Well played, Netflix
The DVD rental giant is as popular as ever, delivering another monster quarter as it continues to nibble away market share at Blockbuster's
Netflix closed out the quarter with nearly 7.5 million subscribers. This doesn't necessarily mean that the market itself is growing. We will have to wait for Blockbuster's quarterly report -- still weeks away -- to tell the tale. If Blockbuster's Total Access loses more than the 451,000 net subscribers that Netflix gained, it will be the second consecutive quarter in which the mail-order DVD rental market contracts. (Review Netflix's previous quarter here.)
I'm not trying to be a party pooper. I'm simply being a realist. Blockbuster's move to increase subscription prices this past summer is great for Netflix, but the size of the overall market needs to grow, because Netflix can only feed on the Blockbuster carcass for so long.
The Netflix report wasn't perfect. Gross margins and free cash flow fell. Churn inched higher. However, that was handily offset by favorable trends like subscriber acquisition costs that clocked in at a four-year low. Now that Netflix isn't locked into a bitter price war with Blockbuster -- something that is unlikely to repeat itself given Blockbuster's iffy state -- it can stand out on its own as a value proposition.
That's important as Netflix heads into 2008 with upbeat projections. It is looking to earn between $1.12 a share and $1.24 a share this year. The company expects to grow its top-line revenue 8% to 13% higher, closing out the year with 8.4 million to 8.9 million subscribers.
Investors can also look forward to a few inevitable headlines. These aren't official, but I'll go ahead and beat Netflix to the punch and be fashionably early.
Online streaming supports Mac
CEO Reed Hastings threw his support behind Apple
The holdup all along has been the lack of a digital rights management solution to protect the studios. Apple's iTunes obviously doesn't have a problem with feeding premium video content into Macs, but it's a higher hurdle for third-party players like Netflix.
Netflix: Live on your Xbox 360
How sweet would it be to have Netflix films beam right into your Web-tethered Xbox 360? It's got to happen. The company already struck a deal to stream films through certain LG Electronics' systems.
Netflix noted during the conference call that it's hoping to land similar deals with home theater, Internet set-top boxes, and video game consoles. Why the 360? Well, Hastings sits on the Microsoft
The roadblock here is that Microsoft is hoping to sell more digital downloads through its Xbox Live service. Even with the limited collection of titles available through Netflix at the moment, it may be seen as counterproductive to have free streaming.
The Internet won't kill DVD rentals in the near term
Netflix is a survivor. Hastings makes a good argument in suggesting that Netflix has grown despite the presence of video on demand and movie beaming services like CinemaNow and MovieLink. The company has held up well against the recent digital forays by both Apple and Amazon.com
The alternatives offer convenience and immediacy, but they lack the selection and smorgasbord value proposition posed by Netflix. However, I still want to see where Blockbuster's Total Access stood at the end of December.
Netflix was asked about Blockbuster's retention rate during the quarter, and the company danced around the question. Hastings suggested that it's a question best left for Blockbuster to answer. He's right, but Netflix has to have some kind of idea. Keep in mind that this is the same company that launched into a price war a few years ago, acting only on inside information that Amazon was going to throw its hat into the market.
If Blockbuster closes out December with fewer than 2.6 million online subscribers, this remains a shrinking market. Don't get me wrong. As a Netflix shareholder I'm digging the quarterly report. But like a subscriber who gets just half of a DVD in the mail, I want to see the whole picture.
For more Foolish streams:
Netflix and Amazon.com are recommendations for Motley Fool Stock Advisor newsletter subscribers. Microsoft is an Inside Value recommendation. You want a price break? You -- yes, YOU -- can take a 30-day free trial subscription to the newsletter service of your choice.
Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.