Surfing the Fool discussion boards, I came across an interesting post by Klingsor4 regarding Netflix (NASDAQ:NFLX):
I read the Fool interview with Netflix CEO Reed Hastings, and he said that their biggest concern was piracy. However, if you are set on pirating DVDs, it seems Netflix is a perfect service to subscribe to.
For $30 a month you can have four movies out -- which means that if a pirate were to get four movies, burn them all in a day or two, then send them back out, he could get four new ones in about six days. Say he goes through five of these cycles in a month -- that's about 20 DVDs burned per month. In six months, that's one helluva DVD library.
When Reed Hastings made the comment about piracy being Netflix's biggest concern, he was referring to the long-term effect that piracy would have on the the likes of Time Warner (NYSE:TWX), Disney (NYSE:DIS), and General Electric's (NYSE:GE) soon-to-be majority-owned NBC Universal -- that is, the companies that make movies. Piracy would decrease the value of producing a movie, thus reducing the number of movies produced -- and Netflix's library with it.
But in the short run, Klingsor4's comment makes perfect sense.
The math actually offers a wide variety of implications, as Netflix offers a four-tiered pricing schedule, ranging from about $14 to $40 a month ($30 per month actually gets you five DVDs at a time). Being able to copy DVDs does increase the value of Netflix's business to pirates by giving them cheaper access to patent-protected property.
(Side note: I would venture that this might benefit a Blockbuster (NYSE:BBI) or a Wal-Mart (NYSE:WMT) even more, where the customer would be able to get the newest stuff when they want it.)
I'm reminded of the days of the CD burner and the original Sony (NYSE:SNE) Playstation (PS1). When the U.S. Playstation was released in September 1995, CD burners were an expensive novelty. However, all you needed to play pirated copies of real games was install a $15 modification chip into your Playstation.
For some, that meant paying $10 a pop over the Internet, rather than $50 at Target (NYSE:TGT) or Electronics Boutique (NYSE:ELBO). If you had direct access, you could get higher quality, factory-pressed pirates for about $1 a piece from Hong Kong (if you didn't, they'd cost you about $20 over the Internet). But the real spread of piracy came when the price of CD burners dropped dramatically, bringing me to my point:
If you had a CD burner, it would cost you a mere $5 rental at Blockbuster.
This has caused some problems. It's why the Nintendo 64 is cartridge- rather than CD-based, and why Nintendo uses pint-sized discs on its GameCube. But it has also helped make Blockbuster very popular among die-hard gamers (though I can't say with much certainty to what extent), and I'd suspect that piracy helps Netflix in the short run as well.
Of course, buyers of pirates will far outnumber the sellers; so longer-term, Hastings will do well to favor a solution.
David Gardner once recommended Netflix in Motley Fool Stock Advisor but recently sold. Mistake? How do you think piracy well affect Netflix? Join the discussion on the Netflix discussion board - only on Fool.com. Jeff Hwang can be reached at [email protected]
