Commodity Service?

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By Harbinger0
December 22, 2004

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My concern (I expect all NFLX stockholders) with this latest development is how NFLX will differentiate itself enough going forward, and what happens in the interim?

It appears that DVD's through the mail is becoming a commodity service - if BBI is able to meet their customers needs (everyone has growing pains) they will retain customers and start/continue to take market share. NFLX must start differentiating itself ASAP.

I must be honest; I don't use any of the mail DVD services, but if I was going to sign up today (and if I wasn't a NFLX stockholder) - I would give BBI a shot and, if the service was acceptable probably stick with them. With no comparison, there is a very good chance that I would stick with them as long as they didn't continually mess things up - I wouldn't know any differently (and I'd think I was saving a few bucks every month over those other guys). It is very interesting to me to read posts on this board from long-time NFLX users about how bad BBI's service is compared to NFLX and how people expect BBI users to switch to NFLX - this may a very few subscribers, but I would bet the conversions are minimal.

As a prospective customer, in a commodity market, I want to know why I should pick one service/product over another - NFLX will have to get the word out - or they are in peril of being passed by.

Netflix is going to have to address this issue and it will cost them no matter how they do so. Advertising and word-of-mouth attracts new customers - which company is going to target new consumers more aggressively - and at what cost? Long term, ideally - the best service should win because word does spread organically, but at this stage of the game, with only a couple million subscribers - it seems to me that both players have many potential customers to tap - the game becomes signing them up (and keeping them).

I want to hear from NFLX how they intend to compete, and what differentiates them - and I want to see them getting that word out to the masses. Is there room for more than one player in this space? - probably, but in my opinion, not if services are viewed as a commodity (in a commodity situation...price wins).

In addition, a company must be profitable - in a price-war it often comes down to who has the deepest pockets to win a war of attrition - how committed is BBI to this end? Are they willing to cannibalize their brick and mortar stores? Their actions do not appear to show this level of commitment - in fact they are trying to expand their stores ( ala Hollywood Entertainment takeover) - they must see a synergy with their storefronts...

Differentiating Revenue:
- I like NFLX for their potential of targeting customers through direct advertisements, but I believe long-term they need some differentiation.

- There has been talk of a NFLX / TIVO partnership to provide online movie downloads; and some news about it a few months back - but what is the status of this agreement?

- Start/grow video games through mail

- Why not rent porn DVD's? - as a stockholder I think this would be a huge boon to their service. My current video store has the "back room" I am not offended that this is a service they offer to their customers - seems to me that this is a huge area for growth - it would definitely differentiate vs. the other players.

Other concerns:
It will be a while before infrastructure is in place to allow acceptable streaming video, but when that day comes - it will be the death knoll for DVD's by mail - I'm sure there will be a time lag between early adoption and market saturation - but long term, DVD's are destined to go the way of the buggy whip - what are their plans for the future? - (in Sept/Oct) NFLX announced an agreement with TIVO to provide online movie downloads - let's hope this comes to fruition.

This is the second time in 3 months that David Gardner has recommended NFLX as his top pick for the Motley Fool Stock Advisor newsletter (Nov and Jan pick) - and within two weeks of each recommendation BBI has cut its online subscription fee.
Is there a trend?
If DG keeps recommending NFLX will BBI eventually be free?

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