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Re: Is Netflix Settling for Wal-Mart?

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By JoelCairo
May 24, 2005

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[This post is in response to a Fool article published on 5/23/05]

I think this misses a few countervailing considerations:

1. Wal-Mart is a bricks and mortar retailer who wanted out of a costly and unsuccessful internet play. Sound familiar? Hasn't that been one of Amazon's paths to growth and success? Like, say, Toys 'r Us? Looking past the particulars, this might be a good thing for Netflix vs. Amazon.

2. There was no way that Wal-Mart, if it wanted to keep a hand in but stem the bleeding, would cooperate with another bricks-and-mortar retailer, like, say Blockbuster. Retail is their game, and they are in direct competition with Blockbuster in selling DVDs, etc., and in attracting foot traffic. If they were going to strengthen someone, it would have to be someone without stores. It could have been Amazon, but why help someone who competes with you on a wide range of merchandise, and is far more powerful on the web than Netflix? So, it had to be Netflix.

3. Think about other outcomes of this, and how they would appear to impact Netflix:
a -- Wal-Mart hands its business to Blockbuster
b -- Wal-Mart hands its business to Amazon

Would anyone feel better about Netflix's chances if either of these things occurred? So, even if there are negatives, or supposed negatives to the actual deal, can they outweigh the negatives that would have come from either of the alternatives?

4. Perhaps Netflix properly recognizes that the real threat to it comes from Amazon, and has decided to be pro-active, instead. If you move past the specific products, hasn't Netflix emerged as another internet-based business in the market of selling/renting low-cost merchandise (especially intellectual property) just like Amazon? Why wouldn't Netflix somewhere consider branching into sales of books, movies, or other things? It seems to me that they have set up an efficient mechanism and business that is as close as almost anyone to compete with Amazon in its own court.

5. Seems that the confluence of Blockbuster's and Wal-Mart's recent actions sounds a powerful death knell for conventional retailers trying to out-Netflix Netflix.

I'm not saying there aren't negatives to the deal, but since it all is just speculating, let's open up the speculation to other matters, some of which are positive for NetFlix.

For instance: Netflix is in a mail-order business with 100% returns, and very rapid turnaround. Who else does that? I can't think of anyone, though there must be. That is huge. Amazon, like all other catalogs, is probably driven as much by a desire to lower the rate and cost of returns as it is by the desire to increase revenues. Meaning, I think this is a harder business for Amazon to enter than people realize, and its not surprising that they'd want to get their feet wet in it in some less stressful competitive environment than the US.

Joel


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