If I were Netflix (NASDAQ:NFLX) founder and CEO Reed Hastings, I'd kick back and pour myself a cold one -- it's not every day that your business rival unequivocally admits you've been right all along.
From the start, Netflix has distinguished itself from Blockbuster (NYSE:BBI) by having no late fees. Read a few interviews with Hastings, and you'll undoubtedly come across the story that his revulsion for late fees prompted him to start the company. Tuesday, Blockbuster admitted that late fees are an albatross around its neck and eliminated them completely.
Well, almost completely.
To recap, customers will now have an additional week to return their games or movies without penalty; after that, their accounts will be charged the rental's "previously viewed" price. If the customer returns the rented item within 30 days, she will be credited with the purchase price, minus a "minimal restocking fee."
What does this mean? Essentially, Blockbuster replaced the late fee with the restocking fee, extended rental periods by a week, and will now force customers to buy the rented games and movies if they keep them for more than six weeks (30 days plus the seven-day grace period plus the original rental period).
How should Netflix shareholders react to the news? Not at all.
Blockbuster's latest policy deserves praise for creativity, but the basic economics of mail-order rentals remain unchanged. When its DVD sits on the coffee table for weeks, Netflix makes money; without late fees, a Blockbuster store does not.
Moreover, it will probably take Blockbuster some time and advertising to shed its "late-fees" label. And while the new policy is certainly less irritating and more fair than being charged for another week's rental if you're half an hour late to the drop box, it is still not on par with Netflix's simple premise that you can keep the movie as long as you want -- period.
But most importantly, the Blockbuster experience is likely to suffer as customers will now be able to hold a new release for nine days or, for just a restocking fee more, a whopping 39 days. With a deal this sweet, why should anyone bother to return the movie by the first due date? Even if inventories are increased, shelves could very well remain devoid of new releases for months.
For long-term owners and those with an eye toward Motley Fool Rule Breakers, purchasing or holding shares of Netflix today is a bet that by 2009 the company will be in the robust position to offer more than 5 million customers immediate movie downloads via the Internet, cheap DVD rentals by next-day mail, and an unparalleled experience of participating in a lively community of movie buffs. Blockbuster's latest move is an admirable attempt to save an ailing company but, ultimately, of little interest to Netflix investors.
For more on Netflix and Blockbuster, read:
- A Hollywood Blockbuster
- DVD Rentals for $15.99?
- Blockbuster's High Hopes
- Big, Bad Amazon
- The Two Million Man Moat
David Gardner highlighted Netflix as a Motley Fool Stock Advisor recommendation in the June 2003 issue and later suggested subscribers take their 197% gains in the stock. David, as he suggested he might at the time, recently re-recommended Netflix for Stock Advisor subscribers at its now lower price because he believes in the company's strong prospects and future. Subscribe today without risk to learn more.
Fool contributor Marko Djuranovic owns shares of Netflix and no other companies mentioned in this article.
