Welcome to the Death of Netflix
Roland is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There has been much hoopla from those left holding a bag of confetti known as Netflix (NASDAQ: NFLX) shares about how it is going to suddenly reach $1000/share and cure world hunger all at the same time. This is a company that had a good business model, then really pooched it. Perhaps this tale is yet another testimony for the ban on “fake weed.”
Netflix had a good business model, but a Web site that could only be described as wretched. Movies by mail, which you could keep for as long as you needed, then return by mail, was a great thing. People living in rural America finally had a video service they could actually use. (Before those of you living in a metropolis bad mouth that, you need to realize that roughly 70% of this country by geography is “rural America.”)
Thankfully, along came Blockbuster with movies by mail, a Web site done by actual IT workers, and the option of exchanging at a brick and mortar location if you happened to be passing one. Despite how late to the game Blockbuster was and how financially strapped, this was perfection. Not only did it serve the needs of the rural market, it fit the “I’m too busy but still like to drop by a store” urban dwellers too.
Wall Street was too enamored with Netflix to pay much attention to Blockbuster. The financial situation got worse and the stock tanked. Along came Dish Network (NASDAQ: DISH) and people thought the two companies would go down in flames together. It closed on Friday at $28.74, not far off its 52-week high of $32.56 and well above its 52-week low of $20.51.
What happened since then? Netflix upper management took a big hit from the ash pipe and came up with the idea of splitting video by mail off to basically jettison that market segment and move into monthly video on demand via the Internet and game consoles. Some 600,000 people canceled their subscriptions. No word yet on just how many signed up with Blockbuster.
Netflix has handed Blockbuster the video by mail business, and, despite what many in Metropolis think, video by mail is not going away. You may have access to unlimited bandwidth cable, but the rest of America makes do with dial-up, 120Meg/day Satellite, or 5 Gigabytes per month wireless broadband plans. Our phone switches haven’t been upgraded to provide ADSL, and even if they were, the 3 or 6 mile limit of that technology simply wouldn’t allow most of us to get it. For those non-technical types in the audience, a DVD without any tricks typically holds 4 Gigabytes of raw binary information. Most cellular providers typically charge $10/Gig for every Gig over your plan limit and Satellite companies throttle your connection below dial-up speed as soon as you pass that first byte beyond 120Meg. This group of people has the following choices:
- Video by mail
- Spend an hour driving to a video store and back
- Watch whatever is on your Satellite subscription
- Pay for an on-demand Satellite movie.
Even with all of the “Infrastructure Upgrades” planned for the communications industry, this group of people will have your level of Internet service for at least 30 years. What is really odd is just how far behind DirecTV (NASDAQ: DTV) is falling. I’ve had DirecTV out on the farm since they first started selling dish service in IL. I was working my way through college when my brother and I bought it for the parents. Today that same package is roughly $100/month and I can honestly tell you I’ve not been contacted by any of those JD Edwards customer service ratings people or DirecTV would NOT be able to run the ads they are running now.
Dish Network may have issues, but it has a much broader video market than DirecTV and given the pathetic 200Meg/day maximum download limit of DirecTV’s HughesNet Satellite Power200 plan ($99.99/month), that’s not going to be a growth industry no matter how many commercials they run. If you have any kind of cell service at all you can get a 5Gig wireless broadband plan for around $50/month. Do the math.