To celebrate this past weekend's debut of Shrek 2 on DVD, Netflix (NASDAQ:NFLX) is giving folks a break from seeing red. No, it's not that shareholders are getting a reprieve from the pounding the stock took after the company announced that it was waging a price war in the DVD rental market. It's the customers who are seeing green mailers instead of the traditional red disc covers.
With Shrek and his sidekick Donkey on the face of the mailer, one may wonder how much DreamWorks Animation (NYSE:DWA) is paying Netflix for the rampant promo. While the rental specialist has promoted character overlays in the past -- Garfield and My Big Fat Greek Wedding come to mind -- this time the entire mailer is in on the marketing gimmick.
The point is that the public is perhaps underestimating the company's potential to create new revenue streams to help partly offset the $4 monthly price cut on its most popular subscriber plan that allows consumers the right to keep as many as three DVDs out for as long as they like.
While the market may have gone cold on Netflix, the fact that 2.3 million homes welcome its signature DVD mailers several times a month is not insignificant. These are not just any 2.3 million subscribers, either. They're 2.3 million subscribers who have the disposable income to indulge in the convenient rental service. Think sponsors wouldn't want a piece of that?
Yes, the company will be barely profitable next year, but the aggressive pricing has the company confident that it may double its subscriber base by the end of next year. Why would Amazon (NASDAQ:AMZN) be entertaining thoughts of entering the market or Blockbuster (NYSE:BBI) be determined enough to enter into the price war that may ultimately devalue its offline bread and butter?
There is more money to be made here than by just loaning out discs. While CEO Reed Hastings' prolific role in education may keep the company out of erotica and it may take another heavy player offering video game rentals for Netflix to throw its hat into that ring, the company's magnetic ways can still reap profits. Google (NASDAQ:GOOG) has become a publicly traded money machine on the strength of paid search results, and Netflix clearly has the web traffic to make some serious money there by hooking up with a third-party search portal. If you think advertising on the mailer is profitable, why can't software and music companies pay for the right to piggyback lightweight samples?
I offered more potentially lucrative revenue streams in my Tomorrow Version 2.0 article back in August, but the green that consumers are seeing this week may be only the beginning. If you scratch the surface on a disc you may damage it, but when you scratch the surface on this business model it's only the beginning.
Will this month's lower prices win you over when it comes to DVD rentals? What are some other ways for Netflix to grow its earnings potential? All this and more -- in the Netflix discussion board. Only on Fool.com.
Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and investor -- since 2002. He is part of the Rule Breakers newsletter analytical team that will be looking to unearth the next Netflix early in its growth cycle.
