Dueling Fools: Netflix Bear Rebuttal

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.

Not Apple
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:

Want to read more about Netflix? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Best Buy, Google, and Microsoft are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers recommendation. Apple, Amazon.com, Best Buy, and Netflix are Motley Fool Stock Advisor choices. Yahoo! is a Motley Fool Global Gains recommendation. Alpha Newsletter Account, LLC, has bought puts on Netflix and owns shares of Microsoft. Motley Fool Options has recommended a bull call spread position on Apple. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Best Buy, Google, Yahoo!, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 

Fool contributor Matt Koppenheffer owns shares of Microsoft but has no financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter, @KoppTheFool, or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (3) | 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 April 22, 2011, at 4:45 PM, cattywampus wrote:

    Not to mention Pirating, Oh! maybe I shouldn't mention that. The film industry has to be concerned about the pirating problem and I'm not talking about Johnny Depp and Keith Richards swigging down a bottle of rum. Younger people are a lot more tech savy than boomers, they cut their teeth on tech. I would imagine that the industry has to be a little happy that netflix makes it so easy to watch video media and keeps us older folks from even thinking twice about peer to peer sites or askng our kids, GFB.

    At least for the time being. My kids say it is popular with their crowd and the price is right.

  • Report this Comment On April 23, 2011, at 2:04 AM, lovesstocks2 wrote:

    For me the large issue is that one misstep can wipe out several years of profits. When you look at long term records, usually the people with the best long term records are the ones who avoided losses. These kinds of stocks do well for a while but then usually flame out. Most profits are made from expanding P/E's, as well as growing companies. You take enough risks investing in a company, why add to it that if the company makes a mistake you could lose half or more of your investment.

  • Report this Comment On April 23, 2011, at 9:39 AM, verylargelarry wrote:

    Being greedy when others are fearful.

    Next lesson, Monday about 1:05 Pacific.

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