28 Days Later

It has now been a couple of months since Netflix (Nasdaq: NFLX  ) began holding back rentals from Time Warner (NYSE: TWX  ) for a few weeks. In exchange for delaying its rentals for 28 days after they hit the home market, Warner Home Video is giving Netflix a price break on a greater number of copies of DVDs. It is also opening up more of its older catalog for online streaming through Netflix.

This has been a controversial move to some and a non-event to others. The stakes were raised earlier this month when News Corp.'s (NYSE: NWS  ) Fox and General Electric's (NYSE: GE  ) majority-owned Universal made similar deals.

I've decided to interview Netflix's policy, at least in my head. The only problem is that the policy's responses are limited to the movies that have been subjected to the 28-day release window this year.

Let's see how it goes.

Rick: I'm seeing a lot of ads for this DVD that hits stores tomorrow. It's a romantic comedy starring Meryl Streep, Alec Baldwin, and Steve Martin. I can buy it in stores. Blockbuster (NYSE: BBI  ) will let me rent it through one of its stores, stream it online, or have it delivered by mail. I can also play it instantly -- with no buffering concerns -- through my cable provider's video-on-demand offering. Why can't I check this out through Netflix for another four weeks?

Netflix: It's Complicated

Rick: Yes, but I can't imagine the studio will still be advertising this release when Netflix subscribers have access to it later next month. Netflix and Coinstar's (Nasdaq: CSTR  ) Redbox are becoming the second-run bargain cinemas of the rental space. I think this is going to be a problem. This tiered stance will be regrettable in a few …

Netflix: Crazy Heart

Rick: That's harsh, though I admit that I'm passionate about my distaste for the 28-day window. You claim that less than a third of your rental shipments are for new releases, though I argue that tight supply of new releases forces a lot of older catalog titles to be shipped out instead. In a recent Consumerist interview, Blockbuster CEO Jim Keyes estimates that 60% to 80% of his chain's rental demand is for new releases. There may be benefits to not being Blockbuster these days, but don't you need new releases to matter to the mainstream market you're now reaching out to? Who will your market be in a few years? Fans of classic flicks? Antiques collectors?

Netflix: The Time Traveler's Wife?

Rick: Exactly. Many of my fellow subscribers don't seem to care. I mean, you actually added 1.7 million subscribers during your first quarter under this policy. Great quarter, by the way. However, subscriber counts have popped 35% over the past year, yet revenue is up just 25%. Everyone's seeing the great numbers in last week's report, but I'm seeing folks trading down to cheaper Netflix plans. Could it be that Netflix -- trying to be all things to all people, including playing nice with the studios -- may actually be forcing movie buffs into relying on at least two movie sources for folks who crave DVDs when they come out?

Netflix: The Blind Side

Rick: That's it! Time Warner made the original deal, publicizing that 75% of its sales occur during the first four weeks of a movie's release. It means that your flicks won't be available for rental until only a quarter of the eventual buyers are left. There's a void there. And if this is truly your long-term plan, there's also an opportunity. Wouldn't it make sense to cut a deal with Amazon.com (Nasdaq: AMZN  ) -- before the leading online retailer morphs into a threat -- where you offer to sell new DVDs and piecemeal digital rentals through it during the four-week lull? Don't brand it as an Amazon.com deal. The two of you can come up with some kind of new brand for the venture as a pseudo-disguise so you're not just handing folks over to a potential rival.

Netflix: Avatar

Rick: I guess. Be honest about it, though. It's a delicate balance. After all, I have a couple of bones to pick with how you are communicating this policy to subscribers. I've been a member since 2002 and I have yet to see this 28-day window explained in any member communique. Even if a subscriber looks up the affected films through your site, it's not spelled out. Avatar came out on Earth Day last week, but Netflix.com's page simply spits out "DVD and Blu-ray available 5/20/2010" without explaining why.

Netflix: The Invention of Lying

Rick: No. Netflix isn't lying. However, it certainly can afford to be a bit more upfront about these things. After all, I remember a big selling point for the deal was the ramped-up availability of affected titles. Well, I waited four weeks for The Time Traveler's Wife to be made available, yet it spent more than a week in my queue after that as "long wait" in terms of availability.

Netflix: Sherlock Holmes

Rick: Well, I have to look around. I'm not just a subscriber, but a shareholder as well. I see you're doing so many things right, and along comes this policy which is wrong on so many different levels. Why not publish hard data about the extra copies? Why not spell out the additions to the digital library as a result of these deals? Why lead us to wonder if we're being had as subscribers when we see widening net margins like this past quarter, when we used to cheer as investors?

Netflix: It's Complicated

Rick: Tell me about it.

Will this policy come back to bite Netflix, or is it a great move? Share your thoughts in the comments box below.

Amazon.com and Netflix are Motley Fool Stock Advisor picks. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also 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 (9) | Recommend This Article (9)

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 April 26, 2010, at 1:42 PM, mschmalf wrote:

    I've been a member since 03/2000 and couldn't be happier overall (aside from selling my stock too soon). As a regular user I just queue up movies, TV shows, etc. and watch them as they roll in. I move any new releases I want to the top and they eventually show up. It's really not an issue with a large enough queue.

  • Report this Comment On April 26, 2010, at 1:50 PM, samueld wrote:

    Rick: So what do I do?

    Netflix: Blockbuster

    Blockbuster is not what it once was, I believe it has adapted quite nicely although it did take a long time.

    Go check out their deals, prices and offerings and how it stacks up against Netflix. I believe you will be pleasantly surprised.

    Their deal where you pre-purchase 25 movies and get a free 2wire player for $99 is amazing.

  • Report this Comment On April 26, 2010, at 2:40 PM, emptygestures wrote:

    Let me get this straight if blockbuster is surviving strictly on new releases then their entire stores (or what's left of them) must be stocked with just new releases. I'm sure Avatar occupies at least 4 shelves. So this is it for them?

    They can sustain their company, a billion dollar debt, and compete with just new releases?

  • Report this Comment On April 26, 2010, at 2:58 PM, samueld wrote:

    - Rent new releases the day they are released

    - By Mail Returns and Rentals

    - DVDs shipped in 1-2 Days

    - Over 95,000 Titles

    - Blu-ray Included in Plan

    - In-store Returns

    - In-store Exchange

    - In-store Game Rental Discounts

    - Online DVD and Game Purchase Discounts

    - Online Blu-ray Purchase Discounts

    Let's add to this online streaming as well as the kiosks.

  • Report this Comment On April 26, 2010, at 3:06 PM, downpour046 wrote:

    Very entertaining thanks for the post.

    They are sustaining a 28 day window AND offering the same service as NetFlix. Plus offering a physical locations & kiosks. NetFlix's only model is older films and tv shows. Once BBI stops wobbling on the edge the competition will begin to increase. Right now BBI is waving in the air trying to re-balance themselves, and the studios are the ones reaching out their hands to balance them.

  • Report this Comment On April 26, 2010, at 3:06 PM, downpour046 wrote:

    Very entertaining thanks for the post.

    They are sustaining a 28 day window AND offering the same service as NetFlix. Plus offering a physical locations & kiosks. NetFlix's only model is older films and tv shows. Once BBI stops wobbling on the edge the competition will begin to increase. Right now BBI is waving in the air trying to re-balance themselves, and the studios are the ones reaching out their hands to balance them.

  • Report this Comment On April 26, 2010, at 3:10 PM, afoolindeed8 wrote:

    After being a Netflix member since almost the very beginning and happy for many years, I finally got fed up with months' wait times for new releases on Blu-ray, further aggregated by the 28 day delay. I frequently found myself renting at a local Blockbuster just to get anything new. So I put Netflix on hold, and joined Blockbuster Online and could not have been happier. In 6 weeks there, I have received more new releases than 6 months at Netflix.

    Sadly, my Account-On-Hold at Netflix is nearing its end. Unfortunately, the Netflix queue manager is much better than Blockbuster's, and I can add movies way longer ahead of their future release.

    Now, my Netflix investment on the other hand is doing great, and I am glad to hear of happy customers, even though I wasn't one of them! However, I wonder how many customers are on hold and not counted in the churn / customers leaving?

  • Report this Comment On April 26, 2010, at 3:39 PM, Ironbob wrote:

    emptygestures, please, are you serious? Almost every video service out there relies on new releases! That's what sells hands down ALL of the time. I guess Netflix and Redbox didn't get the memo that usually (actually always) the first to market gets the lion's share.

  • Report this Comment On April 26, 2010, at 8:11 PM, SeekTheFire wrote:

    I hear you Rick. Good questions. I love Netflix as a customer and as an investor. My thoughts around the 28 day thing is that this is a short term strategy. DVDs by mail is the OLD Netflix business. Streaming is the NEW developing business. The 28 day policy may not matter in two years when everyone is streaming HD over faster connections to their iPads and enabled TVs. The deal cut will hopefully help build Netflix's streaming catalog and lead to long term strength. New releases are important and my hope is that Mr. Hastings has a new release streaming deal in the works that will be much better than 28 days delay for DVD by mail.

    I personally can wait 28 days since I see the movies I really want to see right away on the big screen in IMAX. :)

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