Netflix (NASDAQ:NFLX), the leading DVD rental and online streaming service, is not likely to be impacted by Wal-Mart’s (NYSE:WMT) move to buy Vudu, a startup online movie streaming service. We believe that that Netflix has a variety of advantages that will help to limit the impact of new competitors such as Wal-Mart.
Wal-Mart and Best Buy Enter Digital Film Rental Market
Large retailers such as Wal-Mart and Best Buy are entering the digital film rental market primarily for three reasons:
1. To offset future declines in DVD sales driven by a shift to online storage and access of films
2. To promote the sale of higher-end, internet-enabled, TVs through their retail stores
3. To gain access to a new channel for targeting consumers interested in digital media and electronics
Four Reasons Why Netflix Is Safe (for Now)
Below are four reasons why we believe Wal-Mart’s move is not a significant threat to Netflix in the near term.
1. No New Hardware Needed to use Netflix
- Vudu’s streaming service is available only on internet compatible TVs and Blu-ray disc players. Customers who do not have the necessary equipment need to buy a set top box for additional cost. In comparison, Netflix’s customers have the option to stream movies on their computers in addition to internet compatible TVs.
2. Netflix Has a Wider Selection of Content
- Vudu’s movie catalog consists of latest movies but is limited to about 2,000 titles. Netflix, on the other hand, boasts of over 17,000 titles. We believe consumers would not be interested in incurring additional costs to enjoy Vudu’s relatively new but limited selection of movies.
3. Netflix Services and Pricing More Attractive to Frequent Film Viewers
- Vudu charges between $1.99 and $5.99 per movie rental while Netflix charges a monthly subscription fee for renting DVDs as well as streaming movies.
- Netflix’s $8.99 per month package that allows unlimited access to online movie catalog and unlimited DVD rentals (one at a time). Such film rental plans are likely to be more attractive to people who rent multiple films each month.
4. Wal-Mart and Best Buy’s Entry Will Increase Digital Media Visibility, Benefiting Netflix
- Wal-Mart’s foray into the digital movie rental market comes after Best Buy’s partnering with Sonic Solutions to stream video content. Such moves by big retailers emphasize the importance of shifting consumer preference to online content.
- We expect this trend to increase visibility and strengthen Netflix’s value proposition and help it drive subscriber growth.
What if Neftlix is Impacted?
Although we believe Netflix will not be impacted in the near term from Wal-Mart’s entry into the digital film rental market, you can modify our forecast for Netflix subscribers below to see how Netflix’s stock could be impacted if Netflix’s long-term subscriber growth were to slow as a result of greater competition.
For additional analysis and forecasts, here is our complete model for Netflix’s stock.
