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Re: Apple vs. Netflix

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By JJMSpartan
July 19, 2006

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Disclaimer - I own stock in both NFLX and AAPL. I happen to think both are great investments right now, and I am shocked that there is even a discussion around here of the two companies being competitors.

A1Wes: Is Apple really that innovative? Or are they just a marketing creation? Their primary product is the iPod, which is more expensive and for the most part not any better than many other devices. Their products currently have no features that other companies are not also able to put into their music players. What is driving their sales, then? Marketing and the 'coolness' factor of their style. And, as any sane person would admit, cool is very fleeting. If Apple truly were putting out superior products across the board, I would likely be more worried about what they could do to Netflix in the internet/VOD market.
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This goes back to my original point that Apple's current success is not based upon a superior product or even an above-average product, but rather on a standard, average product that merely looks better according to the taste of the moment. To this day, the new iPod models seem to have some problem or another because they are released probably 3-6 months in advance of when they should be released just to capitalize on the immediacy of the cool or hip factor.

Contrast that approach with Microsoft, who has no qualms about delaying software releases until they can assure their consumers that the functioning will be practicable and usable (not to say that there are no bugs, but at least a minimilization of major problems).
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I prefer the long-term prospects of Netflix to Apple because I feel there is less risk involved due to its fairly business-centric design as opposed to apple's largely image-driven model. I know Apple puts out good products too, it just does not have a superior product as does NetFlix. Want access to 65,000 movies? You have to go to Netflix. Want to listen to music on a handheld device? You have hundreds of choices. More people currently choose the iPod, primarily because of its superior look or because of iTunes, which also has a superior facade to its competition. But you don't need to buy the iPod or use iTunes to access the technology.

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Where to begin... so much info that really is wrong. OK, I'll just summarize points in bullet form.

- Apple Computer is still the name of the company. Yes, they derive a lot of current revenue from the iPod. But make no bones about it; Apple is still a computer company. That point will become clearer in additional points.

- To look at the track record of Apple, you need to look at the times when the current CEO - Steve Jobs - was at the helm - 1977 thru early 1985, and 1997 to today. In his first run with the company, they went from being founded by Jobs and Woz to creating more new millionaires in a single day than any company in history during their IPO in 1980. He oversaw the launch of the Apple II, and the original Macintosh, and Apple had a 20% market share when he left.

When he came back (Apple bought his NeXT Computer in 1996), Apple had lost all it's luster, and had a 2% market share of computers. He took the company through a restructuring, killed off many unfocused products, and created Apple's first 'hit' computer in over a decade - the iMac. Since then, Apple has released the iPod, iBook, Mac Mini and OS-X, all very successful in their own right. In short, Apple under Steve Jobs has been a great success.

- Apple computer makes hands-down the best mass-produced computer in the world (keep Falcon Northwest out of the discussion). In survey after survey, Apple wins the top awards for architecture, reliability, tech support and quality. And they aren't even close to being the cheapest computers out there.

- Their most recent product developments have taken a square aim at Microsoft and Dell - their two biggest competitors. First they launched the Mac mini - an inexpensive entry level computer to lower the price point until people could no longer claim that buying a Mac was too expensive. They made the switch to Intel processors as a way to become more compatible and faster. Then finally they released Boot Camp, allowing people to run Windows on their Mac's, eliminating the last major barrier people had to making the switch to a Mac. This is where Apple's strategy is - to grow their computer business from their current 2.5% market share - and it appears to be working already.

- The iPod / iTunes / iTunes Music Store combination is slick, simple and easy to use. Their products drove the market for making a better player, and they captured market share because they had the best player, hands down. By the time that everyone else has now caught up and are making good players, Apple owns 75% of the digital music world. Coupled with the cost to switch back (that MS hopes to eliminate by creating the worlds biggest money-losing music player - free downloads of every song you purchased off ITMS - I'd LOVE to see what the anti-trust court says about those plans, but I digress...) people are locked into iPods and iTunes. And aside from a few critics - like the French government - people don't seem to mind because no one else out there has a system that even comes close. It's not just the iPod; it's the simplicity and seamless integration of all three that make the iPod such a great success. No one will knock off the iPod until their entire music listening / purchasing experience is better.

- With their conference call tomorrow, I am predicting that they will blow away analyst predictions - not because of iPods, but because of computers. Apple makes over 3x more profit per computer sold than they do per iPod sold, and their PC business is where the growth is going to come from.

With all that said, the next quote is probably the most important one when discussing Apple vs. Netflix:
Frosty77: "This is one of the reasons why there's no activity taking place...you could request a movie from Netflix [which delivers DVDs by mail] before this (1.5 gigabyte) download gets to you." - Frank Casanova, Apple's Director of Quicktime Product Marketing

Anyone who has watched a music video on QuickTime becomes aware quickly of a few things.

- It would take FOREVER to download a full-length movie when you figure how long it takes to download a 3-minute video.

- The quality of the videos downloaded looks good on a 2.5" screen, OK in a 5" Quicktime window, so-so full screen on a 17" monitor, and disgusting when played through an A/V cable on a 35" TV. And you can't burn the movies to DVD, so you have to play it from your computer or iPod.

This does not translate into any type of downloadable movie experience worth having. And it's likely going to be true for all VOD plays for the near future. Too expensive, and not high enough quality.

In short, Apple is a company that I see as a tremendous investment, and not as a competitor or threat of any sort to NetFlix.

One more quick note - the comment about Microsoft delaying releases until the bugs are gone - what planet are you living on? M$ releases are among the buggiest in the entire computer industry, even after all the delays. Apple's are among the cleanest. Apple makes deadlines, and usually beats them. Microsoft has never seen a deadline that they couldn't push back. Think the Zune will be released before Christmas? Not if their company history is any indication...

Whew! That was a lot to get off my chest. I just couldn't let all the misleading comments about Apple go by. Both companies are great investments IMHO.


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