After an extended grace period—two weeks of final exams, a 24 hour journey back to my hometown (highlighted by the 14 hour flight from SYD to LAX), a week of time-zone struggles, and a week in Florida—I am back into the grind. Today, I will take my post in a different direction than I normally do, shifting my focus from the technical aspect of the overall market to a fundamental look at a specific market: Entertainment—movie and TV rentals.
On Tuesday of this week, Netflix (NFLX) made headlines by announcing a raise in price of their DVD-mailing and online streaming services, no doubt frustrating existing subscribers (whose plans will take on the new price structure in September). For their most popular plan (the plan that I subscribe to), which includes 1-DVD (by mail) out at a time and unlimited online streaming, the price will be increased by 60% ($10 to $16). This seems to be a move try and get customers to move to the streaming, which is cheaper to provide and has become epidemically popular this year. Another possibility for this could be the increasing pressure on licensing prices that they are getting from movie and TV production studios, which is expected to cost $100M more in 2012. Then we also have the ever-so-popular inflation debate that can be thrown into the mix.
NFLX, after it’s amazing +275% increase in price in 2010, attracted the attention of investors. The average daily volume (based on a 6 month period), more than quadrupled from January of 2010, ~1.1M shares, to January of 2011, ~4.9M shares. It was able to continue it’s run by gaining another 65% this year (compared to just 5% for the Nasdaq). These numbers speak to just how much Netflix has taken over this market.
Now that the prices are being raised by the once unprecedented and still affordable movie rental company, opportunity arises for more competition to enter the marketplace. Right now, there are a few big names out there with a chance to step in: Hulu, Apple, Amazon, Redbox, and Blockbuster.
Hulu: With their premium Hulu plus, offers access to nearly every episode (including current ones) for nearly every TV show, but has a limited movie selection. They don’t seem to have the ability to take away Netflix users that they haven’t already.
Apple (AAPL): iTunes has delved into the market with their movie rentals, which though they are offered in HD, can be pretty expensive, relatively speaking. They also require a download (which can be lengthy), and have yet to enter the streaming market.
Amazon (AMZN): Amazon has entered the game with their new Amazon Prime, which in addition to access to their own movie and TV show streaming, offers discounted shipping on Amazon.com purchases. However, in order to really contend, the Amazon Instant Video library would have to expand. It is currently sitting at 1/2 of the number of titles as Netflix, as advertised.
Redbox (owned by CSTR): Redbox seems to be second behind Netflix in the movie rental department, but they, like Hulu, focus on just one side of the movie/TV spectrum. They have their own market pretty well in check, catering to the more casual movie-watcher, with $1/night rentals.
Blockbuster (owned by DISH): The former giant in this market has undergone a bludgeoning since the entrance of NFLX and Redbox to the scene, as the $5/5day movie rental became obsolete almost overnight. Blockbuster is lucky to still be in existance, as it’s 2 major competitors (Hollywood and Movie Gallery) merged and subsequently failed. Blockbuster hung on for a few years while their debt climbed and sales fell, and after filing for Chapter 11 bankruptcy last September, they were bought by Dish Network (DISH) earlier this year for $320M. Though a little late to the party, there has been an effort to compete with Netflix as well as Redbox. Their Blockbuster Express vending machines (a la Redbox) have been around for a little over a year, and they have recently began to make a larger push to their DVD-mailing service as well as an On-Demand rental service (a la Netflix). They do not carry as many titles as either of their two main competitors, though. However, because of their existing relationship with production studios, they do have a competitive advantage over Netflix and Redbox as they get new releases about a month earlier (this advantage started late last year, but did not pan out as well as they had hoped). Right now, Blockbuster still focuses on newer titles, and lack the vast selection of old movies that Netflix provides, but that isn’t to say they can’t catch up. Under new management, there is an opportunity for the former major player to use it’s established name to get back into people’s homes. Thus far the effort has been pretty lethargic, but the question is whether or not they will take advantage of this opportunity that Netflix has just presented them, by absorbing some of the agitated customers.
For as well as NFLX has done against the Nasdaq this year, DISH has competed very well gaining +55%, as CSTR just broke positive YTD at +4.5%. But since the announcement of the acquisition in early April (helped tremendously by nearly double expected earnings) DISH has outperformed NFLX by 9.5% and the Nasdaq by 27.7%:
Though Blockbuster is only a part of DISH’s business, it has the potential to grow into a major player in the industry that it once dominated. And with Netflix perhaps driving away some customer base, there is an opportunity to do so. For now, though, Netflix offers the most and the best in this market (which is why it’s share price has risen so much over the last two years).