Netflix (Nasdaq: NFLX ) is a very simple business -- to the point of leaving investors scratching their heads sometimes.
If the idea is to sell movie rentals to as many consumers as possible, why does Netflix agree to a 28-day delay before sending out new releases from Time Warner and other major studios? What's keeping Amazon.com (Nasdaq: AMZN ) or Apple (Nasdaq: AAPL ) from either crushing Netflix in the video rental market, or simply buying the company wholesale? Isn't this little fish swimming in far too large a pond, due to get eaten alive any minute now?
Look who's talking
Netflix CEO Reed Hastings is nothing if not candid, but he doesn't always send out information along the most obvious routes. The hypothetical questions I asked above have been answered in a slide presentation -- on the company's recruiting and job-posting site.
The business opportunity ahead of Netflix today is simple, according to the slide deck: "Lead streaming subscription for TV shows and movies." The road ahead offers "huge opportunity, many threats, daunting challenges," and "big dreams. Innovators needed."
DVD rentals by mail are mentioned every so often, but only in passing. Streaming is the future, and it will eventually muscle out the DVD business altogether. The shipping of discs looks set to peak around 2013, and then go into a slow decline.
But wait -- there's more!
That much was already obvious from as far back as 2006. That was before Coinstar (Nasdaq: CSTR ) introduced $1 new-release rentals, before Netflix even introduced its movie-streaming service, before the studios started pushing time-delayed new releases to Netflix, and at the height of the Total Access onslaught by Blockbuster (NYSE: BBI ) .
The more enlightening material in this presentation deals with all of these issues.
Netflix doesn't want to be everything to everyone. Video entertainment is a massive market, and "to have profitable growth in such a huge market, you find a segment in which you can gain and maintain leadership." Never mind new releases, video games, dating services, and kitchen sinks; this company has found its niche and is content to defend it to the death.
The market nook that Netflix occupies is a low-cost, long-tail space. Hastings wants to provide "content so broad, engaging, and affordable that everyone subscribes to Netflix. We are evolving to be more movie-catalog focused and more prior-season TV-show focused, as opposed to new-release focused."
In other words, leave new releases to Redbox and to Comcast (Nasdaq: CMCSA ) pay-per-view. Let potential rivals enter the movie-subscription space and go home defeated -- with nowhere else to go, Netflix will leverage a decade of growing studio relationships and a significant technical lead and defend its leadership position to the death.
The new-release delay is all right, because that's not where Netflix holds competitive advantages. If the average consumer sticks with cable or satellite service for the bulk of video delivery, and then adds on a cheap Netflix subscription to fill out the back catalog, that's all Hastings really wants.
The Hollywood ending
With that attitude at the top, it's imperative for Netflix to keep growing its subscriber base as swiftly as possible. Amazon and Apple seem unlikely to make any move -- acquisitive or competitive -- into the low-margin market where Netflix makes a living, though Google (Nasdaq: GOOG ) gets fingered as a potential threat. Improving ad targeting in and around ad-supported movies could cut into the Netflix value proposition, if Google or anybody else can pull it off. As great as Google is at the advertising game, that's still a big "if."
Read the slideshow for all the gory details, but this is what it boils down to:
The name of the game for Netflix has been incredible subscriber growth from very early on, so nothing has really changed -- except the tools the company uses. I can't see anybody with much of a reason to buy the company, because low-cost and low-margin services don't attract a whole lot of suitors. Burning the ships to focus on nothing but streaming back-catalog movies will keep potential Netflix-killers at bay. Fanatical efforts to keep customers satisfied won't hurt, either -- and the few who complain about the lack of new releases were barking up the wrong tree to begin with. That expensive service can be found elsewhere, and typically for more money. That's somebody else's market cranny.
And in the end, Netflix gets to keep growing in its chosen market niche, to the delight of shareholders and customers alike. I'm perfectly fine with that.