With shares of Netflix (NASDAQ:NFLX) flapping around in the preteens, it's probably fair to ask whether Netflix is broken -- and, if so, can it be fixed?
The company is looking to close out the year with roughly 2.5 million subscribers. The fact that a pricing war threatens to nibble away at the company's profitability in the near term is not lost on me. However, how can one discount the significance of a company that is able to reach 2.5 million movie buffs who have the appetite for entertainment and the means to subscribe to the company's mail-delivered DVD rental service? How can one dismiss the fact that the company has access to this lucrative audience roughly a half-dozen times every month by mail -- and countless more times through its popular website?
Yesterday I applauded Netflix for not following Blockbuster's (NYSE:BBI) lead into a second wave of price cuts -- even though it was the company that fired first. The convenience of the online format for loaned discs is too good -- and both Netflix and Blockbuster have built out their distribution networks too efficiently -- to sell themselves short by seeing which company can suffer the deepest gash.
Yet now that Netflix appears to be holding the line on pricing it can't just roll up its pioneer socks over its slacks and assume that the spoils will go to the pilgrim. I emphasized the significance of beating Blockbuster to the mail-direct video game rental front earlier this week. Yet that is really only the beginning of what Netflix is capable of doing to take advantage of its significant market share without alienating its user base.
For starters, we have those mailers. The company's signature red mailers have taken a break from the ordinary for subtle marketing promotions to coincide with the release of Garfield, Shrek 2, and My Big Fat Greek Wedding. Would it really impose on its subscribers if it were to help subsidize its low monthly rental fees by including a little more advertising on its welcome postal deliveries? Netflix has a lucrative target audience, and if it works for insurers, credit card companies, and frequent flier programs, why not meaty little Netflix?
And what about the active website? Busy online retailers such as Amazon (NASDAQ:AMZN) and Rule Breaker recommendation Overstock.com (NASDAQ:OSTK) have every reason to avoid cutting their piece of the paid search pie because they don't want to shoo their audience away before they complete a sale. However, Netflix already has the captive audience in place, and its content-heavy site would be perfect fodder for the paid search products that find Google (NASDAQ:GOOG) and Yahoo! (NASDAQ:YHOO) cutting big checks to successful online content publishers.
If you find yourself in a pricing war -- and that's where Netflix is right now -- you have to either minimize your costs or maximize your potential to build out other related revenue streams. Netflix is a lean operating machine, so its emphasis needs to be on paddling its way through new revenue streams. It's just what a Rule Breaker does if it realizes that the game is changing.
How would you make Netflix work at its $17.99 a month price point? Was its biggest mistake dropping its rates two months ago -- or hiking them back in June? 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 also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
