Netflix Thrives While Blockbuster Struggles


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. 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.

While Blu-ray may have won the high-definition format war, on-demand video is clearly the future of video entertainment. Netflix is gearing up for this inevitability and should be able to capitalize on the early adoption of the technology. While the company mainly provides standard DVD and Blu-ray discs, it also enables users to stream unlimited content to their home computer or television through a converter box for $99 and a subscription fee of $8.99 a month.

The online selection is relatively limited when compared with the DVD library -- 12,000 online titles vs. 100,000 DVDs -- but it still far outpaces Blockbuster's online selection and is being increased constantly.

Netflix has gotten a running start on what may well be the future of the entertainment industry. As Amazon and Blockbuster struggle to catch up, Netflix is building a solid base of loyal customers. In fact, the company is projecting revenue growth of as much as 19.7% this year.

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