is history. Long live Netflix vs.
If a company's status can be measured by the rivals thatanalysts and journalists pit it against, then Netflix has just taken abig step up in the world.
In a research note on Thursday that gave Netflix's stock a brief pop,Lehman Brothers analyst Douglas Anmuth upgraded Netflix shares, saying that the company will "transform" the video rental industry.
The report sent Netflix stock up 5% to $28.49 early Thursday, itshighest level in nearly three weeks (it closed at $27.67, up 2%, amid abroad decline in tech shares). Blockbuster's stock fell 2.3% to $4.61Thursday. Netflix's market value has not only surpassed Blockbuster's$879 million capitalization, at $1.65 billion it's nearly twice as big.
Strong customer satisfaction is causing Netflix's subscriber base togrow faster than Anmuth had expected: He now says it will expand to 5.24 million at the end of the current quarter, up from his previous estimate of 5.2 million; and to6.47 million at the end of this year, revised up from 6.4 million.
That growth is giving Netflix a critical mass of subscribers that,Anmuth said, will mean "stronger word-of-mouth advertising anddriving further closures of traditional retail rental stores." In otherwords, the gold-and-blue blockbuster signage in your local strip mallwill soon find its way on the endangered-species list. Blockbusterclosed 4% of its U.S. stores last year and is poised to close more thisyear.
This isn't news to investors who drove up Netflix's stock above $39 in early 2004 -- a rally predicated on the belief that Netflix would become the premier provider of DVDs.
It is news, however, for naysayers who drove the stock downbelow $9 in March 2005. Since that time, Netflix has more than tripled.
So, while the early Netflix bulls pat themselves on the back, otherinvestors are turning their focus to what lies ahead: digital moviesstreamed over the Net and into the homes of film buffs. Netflix customersand investors have been calling for this for years. Only now is thattantalizing goal starting to come within reach.
And that's where Apple comes in. In his report, Anmuth said Netflix is likely to see increased competition from Apple and
, though he warned that consumers may be slow to leave the DVD format.
But Apple has been boldly doing its best to prove Anmuth wrong onthat last point. In the same way that Netflix has been turning the videostore into a historical relic, Apple is quietly laboring to turn the DVDitself into a thing of the past.
Apple is working on a new generation of iPods that many observers believe will come with enhanced video-playing abilities. Recent news reportshave said that when the new iPods are unveiled this fall, the companywill also introduce full-length movie features for downloads on theiTunes site for $9.99 each.
According to the trade publication
, Steve Jobs hasbeen in intense talks with Hollywood studios, which are apparently freakedout about that three-digit price. But if the reports are true, Jobs isagain shrewdly ahead of the game.
New DVDs can already be bought at only a small premium above thatlevel: On Amazon, the best-selling DVD Thursday was
,going for $13.87. The second-best seller was
The World's FastestIndian
, selling for $12.87. Subtract out the packaging, marketingand distribution required to sell those DVDs, and $9.99 starts to soundlike a reasonable price for a downloaded movie.
No stranger to tipping over apple carts, Jobs is clearlyinterfering with Netflix's plans to move stealthily and discreetly towarddownloaded movies. To date, Netflix has been terribly bashful about when --and what -- it may do in this new world of movie distribution.
Things took an abrupt lurch forward when
reportedthat Eric Besner, Netflix's vice president of originalprogramming, as saying that the company is planningplanning, as early as this year, "to introduce a proprietary set-top boxwith an Internet connection that can download movies overnight."
Besner reportedly said that the service would keep the front-end interface, where movies automatically download according to what's in a customer's queue, and that subscription fees would not be comparable toDVD rentals.
It took only a few hours for Netflix to clumsily backpedal. The blog
quoted a Netflix spokesperson who said Besner'scomments were taken out of context. And Netflix issued an
filingoffering some new context regarding set-top boxes: The company "is evaluating abroad range of options," -- of which the set-top box is just one -- "andno decisions have been made regarding specific delivery options or timing."
That filing may have been an attempt to obscure Netflix's true plans.But, reading between the lines, it's actually revealing of what isreally going on. The movie studios know that downloading movies is asinevitable as downloading music. But apparently there's no consensus onhow to profit from it.
Most likely, the studios want to make it as expensive as the market willbear, whereas providers like Apple and Netflix are trying to keep thecosts low to win customers over quickly. And most likely, Netflix
to introduce its set-top boxes in time to beat out Apple,but doesn't want to slow things down by angering the studios unnecessarily.
So, as Apple and Netflix race to become the leading provider ofdownloaded movies, the first round will go to the company that does thebest job of winning over the studios. Clearly, Apple is taking a moreaggressive approach, and Netflix is struggling to be as diplomatic aspossible.
Who will win this round? I'd put my money on Apple, for now. Studiosaren't likely to budge unless they're pushed. Apple's near-term futurerests on a strong holiday season. And if a holiday sales means sellingmovies through iTunes, count on Jobs to stop at nothing to make it happen.