Can Blockbuster Kill Netflix?

Netflix (Nasdaq: NFLX  ) has never felt this vulnerable, and now Blockbuster is the one smelling blood in the water.

Bloomberg reported over the weekend that DISH Network's (Nasdaq: DISH  ) Blockbuster is readying a streaming service to rival Netflix. An unnamed person with direct knowledge of the plan is telling Bloomberg that the new offering is set to launch next month.

As bad as things may have gone for Blockbuster over the past couple of years -- and they were bad, since DISH was able to complete a springtime rescue in bankruptcy court for just a little more than what liquidators were willing to pay to simply gut the sucker -- you have to applaud its newfound sense of perfect timing.

A September to dismember
It's been a challenging September for Netflix, and we're only a few days into the telltale month. Its stock fell nearly 9% on Friday, after Liberty Starz (Nasdaq: LSTZA  ) revealed that Starz will not renew its streaming deal through Netflix when the original agreement expires early next year.

It was the worst possible moment for Netflix to lose an important provider of relevant and somewhat current content. This is the month where existing customers will begin paying as much as 60% more for the service if they want to continue to receive DVDs and stream video. Netflix is estimating that 80% of its roughly 15 million members on disc-based plans will be willing to pay $7.99 a month to access its digital catalog by month's end -- an aggressive target now that its most significant partner is moving on come February of next year.

CEO Reed Hastings was in damage-control mode on Thursday night, telling Business Insider that Starz accounts for only 8% of what domestic viewers are streaming. By the time the deal expires next year, Hastings expects that percentage to be all the way down to between 5% and 6% of its stateside streaming traffic.

His transparency has always been refreshing, but couch potatoes may actually take the time to dust off their salty fingers and clear their cola-soothed throats to voice their complaints. Disc-based subscribers now have to pay for their streams, and there will be less content? Even if Netflix compensates for the Starz defection -- and its digital slate of fresh releases -- by inking a bunch of deals for popular content, the temporary nature of Netflix's streaming titles now makes it less valuable than the more reliable discs-by-mail model.

Jockeying for position
Blockbuster already competes against Netflix through mail-delivered discs.  Blockbuster even has Netflix beat by offering home delivery of video-game rentals. Netflix also doesn't have a solution for instant gratification when it comes to new releases that may take years before becoming available through Netflix's streaming platform. Blockbuster is there through its stores and NCR's (NYSE: NCR  ) Blockbuster Express kiosks.

The one thing Blockbuster has been missing is an unlimited streaming service. It serves up digital piecemeal rentals, but it isn't even one of the five largest players in that niche. Rolling out a Netflixesque service would go a long way toward helping Blockbuster sell individual download rentals, too.

The opportunity is certainly there to take on Netflix in streaming. Hulu Plus is popular, but largely as a source for television shows. Amazon.com (Nasdaq: AMZN  ) proposes a tempting value proposition by making 8,000 of its digital titles available at no additional cost for Amazon Prime members, but the selection isn't as tempting as the volume suggests.

There's a real opportunity for Blockbuster or Coinstar's (Nasdaq: CSTR  ) Redbox to cash in on its bricks-and-mortar brand through a streaming service. Redbox has only been teasing about its digital potential for more than a year. Blockbuster, apparently, is ready to do something about it.

Starz gazing
How neat would it be if Blockbuster is able to take over that Starz deal in five months? Perish the thought, though. Starz apparently wasn't holding out for more money -- which is probably a good thing since Blockbuster can't compete on the size of its billfold. It didn't want to devalue its fresh catalog by participating in Netflix's $7.99-a-month buffet.

Blockbuster won't be taken seriously if it prices its service too high. Until it can match Netflix's tens of thousands of titles, it may even have to go lower. It'll be worth it for Blockbuster, especially if it treats unlimited streaming as a loss leader to drive pay-per-stream rentals of newer titles.

Hit the lights. Part the curtain. The feature presentation is about to begin.   

Motley Fool newsletter services have recommended buying shares of Coinstar, Amazon.com, and Netflix and buying puts in Netflix. 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.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder and subscriber since 2002. He owns no shares in any of the other stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.


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