Netflix Pursues a World of Growth

Earnings season may be over, but the annual-reports season is in full swing. DVD rental expert Netflix (NASDAQ:NFLX) just submitted its 10-K for 2007, and it includes some changes from last year that may mean something to a curious investor.

Video on demand is both a weapon and an enemy. The rise of VOD services from Comcast (NASDAQ:CMCSA), Verizon (NYSE:VZ), and other broadcasters is noted as a threat to Netflix's current business model. On the other hand, a sudden drop in popularity for the VOD format would present another risk to the business. Netflix clearly sees itself riding physical discs as far as they will go, and then switching swiftly to a fully online delivery system. Today's "Watch Now" is just the beginning.

That online streaming service, barely launched a year ago, gets a lot of fresh space now. In fact, nearly all of the serious changes are related to download services. In 2006, Netflix acquired all its movies through direct purchases or revenue-sharing agreements with the studios. Now, there's a licensing component, where the company negotiates directly with studios like Disney (NYSE:DIS) or Viacom (NYSE:VIA) for the right to show their content online for a limited time.

Blockbuster (NYSE:BBI) Total Access is still the only "direct competition" listed, but the roll call of lesser threats now includes a few new names: kiosk rental services like Redbox, and Internet "television content providers." Quite a lot of language about competition worries has been removed entirely, signaling a newfound confidence in the business moat.

There are now 69 million DVDs in the Netflix inventory, spread over 90,000 different titles for an average of about 767 copies per movie. Last year, the ratio came out to 785 per, so the company is either tightening the supply on blockbusters, or expanding the long tail of its library more quickly.

Finally, I think there's an international expansion in the cards. Last year, Netflix was a registered trademark in the U.S. and United Kingdom only. Canada, Australia, and Japan have now joined the party. There haven't been any service announcements, but Netflix wouldn't bother to apply for trademarks in markets it doesn't plan to enter -- even if it only offers a digital-only plan.

Fewer competition worries, tighter inventory control, and global expansion plans. Why wouldn't you want to own this brilliant business today?

Further Foolishness:

• Netflix in 2010
• Smile, You're a Netflix Investor
• Has Blockbuster Left Netflix Standing Alone?
• 5 Stocks Approaching Greatness