It's 5% down and 95% to go for Netflix (NASDAQ:NFLX). At least that's how an overachiever may approach last night's news that the DVD rental specialist has managed to grow its subscriber base to 5% of the San Francisco Bay Area homes.
What's in a fraction? Plenty. Netflix has pegged its long-term model on being the DVD rental service of choice in at least 5% of the country. The fact that it was able to realize that level in a heavily populated market like San Francisco is significant, but it comes with bits of both of good and bad news.
You want the bad news first? Sure. San Fran is the company's home turf. It's where overnight delivery of the latest disc releases has been the norm for years now. As a local firm, it gets all of the warm, fuzzy accolades that marketing just can't buy. It won't get any easier after this home court layup. Market penetration for Netflix everywhere else averages out to a somber 1% showing.
The good news? There's a lot of that, actually. Closing out the June quarter with 1.147 million subscribers (and more than 1.1 million of those as paying members), Netflix is no longer an unproven concept. A year ago, the Bay Area penetration was at just 3.2%, with the rest of the country at 0.57%. The trend is growing nicely and so is the adoption of the DVD format as the home entertainment medium of choice.
Even as Wal-Mart (NYSE:WMT) and Blockbuster (NYSE:BBI) continue to beef up their own online rental offerings, the DVD market itself is expanding. While it might take more than a couple of years for the rest of the country to catch up with the head start that San Francisco has had with its Netflix addiction, who says that Netflix has hit the ceiling in its home market? Five percent isn't the destination; it's just a milestone along the way.
The stock has rewarded its investors nicely. Followers of Motley Fool's research products have been treated to respectable gains since Netflix was featured in November's Motley Fool Select (now Hidden Gems) and last month's profile in the top-ranked Motley Fool Stock Advisor.
Is Netflix immune from the threat of new technology or more experienced potential entrants like Amazon (NASDAQ:AMZN)? No. It all bears watching. But, like a good flick, cliffhangers are often the best parts.
Is Netflix a passing craze, or is it for real? Can it compete with Blockbuster, Wal-Mart, and the next generation of Pay-Per-View? Is its distribution center expansion really that important? All this and more -- in the Netflix discussion board . Only on Fool.com.
