May 20, 2009

DVD Movie Rental - Netflix and Balance Sheets

blockbuster_logo.gif Netflix bucks the trend of the DVD price war.Comment on Netflix, Coinstar, Redbox and the bloody balance sheet.

Netflix Bucks the Trend
By Rick Aristotle Munarriz
May 19, 2009 | Comments (0)

The DVD rental industry is seeing a lot of red lately. Between Coinstar's (Nasdaq: CSTR) Redbox machines, Netflix's (Nasdaq: NFLX) red envelopes, and Blockbuster's (NYSE: BBI) bloodied balance sheet, crimson seems to be a fashionable color.

In his Barron's Tech Trader column this week, Eric Savitz explores the cutthroat competition that Redbox kiosks -- 15,000 strong and counting -- are inspiring. In response to its machines, which spit out DVD rentals for just $1 a day, Blockbuster is testing a similar pricing strategy for in-store rentals, even as it teams up with NCR (NYSE: NCR) for its own automated solution.

Should Netflix worry about the price wars taking place in the real world? I don't think so, but don't just take it from me.

"Netflix's convenience is very strong, because we do the by-mail delivery to the consumer's home as well as the streaming," Netflix CEO Reed Hastings told us during an interview after last month's stellar earnings report. "That is what we focus on. Kiosk vendors focus on something else, which is super low price of DVD new releases, but you have got to drive to the store and drive back, and you are very conscious of having to watch it within 24 hours."

Rentals for a buck sound compelling, but the product isn't a fair match to Netflix. Even on a value basis, Netflix holds up surprisingly well. Its most popular subscription plan gives members unlimited rentals, with three movies out at any given time, for $16.99 a month. The Redbox equivalent of having three discs out at a time would run closer to $90 a month. Then you have to tack on the gas, time, and inconvenience of the roundtrip treks.

Kiosks are also limited in selection, naturally. Netflix has a catalog of more than 100,000 titles. Redbox machines can only stock a handful of mostly new releases. Netflix also makes on-demand streaming available to its subscribers at no additional cost, a bonus that also helps silence the lack of immediacy in conventional Netflix rentals.

This doesn't mean that Netflix can ignore its buck-a-day rivals. However, this is a bigger problem for the movie studios trying to protect the value proposition of DVD purchases than it is for Netflix. Let Hollywood see red; I think there's still plenty of room for all three major video-rental players to make a lot of green.

Posted by staff at May 20, 2009 01:15 PM