Goliath Falls in DVD Wars

Netflix claims it is ahead of the curve on technology, partnering with the digital recorder pioneer TiVo (TIVO) to develop new offerings.

"Netflix is a very well-run company," Ernst said. (He does not own shares in Netflix or Blockbuster, and his firm has no investment banking business.) "Just look at its third-quarter net income margin at 13%. It generated $35 million in cash last year, giving it a 7% cash-flow yield. Also, it's growing revenue by 70% every year. Those are impressive numbers for such a young company."

Both Ernst and McAlpine conceded that a partnership between Amazon and Blockbuster against NetFlix looks increasingly likely.

"Amazon could do a deal with Blockbuster, and I think that would scare the hell out of NetFlix," said McAlpine. (He does not own shares in Netflix or Blockbuster, and his firm has no investment-banking arm.)

Amazon boasts huge numbers in terms of online traffic, an asset that Blockbuster could leverage. McAlpine said such a partnership would constitute a grave, long-term threat to Netflix, which is expected to lose $5 million to $15 million this year. But as of now, the deal is far from reality.

"Netflix still looks good to me in the long term," McAlpine said. "They've shown an ability to execute while Blockbuster has stumbled. They've proven that they're not going anywhere anytime soon."

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