Netflix's fourth-quarter earnings report released Monday shows the company is widening its lead ahead of its chief rival, Blockbuster (Stock Quote: BBI).
Netflix (Stock Quote: NFLX), the biggest U.S. mail-order film-rental service, reported revenue of $359.6 million, beating analysts' estimates of $354.2 million. Revenue grew almost 19% over the same period in the previous year, extending double-digit gains to three consecutive quarters. TheStreet.com Ratings has Netflix ranked as a buy, and the earnings announcement validates that view. Blockbuster is a sell.
The engine to Netflix's phenomenal performance came from new customers. Netflix posted an astonishing 26% increase in its customer base, up to 9.39 million. The cost of attracting customers fell to $26.67 per person from $32.21 in the third quarter of 2008, reducing the biggest expense for the company, marketing, which cost $55.6 million last quarter.
Netflix's stock rose 13.4% last year as the S&P 500 fell 37.6% and the Amex Interactive Week Internet Index (Stock Quote: ^IIX), which includes Google, Yahoo!, Amazon and Research in Motion, tumbled 40.9%. Blockbuster plummeted 65.4%.
Tough economic conditions may be helping Netflix, as people rent videos instead of going to the movies. Netflix's churn rate, the amount of customer cancellations during a period over total customer base, has stayed consistent during the past year at 4.2% through the fourth quarter.
Blockbuster has started to copy Netflix's business model by renting out movies by mail and providing limited on-demand content, but the weight of its vast network of brick-and-mortar stores has eroded earnings. Blockbuster seems to have no plans to close its stores and move entirely online. The company recently built a concept store, showcasing the amenities of Blockbuster locations of the future.
Netflix, on the other hand, runs a lean business with expenses coming from marketing and the fulfillment of customers' requests, mainly in the form of postage. The latter will most likely diminish when on-demand video becomes the dominant form of media consumption.