Did You Hear What Netflix Said?

Netflix (Nasdaq: NFLX  ) is rocking a refreshingly blowout quarter, but the story doesn't end there.

Between last night's letter to shareholders detailing its latest financials and the subsequent conference call, Netflix had plenty to say about its performance, the competitive landscape, and where it's going in the future.

Let's dive into some of the video service giant's more intriguing revelations.

Here comes Amazon
"We expect Amazon to continue to offer their video service as a free extra with Prime domestically but also to brand their video subscription offering as a stand-alone service at a price less than ours."

A New York Post article earlier this week indicated that Amazon.com (Nasdaq: AMZN  ) will begin charging for the unlimited video service that it currently offers millions of its Amazon Prime members at no additional cost.

Netflix's comments naturally confirm that it is also hearing the same speculation. However, Netflix's comments go further than that. The indication here is that Amazon will continue to keep offering folks paying $79 a year for free two-day shipping and monthly Kindle e-book rentals the unlimited streams from a growing catalog that they have enjoyed since last February. The premium service will be a separate offering.

Netflix will need to be careful here because Amazon will radically undercut Netflix on price. At $79 a year for Prime, we're talking $6.58 a month. Obviously, the stand-alone streams will cost far less since they don't include the free shipping and e-book rentals.

This will be interesting. Amazon can probably charge $3 or $4 a month for this -- half of what Netflix charges -- for its admittedly inferior catalog. However, Amazon would be doing this to get folks to connect their living rooms to Amazon, giving the leading online retailer the opportunity to be their top choice in buying premium new releases a la carte that are -- currently -- not available through Netflix digitally.  

Re-run TV is a badge of honor
"Catch-up TV is really a good model for authentication. ... We're comfortable with that partitioning because we feel like our segment is very broad and big at a low price point of $7.99. And so that's why we're partitioning ourselves to be prior season. We're not bidding on any current season, and we don't have any current season."

Netflix takes a fair deal of ribbing from Hulu fans because it doesn't offer current television episodes. Netflix explains that this prevents it from being perceived as a threat by the cable networks and service providers that would view Netflix as a cord-cutting threat if it offered fresh content. By striking licensing deals for earlier seasons exclusively, Netflix should be viewed by the TV studios as either an educator or a gateway drug.

Couch potatoes may not like having to wait as long as a year to see a new season through Netflix, but it's what the company has to do -- strategically and financially -- if it wants to have those shows at all.

Game off
"We have no plans to enter video games."

Now that Coinstar's (Nasdaq: CSTR  ) Redbox kiosks are spitting out video games -- and DISH Network's (Nasdaq: DISH  ) Blockbuster is offering games either in-store or through the mail -- Netflix is the only major distributor of movie rentals on optical disc that isn't offering games.

It's going to stay that way. Netflix may have promised video games during September's Qwikster push, but that initiative apparently had a shelf life similar to Qwikster's.

You've got disc
"We expect DVD subscribers to decline steadily every quarter forever."

Netflix shed a whopping 2.8 million net DVD subscribers during the fourth quarter, even though streaming members and overall unique accounts inched higher. Netflix is targeting 1.5 million net defections on the disc end during this current quarter, breaking Netflix below the 10 million subscriber mark.

This is starting to seem a lot like AOL's (NYSE: AOL  ) once-flagship America Online business, and not just because both businesses involved pushing discs into your mailbox with feverish velocity in their prime. AOL views its access business as a cash cow that will fade in perpetuity to the point where it's no longer aggressively marketed. It's a dying business that it can use to help grow its online endeavors. Netflix's DVD business is contributing the lion's share of the company's operating profit, though Netflix points out that every incremental streaming customer is more lucrative than every incremental DVD or Blu-ray subscriber.

Netflix isn't actively marketing the DVD business, but it will continue to keep running it effectively and restocking it with fresh releases.

The bottom line is that Netflix is all about living up to its name of net and flicks. There are now more than twice as many streaming customers as there are DVD accounts, and that gap will widen with every passing quarter.

Motley Fool co-founder David Gardner has been a fan of Netflix as a disruptor for nearly a decade, but there's a new rule-breaking mutlibagger that's worth getting excited about these days. Learn more in a free report that you can check out now.

The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Netflix and Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (4) | Recommend This Article (8)

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  • Report this Comment On January 26, 2012, at 12:36 PM, EGTalbot wrote:

    One note about Amazon's ebook rentals - they are only available to Amazon prime customers with a kindle and customers only get one book a month. Amazon's cost per book borrowed (what they pay the publisher, or author in the case of direct author publishers) floats around $2 per book currently, but only a small fraction of the prime customers both can and do take advantage of it. So essentially that cost is negligible. I am not certain how much the free two-day shipping costs them.

    Your point is correct that Amazon can charge far less than netflix, and they can do it for an extended period of time. And they probably will.

  • Report this Comment On January 26, 2012, at 12:45 PM, lucasmonger wrote:

    A year and a half ago I peeked at Netflix stock as an investment and didn't like the over $100 price. Then it started climbing like crazy and was still scared off by the premium price. The recent blunders pummeled the prices down to where I piled in at about $70 per share, and today that paid off.

    Although the general public didn't like the Quickster/NetFlix split, not splitting the companies into two separate entities will make it a bit harder to possibly sell the streaming business to interested parties (Microsoft, Apple, Google, others?). Amazon and Hulu each appear to be nibbling each other with slightly different offerings (Amazon's streaming comes with shipping and books, Hulu has new shows, Netflix has old shows), but who is going to emerge with an offering that gets you everything?

    And I mean everything. I want to be able to watch any show or movie from the beginning of time. Or catch any sporting event from the current season within hours of the game. Whether it is an a la carte pay as you consume model or consume everything for a fixed monthly cost, if anyone can provide everything (or most everything) for a cost less than cable or satellite, they will win. Even better, if this could be no cost to the consumer, and paid for via advertising (just like current broadcast TV) then you will have cracked the nut. Maybe that's what Steve Jobs was alluding to in his biography?

  • Report this Comment On January 26, 2012, at 1:47 PM, LHK72 wrote:

    The article says, "The indication here is that Amazon will continue to keep offering folks paying $79 a month for free two-day shipping and monthly Kindle e-book rentals the unlimited streams from a growing catalog that they have enjoyed since last February."

    Is that a typo? You mean, $79 per year, don't you?

  • Report this Comment On January 26, 2012, at 5:28 PM, TMFBreakerRick wrote:

    LHK72, good catch. Yes, Amazon Prime is $79 a year -- and it has been corrected.

    EGTalbot, I don't know what the take rate is on the free rentals, but I do know that I've been through a Seth Godin and Michael Lewis book for "free" since the progtram began.

    Counting the days to February 1 for my next rental, I am.

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