Don’t look now, but there’s one of those brutal price wars happening, this time in video rentals. Unlike the cola wars of legend or the perennial PC-chip wars of the last decade or two, this is a price battle I find fascinating.
In the short-term, the DVD price wars will create one of those rare pockets where consumers benefit at the expense of investors. Longer term, it could shape how we watch movies. One of these two companies understands better how to give us the video we want when we want it, price notwithstanding.
I am a member of both. But I use Netflix more often, simply because the nearest Blockbuster store is too far from me to bother with Total Access. So thank you Netflix for dropping my monthly subscription by a couple of dollars. Or rather, thank you Blockbuster for forcing Netflix to do it. I’ll save $24 a year, enough to defray a whopping 1/30 of an annual cable bill. But really, I’d rather those negligible savings go toward a better movie viewing experience.
For now, Blockbuster’s gambit is working – sort of. It signed up more customers in the June quarter, while Netflix subscriptions fell. But the cost came from investors: The value of Blockbuster’s stock, $864 million, is a mere 16% of its revenue. Sixteen cents in stock value for every dollar Blockbuster brought in: Now that’s depressingly low. Compare the 1.01 price-to-sales ratio at embattled Netflix, or the 2.85 ratio at Amazon.com.
How is this a victory again? Well, Blockbuster will reportedly raise its Total Access fees later this year – which means so many new subscribers, weary of years of excessive movie prices, will simply revert back to Netflix when it does.
Netflix has its own loss leader, known as the Watch Now feature, which it introduced in January. Netflix currently offers nearly 2,400 videos on Watch Now, including underrated gems of old, like The Jerk (supposedly a favorite of Stanley Kubrick), and of new, like Sherrybaby. Each film streamed on Watch Now at no cost to subscribers loses Netflix several dollars, just as the Total Access plan does for each free-rental certificate it hands out to subscribers of Total Access.
Netflix has streamed more than 5 million movies this year. Now let’s say I watch an average of 8 DVDs a month on Netflix’s (recently lowered) $13.99 a month plan. That’s $1.75 per movie. And at 5 million free movies, that’s nearly $9 million lost over two quarters. And since Netflix ate the costs of those free movies, most of that $9 million would go directly to profits, split over two quarters.
For simplicity’s sake, let’s add $4.5 million to the first quarter of 2007. That raises the EPS from 14 cents to 20 cents. In the second quarter, the same adjustment raises the EPS from 33 cents to 39 cents a share. That’s a lot of money that Netflix could have theoretically made, but didn’t.
Investors may not consider this when they look at how Total Access is hurting Netflix. But think about the costs that are going into Total Access versus Watch Now. According to 24/7 Wall Street, Blockbuster has $2.4 billion due in rent for the very stores its Total Access subscribers return their DVDs to. Netflix has to pay for servers pushing out its free movies, much cheaper than retail space.
Blockbuster’s new CEO, who hails from 7-11, is pushing its stores into smaller retail spaces. That may cut overhead costs, but it also makes them even more dependent on the lowest common denominator – and against the tide driving consumers to niche-driven, narrowly targeted titles.
Netflix, meanwhile, is driving its users toward such obscure titles every time it adds new movies to its free Watch Now feature. The bulk of them, from classic Casablanca to Rescue Dawn precursor Little Dieter Needs to Fly, have a smaller but perennial audience.
This is a tough time for both Blockbuster and Netflix, by their own choice. Both are too busy hitting themselves in the head with hammers. As consumers, we should benefit while we can. As investors, you’d be better to stick with Netflix, which has the smarter – and less costly – longer-term strategy.
Pricing wars are so OLD SCHOOL!
Moser Baers, a leading CD/DVD manufacturer in the world, based out of India, has over the last year bought rights to over 5000 Bollywood titles and intends to sell the music CDs at INR 30/CD (approx. US 75cents) and DVDs at INR 45 (approx. US$ 1.25)!!
Let me introduce myself as a contender of this deathmatch.
I host most of my gems in the world of P2P and my library rivals that of netflix.
Do not forget that i do this as a service to mankind.
God Bless.
In addition to all that, blockbuster has successfully implemented “Blockbuster Exclusive” where Blockbuster has become the only authorized rental source for new movies from The Weinstein Company.
To the average customer this could be a potential benefit. For example the customer would think “Oh well, if blockbuster is going to secure me guaranteed rental to certain movies that I can’t get anywhere else, I might as well keep my membership here, instead of switching to Netflix.”
Netflix MAKES money each time you WatchNow.
You pay Netflix a monthly subscription, whether you watch a movie or not. They’d love it if you watched no movies at all. That way they save the postage.
You do not pay Netflix per movie. You have a flawed premise.
Exclusives are an empty threat, and everyone who does more than the occasional BB visit knows it. I rented one of the Weinstein exclusives from Netflix the week it came out. It is a hollow PR victory for Blockbuster at best. And just in case no one else mentions it, Blockbuster has ALREADY raised their prices. And changed the deal of in store exchanges. SO FAR, they are ‘grandfathering’ all existing customers with the deal they have. But new customers will pay more and get less, or pay a LOT more to get what we are getting now. And yes, I’m both a Blockbuster Total Access and Netflix suscriber.
Where does HDDVD and Blu-ray fit into the comparison? And the overall picture in general? (FYI, I have a PS3)
I used to rent Blockbuster, now they have changed the free instore exchange programs to 5 free exchange only. It will affect them and many will switch to Netflix I think.
Total Access is still the clearly superior program unless you live in the middle of nowhere, which I’m guessing isn’t exactly Netflix’s sweet spot.
I didn’t understand your comment:
“… That’s $1.75 per movie. And at 5 million free movies, that’s nearly $9 million lost over two quarters. And since Netflix ate the costs of those free movies, most of that $9 million would go directly to profits, split over two quarters.”
A user doesn’t get charged per movie; in fact Netflix might save money on shipping and handling charges for each movie a user sees on “View it now” vs. on DVD, isn’t it?
I discussed this at my blog, http://www.BizPlusBlog.com. It appears many Kevin’s are interested in this topic. I believe this will be a huge battle. It certainly is fun to watch.
Watch Now movies would be much cheaper for Netflix than mailing out DVDs, which may be the company’s ultimate aim. But that would only be the case if it used Watch Now instead of mailing out DVDs. But it’s not doing that. It’s offering Watch Now in addition to the mailed DVDs you pay for in a subscription.
I’ve been using Watch Now and it hasn’t reduced the number of DVDs I order from Netflix in a given month. I’m just watching more movies. But Netflix isn’t making more money from me or, I imagine, most other customers using Watch Now. If I did find myself having fewer DVDs shipped each month, I would downgrade to a cheaper subscription, which would also cause Netflix to lose money.
Blockbuster USA should take a look at the Australian designed system (by Mobilesoft Ltd) currently being trialed by Video Ezy who have bought the Blockbuster franchise in Australia. It allows for very fast downloads of movies (up to 40) onto memory sticks/ IPods etc that are taken home and loaded onto a Home Media Centre incorporating a digital tuner, PVR hard drive and charged only when, or if, viewed through your TV. Stores shrink significantly (less rent) , much less staff, no returns, no late fees, no bad debts, no damaged disks, no telephone calls to remind or chase up clients. They can also be downloaded via ATM style kiosks at gas stations, bus depots etc.
I use Blockbuster Total Access. Netflix never could get the DVD’s to me at my old apartment. I moved away from any delivery service for a while and just used Vongo/Movielink/iTunes for a while, but then moved back to Blockbuster when they created the Total Access program. I think the future is in streaming movies. Who wants to go to a video store or wait for movies to arrive?
I use Netflix, and I like it a lot. I find myself taking a long time to return movies, though, because I hate having to find a drop box to put them in. I like Netflix’s selection, though. I am sure Blockbuster’s selection(especially the in-store selection) leaves a lot to be desired. I used to work at a Blockbuster a long, long time ago, and I always thought it was funny how there were so many movies Blockbuster could not carry because they were too racy. I like the idea of Netflix’s Watch Now, but I haven’t found any movies that I want to watch in that category. The movies I want to see are only available through the mail. Also, I don’t like watching movies on my computer. I would much rather it be on my TV. The company that can provide every movie ever made through a cable and onto your TV will win the battle.
The math behind that statement is wrong. You may rent 8 DVDs a month from Netflix, but the number is limited by how many are shipped to your house during that period. If you watch a movie on demand from their site, you will have watched 9 movies that month. Netflix does not “eat the cost” of the free movie. Netflix only pays for the bandwidth. So $9 million in lost profits is completely inaccurate.
Have been with Netflix for years and very happy until lately some “very long waits” have been much too long. When I was able to get one of those at the local Blockbuster store, I began to consider BB. Have their free trial now but Netflix will probably win as the turnaround by mail is so much faster. If I mail a DVD back on Tuesday I usually have the next one from Netflix on Thursday. Mailing one to BB on Tuesday results in a Saturday DVD arriving here. I can’t be bothered to return them to the store — I started Netflix to avoid that! Blockbuster does have a customer service that does respond and that is nice, but I’ve never had problems with Netflix, except for the long waits, that I’d need customer service for. Netflix is also much more user friendly for me with its graphics and organization of information.
I did Netflix, now do Blockbuster simply because they throw in a free game rental each month and I don’t usually watch that many movies. It might be worth mentioning that the game feature is a real selling point for Blockbuster and has turned me from a “hater” to a lover of Blockbuster. Also, they do turn some extra revenue when I ALWAYS seem to forget to bring disks back on time.
Very interesting blog. It does the usual Netflix/Blockbuster financial dissection.
What I dont get as a customer right now is why should I be bothered with this. If we get the movies on time and they are the same movies we can get from either service, why not go for the Blockbuster flexibility of in store return/exchange. If BB goes bust supporting this model, or Watch Online from Netflix goes straight to my TV or set top box, or Netflix slashes prices by 50% then I will gladly go back to Netflix .. no vested interests, loyalty or philosophical hangups here with Blockbuster.
But for right now give me a good reason why we wouldnt go with BB.
http://netflixblockbuster.blogspot.com/
I use both services (3 DVDs at a time), for more movies.
I post long wait movies on top of each queue, and cancel the one not mailed.
Turnaround by mail is the same for both (2-3 days).
Netflix is closed Saturday, Blockbuster isn’t. And Netflix ignores Friday returns (essentially closed).
Netflix-open-4-days vs Blockbuster-open-6-days…Blockbuster WINS!
I have been a Netflix subscriber for less than a year, but have been exceptionally pleased with the service, easy to navigate web site and the customer reviews. I did consider moving to Blockbuster a couple of months ago, enticed by the Total Access deal. However, in the last 90 days, Blockbuster has closed numerous stores in my are (southern California). That sealed the deal to stay with Netflix for me. What’s the attraction of being able to return dvds to the store and get a free in store rental if there aren’t any stores in the area?
With the huge amount of retail rental expense that Blockbuster is facing, I believe these store closings will accelerate. With fewer retail locations, their program’s one advantage over Netflix will disappear. If I were an investor I would have to agree with Mr. Kelleher. In the long run, assuming no management missteps, Netflix is the stronger company.