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

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

[winkydink]

I don't know a single person that uses Netflix so that's rather difficult. I also haven't heard it *anywhere* other than on Slashdot. I wouldn't even know it existed otherwise.

They have 1.5 million customers. Clearly somebody is using it. In our little corp headquarters office or 25 people I can think of 4 people who use it (myself included) and the other 3 are definitely not in the Slashdot demographic.

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

[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...

[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.

Both have physical distribution - Netflix wins

[SuperKendall]

The assumption that Netflix does not have physical distribution methods (such as Blockbuster stores) is just plain wrong.

The reality of physical distribution nodes is that Netflix has a lot - they are called distribution centers! In fact they are far better off than Blockbuster in that regard.

Yes for perhaps 10-20 titles you might get stuff a little faster at Blockbuster. However a lot of stuff people rent is not going to be something carried at your average Blockbuster - and then the advantage of Netflix becomes apparent, in that you are going to get ANY movie no matter how obscure pretty quickly. Not just the 10-20 post popular at the moment.

So basically Blockbuster has a lot of distribuition centers, but with poor stock. You can think of it like a really badly run cache management scheme, where Netflix fares much better.

And both are just idling until online distribution takes place in large quantities - I'll bet that Netflix is more nimble in this regard.