Netflix Making Moves to Boost Profits
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Simplicity is a major aspect of innovation today, being favored well over anything timely or difficult to understand. People do not want to take time out of their lives to do things if other options to accomplish the same thing faster and easier are available. For example, why would anyone prefer driving to a store to rent a movie that has to be brought back a few days later when they have the option to click a button on their TV or computer and get the same movie instantly. They don't, hence the shutting down of Blockbuster movie rental stores and the increased popularity of web streaming rental companies like Netflix (NASDAQ: NFLX).
Originally, Netflix started with the innovation of renting movies via ground mail. You receive the DVD you would like to rent in the mail, keep it for however long you'd like, then mail it back in exchange for a different one, without any late fees. While this method is highly preferential over making a trip to a movie rental store, Netflix continued to enhance the easy accessibility of renting movies, now with options to rent a movie from an online account to watch from almost anywhere.
Similar to Netflix' original DVD rental method is Coinstar (NASDAQ: CSTR) subsidiary Redbox, a type of DVD vending machine with convenient locations at almost every grocery store. Redbox allows customers to select DVDs for as little as one dollar per day, which is less than what Netflix charges. It also has a large target market for customers since the majority of people shop at large grocery store chains for their food. Yet again with the matter of simplicity, customers can easily rent a DVD after going grocery shopping, but then have to make another trip back a few days later to return them. I think Netflix’ move towards more usage via live streaming is a good one, even though it still has several satisfied customers with the mail-rental option.
Web streaming movies and TV shows are now offered by several other companies as well. Some television networks such as HBO and The CW allow you to watch full episodes of shows after they have been aired for free, the only down side is frequent commercial interruption and limited content. Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) also offer unlimited live streaming for movies and TV shows with the purchase of a membership. I think Amazon is too diverse to be any real threat to Netflix, it offers too many different industries to have a main focus on streaming videos. Typically when people think of or use Amazon it’s to purchase or sell items or books, not to rent a movie.
Apple’s movie and TV show streaming is available through iTunes, and may be preferential to customers already accustomed to using the program, but it is not exactly a great option for non-Apple product users. Despite the many Mac, iPad, and Apple TV owners, it is missing out on a potentially large market of additional customers that do not have Apple products. Also, similarly to Amazon, Apple is so diverse that I think it will be difficult to attain focus on streaming rentals since it already has so many other features. Netflix definitely benefits by having its sole focus on easy to access and affordable rentals.Wal-Mart (NYSE: WMT) also offers streaming rentals but at least was smart enough to do so under a different company name. VUDU offers rentals for only $2 for two nights without the requirement of a membership.
Moving On from Pricing Woes
Netflix suffered from a decline in customers last year due to its sudden increase in membership prices when it to combined its mail rental option with its live streaming option after a failed attempt to split the options into two different companies. Despite the customer decline shock, Netflix's earnings still rose 65% for the quarter that ended last September, earning about $62.5 million up from about $38 million for the same quarter.
After the sudden price increase Netflix wrote a letter to shareholders explaining the purpose for the increase and why it did not go over well with customers. It admitted that it might have moved too abruptly, increasing membership pricing from $10 to $16, which may have appeared to be considered greedy by customers. The price increase was explained to be due to the expansion of streaming content, and steady DVD costs, but it never explained the reasoning to customers.
I think that the price change is appropriate considering that the membership now includes DVD rental and live streaming options, Netflix just needs to make sure all of its customers are aware of the change and possibly even offer the option to allow customers to keep their current memberships until they expire, or upgrade to the new one. In the long run, I think Netflix’ strong focus on streaming rentals will protect them from its competitors despite this minor glitch.
Another major move Netflix made, that is another first in movie rental history, is a deal with DreamWorks Animation that involves its movies and television specials being played through Netflix. The deal is replacing a less lucrative deal between DreamWorks and HBO, the first time a major Hollywood supplier has chosen web streaming over pay television. I think Netflix should consider seeking deals with other major film companies to further expand content database and increase sales.
Netflix has also begun expanding internationally, which is a good idea considering that competition outside the United States is fairly low. The only risk of global expansion is losing money from operating fees, and the cost of expanding its database to have more international films and shows. Also, broadband quality is not as good internationally as it is in the United States, and also the usage of technology is not as popular, which may potentially limit memberships. A slow expansion will most likely be successful in the long run, but I think Netflix should keep its main focus on its business in the United States.
The Foolish Conclusion
Difficulties in finding its footing (and pricing) aside, the company still has real growth prospects. I and fellow Fools should not discount the company's growth prospects in the long-run, where a multi-billion person demographic awaits the company's streaming services, particularly in hard-to-reach places inaccessible by courier mail. Ultimately, content is king and Netflix has it right: Add content and subscribers will follow.
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