Netflix Is Getting Bashed for All the Wrong Reasons

Last week was brutal for Netflix (Nasdaq: NFLX  ) . The stock tumbled 28% after posting disappointing quarterly results, and a scorching Consumer Reports review showed Netflix lagging the digital-video competition when it comes to customer satisfaction.

The quarterly report warranted a bearish reaction. As long as Netflix continues to point to quarterly deficits in the future -- as it did in warning shareholders to expect a loss during this year's holiday quarter as it expands into a new European market -- the stock isn't going to get back on track.

However, the Consumer Reports review wasn't all bad. Let's take a closer look.

Validation in a sour wrapper
There were 15,277 subscribers polled in the survey featured in the new September issue of Consumer Reports. A whopping 52% of them said that they used a streaming service over the past month, and that 81% of those digital video consumers are Netflix subscribers.

Let's put that 52% cut in perspective. Just 47% of the 15,277 subscribers surveyed went to a movie theater over the past month. The number of people renting a DVD or Blu-ray was just 43%, while 32% of the survey participants had used a cable provider's video-on-demand offering.

Now, we can always argue that Consumer Reports readers are a thrifty lot. There's plenty of research going into their discretionary income decisions, so they're not exactly the target audience for multiplex operators. Many have probably cut the cord with their cable and satellite television providers.

However, this is still validation for both Netflix and the niche that it chose to lead.

Unfair knocks
The unlikely leader when it comes to digital video is Wal-Mart's (NYSE: WMT  ) Vudu, with a reader score of 76. Apple's (Nasdaq: AAPL  ) iTunes and Amazon.com's (Nasdaq: AMZN  ) Instant take the silver and bronze, respectively.

Now, you may be quick to notice that none of these three services offers unlimited streams. They simply allow viewers to buy a la carte releases. The $7.99 a month that gives Netflix customers an entire month of streamed video content would be good for roughly only two movies through Vudu, iTunes, or Amazon Instant. Sure, they will be new releases -- comparable with what's available through cable on demand or the new-releases shelf at a local video store -- but is it really a fair comparison?

Netflix served up more than a billion hours of content to its subscribers in June. Work the math, and it means the average subscriber took in nearly 40 hours of content last month. That's a pretty good deal for $7.99 a month.

Are we talking about a library that consists mostly of non-current seasons of TV shows and older movies? Sure, but $8 through the top-rated services is really only good for roughly a tenth of the time spent streaming.

The only fair comparisons to Netflix would be Hulu Plus (which ranked lower than Netflix) and Amazon Prime.

Now, Amazon Prime ranked just ahead of Netflix -- which ranked sixth, by the way -- but that may also not be a fair fight, since Amazon Prime is made available to the online retailer's loyalty shopping club members at no additional cost.

The biggest knock on Netflix by Consumer Reports subscribers is the selection of its streaming smorgasbord, and obviously the Amazon Prime library is even more limited.

So Netflix can't win in this survey. Its value isn't recognized by those who prefer paying up for piecemeal rentals of digital rentals, yet it's not perceived to be as cheap as Amazon Prime when money is the key driver.

In the end, should we really worry? The bigger takeaway in this survey is that folks are more likely to stream video than head out to the local multiplex.

DVDs will never die
In an ironic twist, Netflix is actually the highest in customer satisfaction when it comes to optical-disc rentals.

Netflix edged out Coinstar's (Nasdaq: CSTR  ) Redbox and was way ahead of Blockbuster to top the same Consumer Reports survey when it comes to DVD and Blu-ray rentals. It doesn't seem to matter that scoring a Blockbuster rental would be speedier or that Redbox -- if the movie buff is disciplined enough to return the disc the next day -- would likely be cheaper.

The convenience and selection of Netflix's original disc-based service rocks, even if less than a third of Netflix's 30.1 million subscribers are still receiving physical rentals in red mailers.

Maybe Netflix can actually use the DVD results to market its fading mail-delivered service. Maybe this survey will awaken Netflix to the inevitability that it will have to add digital piecemeal rentals to its smorgasbord to be a complete provider.

Either way, the survey wasn't so bad after all.  

Stream on
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The Motley Fool owns shares of Amazon.com, Apple, and Netflix. Motley Fool newsletter services have recommended buying shares of Amazon.com, Netflix, and Apple and creating bull call spread positions in Apple and Wal-Mart. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He owns no other 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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