Netflix Has a Million-Dollar Advantage

By Anders Bylund (TMF Zahrim)
June 29, 2009 | Comments (4)

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So you think Netflix (Nasdaq: NFLX) will become irrelevant in the all-digital movie watching era? Think again.

I am supremely confident that Netflix holds unique advantages over the competition that will keep the company at the forefront of any new movie rental market. When the DVD joins 8-track players and 5.25-inch floppy drives on the scrap heap of storage format history, Netflix will still be a digital movie leader.

So why do I believe in Netflix even as major rivals like Blockbuster (NYSE: BBI) and Amazon.com (Nasdaq: AMZN) are scaling up their own solutions for streaming or downloading digital feature-length movies? It's because the media giants of the future will be the ones that know how to guide me to the content I want to see. And Netflix knows more about entertainment tastes than anybody else.

The Netflix Prize competition is evidence of that fact, and also shows how seriously Netflix takes the whole movie recommendation issue. The competition kicked off nearly three years ago, dangling a $1 million prize in front of software developers and data-mining experts the world over. All you had to do to get that fat cash was to outdo the company's own recommendation system by a measly 10%.

Over 41,600 attempts later from 4,670 different teams in 184 countries, the prize may have been claimed. Once Netflix verifies the efficacy of the submission from team BellKor's Pragmatic Chaos and gives everyone else 30 days to beat their 10.05% improvement over the Netflix Cinematch system baseline, it's all over but the crying. The team includes senior research engineers from AT&T (NYSE: T) and Yahoo! (NYSE: YHOO).

Think about that for a moment. The winning team is actually an amalgamation of several of the challenge's previous leaders. There was a serious monetary carrot leading them on. And it still took three years to better the company's own system up by a modest 10%.

It will take a lot more than $1 million of in-house research for Blockbuster and company to become a more valuable movie-finding resource for curious consumers. TiVo (Nasdaq: TIVO) might have a shot at it after collecting thumbs-up ratings worldwide for a solid decade. Amazon does have a five-star ratings system, but I don't see the massive volume of inputs you get at Netflix and TiVo.

A new entertainment age is dawning. But Netflix will lead the new pack, too.

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Fool contributor Anders Bylund owns shares in Netflix, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.

Comments from our Foolish Readers

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  • Report this Comment On June 29, 2009, at 3:24 PM, jkellynewyork wrote:

    I dont think people need netflix to tell them what they should watch. Critic opinions, user ratings on Yahoo and amazon, rotten tomato and the like, and word of mouth do just fine.

  • Report this Comment On June 29, 2009, at 5:41 PM, zenmasterV wrote:

    I agree netflix is ahead of the game, but primarily because they are already the leading place people go to get movies. They also already provide a limited library of movies for streaming, and are compatible with many people's set top boxes. They could still lose the war, if netfilx doesn't get serious and begin offering all new releases for viewing via streaming, and a competitor does this, they lose all their advantages. Who cares if they can make a recommendation... can I watch a new movie on my TV without waiting for a disk or going to the store? Thats the question to answer.

  • Report this Comment On July 01, 2009, at 1:41 PM, Saintramus wrote:

    Hey, I'm a NFLX fan and use their service, but...

    I rated a 'bunch' of movies, I went to their website and found a recommendation waiting for me, presumably based on everything I'd rated before and the movie I had just watched and rated the night before, and this movie was so bad, disgusting and a piece of sheiss, that I don't think I made it through a minute and a half of it. I've basically almost quit rating anything, in part because there aren't enough breakdowns in the rating system; I usually feel I'm inbetween liked it and either liked it a lot or didn't like it.

  • Report this Comment On July 23, 2009, at 3:58 PM, raider1234 wrote:

    Netflix will end up lagging once their middle aged demos start to retire and their base begins to peak off. Netflix will end up going the way of aol/blockbuster.

    The real leaders will end up being the file sharers whose original goal was to have free online content, the studios will eventually create such free streaming content to just keep up.

    Don't ignore the potential power of the international market and younger users.

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