Netflix Dodges New Release Competition in Pay-Per-View Market

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Netflix (NASDAQ:NFLX) has stuck to its business model of delivering DVDs and streaming content to monthly subscribers only.  Meanwhile, the competition has focused on pay-per-view access to individual movies (specifically, new releases) and TV shows rather than adopting Netflix’s subscription model.

Retailers like Amazon (NASDAQ:AMZN), Wal-Mart, Best Buy have been entering the pay-per-view market where they face competition for video-on-demand services provided by Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC), as well as distributors like Apple (NASDAQ:AAPL) (through iTunes) and Red Box (DVD rental kiosks).

Netflix’s success against growing competition can be attributed to its business model which offers a unique blend of DVD rentals and online streaming.  We believe that avoiding a pay-per-view model is the right choice for Netflix and helps distinguish the company in an increasingly competitive rental market that is driven by new releases.

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Below we highlight how and why competition has increased in the pay-per-view market, and how Netflix’s subscriber growth, despite competition, continues unabated.

Retailers Interested in New Release DVD Sales

Big retailers like Wal-Mart, Best Buy and Amazon have entered the pay-per-view market with their services Vudu, Blue Sky and Unbox, respectively.  DVD sales, especially new release sales, are a significant source of revenue for these retailers and such sales are increasingly at risk as film delivery becomes increasingly digital.  By entering the digital film rental and sale market, Wal-Mart, Best Buy and Amazon are positioning themselves for the eventual demise of physical DVD sales.

Netflix-Apple Co-ompetition

Apple has collaborated with Netflix recently, allowing Netflix to stream its content on Apple’s mobile devices like the iPad and in the near future, the iPhone.  Apple has an established business of selling pay-per-view video content, including new movie releases, via iTunes.

We believe Apple’s pay-per-view offering through iTunes is not threatened by Netflix’s proposition, as Netflix does not offer new releases online. This reduces any revenue conflict between the two companies, and gives Netflix the opportunity to leverage Apple’s ecosystem to expand its reach and improve user experience.

Kiosk Competition Limited to New Releases

DVD rental kiosks, with their strong proposition of providing new DVD rentals for $1 a day, have been one of the prime competitors to Netflix.  For Netflix, new releases constitute a small portion of its overall rentals.

Netflix recently entered into agreements with movie studios whereby rentals for new releases will be restricted for a period of 28 days.  In return for the restriction, Netflix is able to purchase content at cheaper prices from studios and invest the net savings in improving its online content.

Netflix been investing to improve its online content and overall subscriber satisfaction levels.  As demand continues to transition online, Netflix will have a long-term advantage over rental Kiosks.

Strong Netflix Subscriber Growth Continues

With its focus on improving convenience, content and overall customer service, Netflix continues to gain subscribers at a brisk pace.  We expect Netflix will reach a subscriber base of close to 36 million by the end of Trefis forecast period despite an increasingly competitive film rental marketplace.

You can modify the forecast above to see how Netflix’s stock can be impacted if it were to gain subscribers at a pace faster than we expect.

For additional analysis and forecasts, here is our complete model for Netflix’s stock.