect and bound to be a major player.

  • Report this Comment On February 04, 2009, at 12:28 PM, Shar54 wrote:

    I bought Netflix at 22 and haven't looked back. I liked it because I was a customer and I love the instant streamlining to my Television through my computer. I agree that this is a stock that has alot of room to roam and if it ever starts paying dividends will be a major large cap by 2012. Buy and hand on!!!

  • Report this Comment On May 20, 2009, at 8:47 AM, coffeeman11 wrote:

    well Netflex isnt the first company to offer streaming movies, and they certainly wont be the last!

    once broadband becomes more powerful and plentlyful we will see everyone offering this kind of service!

    like one of the above posters said, the ISP companies might even team up with hollywood to allow this..

    once warner bros, or turner movies notice that they can get in on this... netflex might have a hard time against the big boys...

    BLOCKbuster well they have been around for a long time, and they have a lot of connections with distributors

    once blockbuster moves into video on demand, and allows live streaming or downloading of their movie titles, I think Blockbuster will take back the market share!

  • Report this Comment On July 23, 2009, at 4:08 PM, raider1234 wrote:

    In the end free video will win out and take market share. Whether it is due to a severe recession, broadband speeds or what not. Netflix exist because of hollywood, hollywood can strangle netflix anytime the please, due to that dependency netflix is not all that safe compared to services such as p2p.

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