Netflix Shakes Hands With Sony

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Netflix (Nasdaq: NFLX  ) is playing nice with yet another studio, agreeing to hold back on renting Sony (NYSE: SNE  ) movies during the first 28 days that a new release is out on DVD. According to All Things D's Media Memo column, Sony will reward Netflix's restraint with cheaper DVD prices and broader streaming access.

I'll sheepishly admit that I adamantly opposed this strategy when Netflix began striking similar deals earlier this year.

"Netflix Sells Out Its Subscribers," read my January headline, after the company brokered a trendsetting pact with Time Warner (NYSE: TWX  ) .

Despite the cost advantages and the desire to build up its digital catalog, I felt Netflix was cheating subscribers by accepting the four-week window. If local video stores were stocking a new release, and cable providers were renting it on demand, why was Netflix holding out? I felt that Netflix was turning into a second-run cinema house, and I wasn't alone. Two-thirds of the more than 1,700 respondents of the poll at the end of the column agreed with me.

Well, I don't know if the other 1,131 voters have had a change of heart, but I can now say I was wrong. Sure, I get steamed when I see television ads for an upcoming DVD, or see the titles being released come Tuesday in an ad circular -- only to find that I'm four weeks away from having a shot at that flick through Netflix.

However, the masses have responded. They're cool with the 28-day window. Netflix shares have nearly tripled over the past nine months. Churn is low. Subscriber growth is through the roof.

Would things have played out differently if Redbox parent Coinstar (Nasdaq: CSTR  ) hadn't followed suit, or if Blockbuster hadn't filed for bankruptcy reorganization? Probably not. Netflix has become an all-weather performer, seemingly immune to the actions of others.

We can't definitively say that Netflix has these deals unharmed. Subscribers continue to downgrade to cheaper plans since the move, indicating that folks are either gravitating to the streaming model, or turning to just one-disc-out-at-a-time to budget for the newest releases elsewhere.

However, as long as earnings, subscriber counts, and share prices point higher, Netflix's gutsy strategy at the beginning of the year clearly seems validated.

How do you feel about the 28-day window, now in place with four of the major studios? Share your thoughts in the comment box below.

Netflix is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

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 (6) | Recommend This Article (3)

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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 October 07, 2010, at 10:04 AM, maximus9 wrote:

    I think the 28-day window deals are a big positive for Netflix. In exchange NFLX is getting expanded licenses for studio’s content which will further help bring down its distribution costs and increase the margins. Netflix is focused on expanding their streaming business and they are already on track to double their subscriber base by next year. Their business model is highly scalable with low costs, great customer service and best of partnerships. It will take far more in advertising costs alone for rivals to catch up with Netflix's subscriber base.

  • Report this Comment On October 07, 2010, at 10:14 AM, feldmail wrote:

    Rick, the point here is that NFLX is positioning itself for the future. Physical disk rental is the past. Studios want to minimize this low margin business and replace it with VOD and other forms of digital. Within 5 years, you will probably see the rental market composed of just 2 elements: NFLX for catalog titles and the rest of the competion digitally providing new releases. This leaves anyone in the physical disk business as dinosaurs (Coinstar's Redbox, NCR's Blockbuster Express, remaining brick and mortar stores, etc.).

  • Report this Comment On October 07, 2010, at 2:20 PM, emptygestures wrote:

    Although Redbox doesn't have to wait 28 days with Sony thus they already have the remade Karate Kid when NFLX will have to wait 28 days. This is going to make a lot of NFLX subscribers bitter and perhaps even result several cancellations.

  • Report this Comment On October 07, 2010, at 4:40 PM, morrisjd wrote:

    I can wait 28 days. At least that way, I have some ratings input on whether the movie was all it was cracked up to be.

  • Report this Comment On October 08, 2010, at 12:26 PM, AlphaCenturion wrote:

    I too was very skeptical of the 28-day window strategy when it was first announced but I think by now it has proven to be a perfect fit for Netflix's model. Netflix subscribers in general place more value in the convenience and comprehensiveness of a broad streaming catalog over the superfluous marginal benefits of new releases. Studios are happy because they make more money on those new releases and Netflix subscribers are happy because they have a much larger selection of instantly available movies to stream. It's win-win.

  • Report this Comment On January 14, 2011, at 1:53 PM, nickfinia wrote:

    I can wait 28 days. The price is right and there are plenty of other things to watch on Netflix.

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