I like a good story. I read a little fiction before bed every night, and I love a movie with a strong plotline.
But sometimes, what appears to be a plausible story can end up looking like Swiss cheese if you take a close look at it. My fellow Fool Anders Bylund has told a pretty good tale about Netflix (Nasdaq: NFLX ) as a compelling investment, but I just don't think it holds up to closer examination.
Anders' first bullish bullet compares Netflix to Apple (Nasdaq: AAPL ) : "Apple already broke open the levees for the music industry, setting the stage for an iTunes-like upheaval of film distribution. That's what Netflix is doing, better than anyone else."
That sounds good, but there's a significant difference. Apple has built an entire ecosystem that its music sales flow through. By first locking consumers into its music players, Apple was able to drive those customers to the iTunes platform, which makes purchasing music quick and easy. But it gets better. Having set up their entire music library in iTunes, customers find that switching costs -- from iTunes or Apple music products -- becomes uncomfortably high, so they keep right on doing business with Apple. It's a virtuous circle for Apple.
There's no such ecosystem to lock customers into Netflix. Sure, there's your movie queue, but just ask Blockbuster how well my movie queue held me as a customer when the company tried raising my rates.
What are customers after?
Netflix provides an easy way for customers to get movies and TV shows. Right now, it's really the only serious game in town when it comes to all-you-can-eat streaming. But will that really last?
For some perspective, we can look at the market for all-you-can-eat music streaming. Nobody's making money hand-over-fist in that market, and there's competition aplenty -- Rhapsody, Napster (now owned by Best Buy (NYSE: BBY ) ), Sony's (NYSE: SNE ) Music Unlimited, Spotify … heck, even Microsoft offers a music-streaming service.
The technology for streaming movies is a little more complex because of the size of the files, and perhaps the movie studios are dragging their feet a bit and making licensing more difficult. But the bottom line is that with nothing to lock in its customers, Netflix will find its moat easily hopped when studios start playing nice with its competitors.
Sure, Anders notes the ubiquity of Netflix on Blu-ray players and boxes such as Roku -- but since Anders is much more tech-savvy than I, I know that he knows full well how flexible these devices are and how easy it would be to load up a competing service from Google, Amazon.com (Nasdaq: AMZN ) , Facebook, or Hulu.
So really, the story of Netflix is the story of a first-mover in a budding market. And although that can be a profitable seat to occupy for a while, it can often lead to an uncomfortable episode of "Where Are They Now: Corporate Edition" -- just ask Netscape, Yahoo!, or MySpace about that.
Explore this Foolish Duel over Netflix:
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