Post of the Day - Netflix
Mr. Market is Yelling Again

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By wdipaolo
January 8, 2007

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Mr. Market has got to make you laugh at right now.

It wasn't that long ago (only a few months actually) � that NetFlix took a pounding because Apple and Amazon were rolling out movie downloads. Mr. Market screamed "Sell! Don't you realize DVDs are history! It's all about downloads and VOD!!" And when Mr. Market speaks, the "lemmings" (used with due credit to "M") followed. Down went Netflix stock. But Netflix kept rolling along, making more money and signing up more subscribers.

Now BBI, in a move calculated to hit, no matter the cost, the CEO's stated 2006 2MM subscriber number, BBI comes out with Total Access. I'm not denying that Total Access is a good deal. It's a very good deal, (basically giving you six out for $17.99). Sure enough they hit their number and Mr. Market is now screaming "Blockbuster is gaining on NetFlix! DVD's are HOT � VOD is years away. Forget downloads, the studios will never go for it!" And again, the "lemmings" are following.

But consider what has really happened. Should we be surprised that video renters, who have yet to try renting online, switch over? Considering they had been paying blockbuster $3.99 per DVD � they can now get all they can watch for just $17.99! Is the physical location more or less profitable now? Is the online division more or less profitable now? Should we be surprised if high volume NFLX users switch to Total Access? Is this really a reason to celebrate BBI and trounce NFLX? Has the competitive landscape really changed at all?

Would we shareholders celebrate NFLX if it rolled out a plan to offer 6 out for $17.99? Why stop there? Why not offer 15 or 20 out, then sit back and count all those new subscribers?

The bottom line is that the Total Access program is probably NOT viable at its current price point. Why? Because it may at best only break even, or at worst (if used by avid movie fans) be the cause of a major cash hemorrhage. Since BBI is already soaked in red ink...why does Mr. Market applaud an initiative that may only serve to burn more cash?

Bottom line is that we need to focus on the business models and their associated profits. Let's not confuse a "great deal for the consumer" with a "great business for the investor".


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