Best Buy Swings at Netflix -- and Misses

Best Buy (NYSE: BBY  ) is stepping into the digital video market with pomp and circumstance. Its CinemaNow video rental service should appear on connected TV sets, Blu-ray boxes, and other home-entertainment components this summer. But while Netflix (Nasdaq: NFLX  ) might seem the logical target of Best Buy's new salvo, a host of rival renters ought to take cover instead.

Under Best Buy's wing, CinemaNow will market itself as a provider of fresh goods. Like Blockbuster (NYSE: BBI  ) does in its bricks-and-mortar video stores, CinemaNow will offer newly released DVD titles on day one of their release. Customers will pay about $4 per rental or $15 to own a permanent viewing license, but will not be locked into a subscription of any kind. LG Electronics and Samsung are first in line to provide compliant hardware, but given Best Buy's retail heft, I would imagine that Sony (NYSE: SNE  ) , Panasonic (NYSE: PC  ) , and every other company that matters would be quick to take a number and get in line.

As a Netflix investor, I welcome this CinemaNow buildout for several reasons:

  • A wider range of devices that can play CinemaNow videos will also be fertile ground for Netflix to insert its own video platform. Would you rather buy a Blu-ray player that supports one digital video service, or a player that offers all of the important ones? Healthy competition will help the addressable market grow.
  • The pay-per-rental model fills a different niche than Netflix subscriptions, and I think Best Buy is more likely to expand the total digital video market than to steal customers from Netflix. Investors in Blockbuster and Redbox operator Coinstar (Nasdaq: CSTR  ) should be much more worried, because Best Buy is aiming at the heart of their market.
  • The more, the merrier! If CinemaNow gains traction with consumers, the studios will have one more data point showing that video downloads work as a business. In the end, Netflix and everybody else will benefit from a more open licensing environment and wider market acceptance of the whole digital concept.

Best Buy digital video director Ryan Pirozzi says that it'll take some time for the new delivery model to take over, and predicts that Best Buy could start removing DVD racks from its stores in 2012. That's a couple of years faster than I had expected, dude. The future is digital any way you look at it, and now Best Buy has joined the fight to become the preferred rent-as-you-go provider.

But even as the market for piecemeal digital rentals gets ever more crowded, I'm still waiting for someone to challenge Netflix's subscription model.

Fool contributor Anders Bylund owns shares in Netflix, but he holds no other position in any of the companies discussed here. Best Buy is a Motley Fool Inside Value choice. Best Buy and Netflix are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a bull call spread position on Best Buy. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On May 19, 2010, at 4:49 PM, whatwhatwhat89 wrote:

    I think it will help spur more competition but regardless you do realize Best buy sells netflix subscription cards

  • Report this Comment On May 19, 2010, at 9:17 PM, JudasTouch wrote:

    Netflix = movies.

    Best Buy = movies ... CDs ... computers ... iPods ... vacuums ... refrigerators ... big screen TVs ... laptops ... video game systems and discs ... Snuggies and shoe storage bins ... Gummi bears and M&Ms ... musical instruments (some locations) ... GPS units ... PDAs ... DVD players ... clock radios ... cameras ... washer/dryer combos ... thumb drives ....

    If focus matters, and it almost always does, then I don't think Best Buy is any threat to Netflix.

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