It’s only natural for people to want to compare Netflix (NASDAQ: NFLX) with Blockbuster (PINK: BLOKA), especially with Blockbuster having filed for bankruptcy yesterday while Netflix launched to new all-time highs. Many generations associate Blockbuster with movie-watching and Netflix as a young upstart company certainly launched as a head-on attack against Blockbuster. While in the past, the competitive comparison was very relevant in gauging Netflix as a company, that contrast no longer applies in the present.
Although Netflix continues to grow its DVD-by-mail rental base, the true growth and real catalyst behind the stock’s ascent is its positioning in the ever-important streaming market. It’s almost amusing how little people in the finance arena understand about the Netflix model. Just two months ago I had to step up and defend Netflix from attacks that they are “the next Crocs (NASDAQ: CROX)” and every day, I continue to see someone complain that Netflix’ recent move is reminiscent of 1999. Keep in mind that this is a real company, with real revenues, positive earnings and what in 1999 would be an insanely modest P/E of 65. Heck if this were 1999, forget about $160 a share, Netflix would be at $1,000.
Back to the why the Blockbuster comparison is irrelevant. The future of content and media distribution lies in the virtual world of the Internet. It’s only a matter of time before DVDs go the way of the VHS. As much as Blockbuster may try to reorganize its balance sheet, it lacks any sort of digital footing and for that reason, it’s presence is a moot point in the Netflix picture today. Netflix’ real competition comes from the likes of Hulu, Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG) and Amazon (NASDAQ: AMZN)–web-based companies with built in media distribution infrastructure.
If you want to know just how strong a force Netflix is in this new domain, look no further a recent Wall Street Journal report on Amazon’s attempt to build a subscription-based movie rental service:Amazon could face an uphill battle matching Netflix:
Some people familiar with the matter said Amazon executives had initially balked at what it would cost to license movies at rates paid by Netflix. The DVD-by-mail pioneer has been increasing its spending to secure programming for its Web-based service.
It is an incredibly capital intensive process to build up the type of streaming infrastructure that Netflix already has in place. In order to acquire the rights to streaming Paramount, Lions Gate and MGM films, Netflix agreed to fork over $1 billion over the next five years. It is telling that a company as well capitalized as Amazon, who recognizes the opportunity in streaming content, is unwilling to step up to face Netflix.
This particular WSJ report only focused on the access to content element of the business. Netflix enjoys a further advantage in their established presence on numerous media-consumption devices. You can now stream Netflix movies from devices such as any traditional computer, the iPad, Xbox, Playstation 3 and the Roku. Do you even see Blockbuster anywhere in this picture?
Disclosure: Long GOOG.