The DVD Rental Race Analyzed

Thomas Hawk writes "Netflix and Blockbuster have been locked in a price war with regards to the DVD rental space. Wedbush Morgan Equity Analyst Michael Pachter has a $3 dollar price target on Netflix and is in contrast bullish on Blockbuster. Davis Freeberg challenges Pachter's thinking that Netflix will be the loser in the DVD rental battle and Pachter himself responds back on his rationale on why he thinks Blockbuster has the advantage." From the article: "Irrespective of what Pachter thinks about the overall DVD rental business, Pachter's seemingly obvious prediction would appear pretty dire for Netflix. Pacther updated his price target for Netflix On 4/22/05 with the new $3 price. If Pachter is right, then we should expect to see Netflix's stock fall by approximately 75% over the next 12 months."

Comments

One important thing Michael Pachter is missing

[Emperor Shaddam IV]

Is the fact that Blockbuster's previous practices of changing late fee's that were outlandish, has pissed a ton of people off. Also, Blockbuster used to not carry a lot of movies because they were too of the wall or "racy" or "sexually" oriented.

Blockbuster pissed me off so bad in the 1990's I haven't rented from them in several years, nor would I even consider renting from them if they charged less than half what Netflix did.

Check out the other people they pissed off:
http://www.google.com/search?hl=en&q=blockbuster+s ucks

Financial analysts

[Petronius]

These are the same people that predicted that Enron and Worldcom were the companies of the future, that Lucent was going to grow forever, that QQQ was the ticket to retiring at 30. Who gives a shit about their opinion? Listen to successful investors: W. Buffett, Peter Lynch, they'll tell you that the best thing to do about analysts is to ignore their predictions. So what does this guy know about Netflix? Has he actually even tried their service?

Re:Netflix needs to be acquired

[shayne321]

Netflix should get off their collective butts and start shopping around.

I keep reading people saying this, but my question is: Why? Every interview I read with the founder of Netflix says he's having a ball running the company as is, they're moderately successful, profitable (how many startups can you say THAT about?), and have a strong brand.

What would the deep pockets of wal-mart, amazon, or blockbuster give them? It's not like there's a lot of room for innovation in the online rental market. I go to the site and request a disc, they mail it to me, I mail it back. What sort of value added service are they going to provide, offer to mail me popcorn with my disc? Thanks but no thanks.

I think Netflix has a good thing going, and the founder has said repeatedly he is not going to get into a price war with blockbuster, he is going to compete on service.

Granted I'd love to see netflix do away with throttling, but for my $18/month I'm happy.

Re:Netflix needs to be acquired

[Morinaga]

Blockbuster has the size, marketing and money to TRY and crush Netflix. However, they also have overhead, tons and tons of overhead. Retail consumer locations cost money but nothing in comparison to the empolyment costs of having people in those buildings. When you run a company that floats a margin above large amounts of overhead your company's profit margins look like the DOW with very high Highs and very low Lows. Overhead produces the types of losses you see from Airlines and car manufacturers. They have fixed costs in this massive retail chain that don't change without significant closings, firings etc...

Netflix on the other hand has a much more flexible overhead structure. They have fewer customers? Well first, they KNOW how many fewer they have because they have subscribers and a predictable cash flow regardless of customer usage unlike Blockbuster. Second, if they get fewer customers they spend less on postage. Perhaps they reduce purchasing on new titles. At worst perhaps they lay off employees.

Netflix is a remarkably proficient business model. The biggest issue is that since they went Public in '02 they have become part of the beast that is stakeholder appeasement. They are a 'growth' stock. Shareholders want growth so a company has to invest in infrastructure, marketing, promotions and everything under the sun to show revenue growth. It frankly doesn't matter if the growth is done smartly as long as it's not slowly. The board of directors gets pressue for stock growth, which bears pressure on the CEO for that same growth (who is beholden to their own income (ie options) to show growth). The days of developing a solid income stock company are dead. Profits be damned if revenues grow by 19.5%!! Who cares if you lost 100 million in a quarter. Anyway, that's all a tangent rant but suffice to say that because Amazon posted losses during their growth years doesn't mean the business model won't work. It also doesn't mean there's no place in the market for retail when a web service is available.

Re:I'm no market analyst, just a movie watcher...

[jp10558]

I've used netflix quite a bit (in fact every time I have a full time job - currently in college though). Their prices aren't bad - especially given where I live there is no cable anyway.

So, for the price of basic cable I can get DVDs right to my doorstep, usually with no more than a day lag time. I can hold on to those movies, with no penalties. They have a selection that puts the "local" (30 mile one way trip) blockbuster to shame.

I think services like NetFilx will be able to find a niche if they want to - specifically with rural america (which is pretty big IIRC from the last election etc...).

With gas costs rising, do you want to drive 20+ miles to get to blockbuster, and then drive back, and then be locked into driving them back within a week (or 2 now?) or else fees? Gas is somewhere around $2.20 a gallon most places in the US.

I think the average gas mileage is 25MPG or so. So figure on average 3 gallons per trip out to blockbuster for many rural americans. That's 6 gallons once you return the movie. So, it cost you around $13 just for travel, not counting wear and tear on the vehicle or time. That one trip to blockbuster just about paid for a standard NetFlix monthly package, before you rent one video. And this assumes your time is worthless.

Of course, we try to make our blockbuster trip coincide with other shopping and such, but that's not always feasible, though the new extended time (I think, I haven't really looked at whatever the "end of late fees" became) it's a lot easier compared to the 2 day turn around time on new releases previously.

With more TV shows coming out on DVD a year later, and with our situation in the country, when the analog TV goes dark, we'll just up our NetFlix subscription. Better quality, better choice(4 analog tv stations on a good day), and no commercials.

So, I think NetFlix can do very well if they don't mind catering to the rural market.

Re:I'm no market analyst, just a movie watcher...

[badasscat]

They have 1.5 million customers.

They have 3 million subscribers, not 1.5 million (I hate to link to such a dire-sounding headline, but the article does have a lot of hard info). And their subscriber base is growing rapidly.

Every day at my office you can see a bunch of those red envelopes in the office inbox. And a lot of us that subscribe get them at home, so clearly there are more where I work than I even know about.

This is a popular service and one that people really like. One of the first things I learned when picking stocks is that the bottom line is the product has to be something people want. The quick test of any stock is to look around at what people are saying about the company, not from a business perspective but as customers. I have honestly heard the words "I love Netflix" more times in one week than I've probably heard the words "I love Blockbuster" in my entire life.

That doesn't mean the company's on the road to success, but it does mean they have the basic building blocks right. Blockbuster's really got nowhere to go but down at this point.