Netflix Finds Value In Contrarian Approach

"Not all of this is brilliant strategy. A lot of it is luck," he said. "Netflix grew and created efficiencies into DVD-by-mail from 1999 until 2004. But if Blockbuster had taken this seriously and entered in 2001, I probably wouldn't have a job. Netflix built up both scale and efficiency by the time Blockbuster entered. Blockbuster spent $500 million trying to create the scale and efficiency that Netflix has and it didn't work."

Internet Streaming Revolution

With the global economy continuing to struggle and a recovery not on the immediate horizon, Netflix continues to offer one of the best entertainment options for cash-strapped consumers. The company is benefiting from an ideal competitive environment on two fronts, one on the DVD-rental side and the second on the Internet-streaming side.

On the physical product side, Netflix faces competition from Blockbuster and RedBox Automated Retail, a chain of self-service DVD rental vending machines owned by Coinstar (CSTR Quote) and McDonald's (MCD Quote).

Both companies were late to the DVD-rental-by-mail party, allowing Netflix to build up a strong customer base it has maintained despite the increase in competition. Even Wal-Mart (WMT Quote) faltered with its DVD-rental program, allowing Netflix to gain dominance in the sector.

However, Netflix also is facing down competition from Apple's (AAPL Quote) iTunes store and Amazon.com (AMZN Quote).

"Who's going to go to Apple or Amazon and rent 'The Jerk' or 'Ghostbusters' for $2 if they're a Netflix customer?" Pachter asks. "It's a great defensive measure. It's a great hook if you can tie it in with Xbox Live, which they did. I will give him luck with his vision and absolute A+ for his execution."