In case you missed it, my colleague Rick Aristotle Munarriz provided us with a nice snapshot view of Netflix's
This installment of Fool on Call will take us deeper into Netflix, providing us with pertinent information that it's just not possible to receive from any other investment-related article. Why is that? Because Fool on Call is the only one devoted purely to an analysis of comments made by executives in quarterly earnings conference calls, which are often the best source of determining where a company is at and where it is going.
We will center on these topics:
- The San Francisco Bay Area: an indicator of boom or doom?
- Blockbuster: competition or "coopetition"?
The Bay Area: an indicator of boom or doom?
Rick mentioned in his analysis that Netflix has currently infiltrated 15.7% of the homes in the San Francisco Bay Area, the company's base of operations. But why is this figure important? And why is this particular market important? During the call, CEO Reed Hastings provides us with the answers.
Hastings believes the Bay Area is important for the company in two ways. First, since it is Netflix's initial market, it provides a "leading indicator of the potential market size nationwide." Netflix is well on its way to commanding a household penetration of 18% in the Bay Area by the end of fiscal 2007, and that suggests the possibility that it could enjoy similar success in like markets.
Further, according to Hastings, the Bay Area is the most competitive market in America in terms of delivering entertainment, and that Netflix has been successful in such an environment points to the demand that consumers have for its product. The reason why the Bay Area provides a unique challenge is because from Hastings' perspective, no other market is as plugged in digitally. From Comcast and its Video-On-Demand feature made available to this market, to the presence of Apple iPods and readily available downloadable movies, to the popularity of TiVo
So the Bay Area points to the possibility of a boom for Netflix as it looks to establish a foothold nationwide, right? Umm, not so fast.
There is another way to look at the logic Hastings is employing, which leads to a very different conclusion.
Try this line of thinking: Netflix has been successful in the Bay Area not in spite of the competition, as Hastings suggests. Rather, it has been successful because of the culture of that region. It could be argued that the reason Netflix has enjoyed the presence it has in that market is because no other region has such a culture, such a thirst for electronic media.
So, instead of the Bay Area being an indicator of potential for Netflix by highlighting the brand's strength in the face of competition, it may in fact be an indicator of future problems because no other market in the country has the kind of culture for electronic media that the region enjoys. In a nutshell, the Bay Area may point to significant challenges as Netflix tries to push for acceptance among consumers nationwide who just are not quite at the same e-media-junkie level.
Time will tell which perspective is right. Regardless, I think it behooves us to consider both scenarios, rather than simply buying into Hastings' argument outright.
Blockbuster: Competition or "coopetition"?
The HBR article defines "coopetition" as "looking for win-win as well as win-lose opportunities." This is exactly the mindset Hastings has when he looks at Blockbuster's major push into online-based DVD rentals.
In his prepared remarks, Hastings stated the following: "America is fast becoming a nation of online renters. Netflix and Blockbuster combined now have over 8.5 million subscribers, and the space seems likely to grow to 12 million subscribers this year. Together, the two companies are growing online DVD rental faster than either could on its own."
Wow! "Together"? The word strums my sentimental heartstrings, and indicates to me that Blockbuster and Netflix may do as much to complement each other's business as they do to beat the other up.
In the question-and-answer session, one analyst asked whether the combined growth of Blockbuster and Netflix in the fourth quarter points to a "collective tipping point" for the industry. CFO W. Barry McCarthy responded by saying he believes the net subscriber additions between the two companies will "accelerate the tipping point." Elaborating further, he added, "The bigger that online gets, the tougher it is to make the economics of the video store work. So we look at it and say, 'Let's go -- let's make a really combined online market, which only drives more and more subscribers online.'"
Blockbuster and Netflix are playing out a classic win-win scenario. But that doesn't mean Netflix isn't also looking at a win-lose situation as well. To be sure, Netflix believes it is superior to Blockbuster, and it's basing its competitive advantage on customer satisfaction.
Hastings states, "We were independently recognized for having the highest customer satisfaction in the entire e-commerce world, edging out such great companies as Apple and Amazon.com
Not so lovey-dovey after all
So, while it is true that the combined effect of Blockbuster and Netflix helps to create greater demand for online DVD rentals, it is also true that Netflix believes it is in a superior position to capitalize on this culture. For this and other reasons, Hastings believes Netflix will be the leader in this emerging market.
I am not invested in either Netflix or Blockbuster, but it isn't for a lack of interest. I find the cooperation between the two as they work together to define a new industry to be thoroughly enriching to watch and learn from. We are reminded that competition, far from being a threat to a business, can actually be a stimulus for opportunity and growth. This is an invaluable lesson for investors: by identifying the other "winners" in a competitive environment, we might just find other winning investment opportunities.
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