Netflix (NASDAQ:NFLX) may benefit from new restrictions placed by retailers, like Walmart (NYSE:WMT) and Target (NYSE:TGT), on the number of new release DVDs that can be purchased at a time. Such restrictions are designed to impact rental kiosks, like RedBox, that purchase their DVD rental inventory from the retailers and compete with new DVD sales at those retailers as well other film rental services like Netflix.
Below we highlight why retailers are restricting new release DVD sales and why we think DVD rental kiosks like RedBox do not pose a significant threat to Netflix. We also show how there could be a 10% upside to our $57 Trefis price estimate for Netflix’s stock if the company’s subscriber growth were higher than we forecast.
Retailers Restrict New Release DVDs in Order to Sell More DVDs
The decision by Target and Walmart to place caps on the number of new release DVDs that can be bought by a customer at one time is attributable to declining retail sales of DVDs and cannibalization of DVD sales by DVD rental kiosk operators. RedBox, one of the leading DVD rental kiosk operators, has about 20,000 locations spread across Walmart and other large retail stores, and is heavily dependent on retailers for access to new films as well as distribution locations.
Caps on New Release Sales Reduce Competition for Netflix
The DVD rental kiosk market is estimated to grow by 42% in 2010 and we believe the DVD purchase limit introduced by retailers will slow down the expected growth, benefiting Netflix by reducing competition. Specifically, Netflix will benefit from:
1. Limited Availability of New Releases on RedBox
Adams Media Research estimates that RedBox buys about 40% of its new DVDs from retailers and rents them for $1 a day. With Walmart and Target imposing buying limits, the availability of new releases on RedBox will be diminished unless RedBox can create partnerships with studios to purchase DVDs directly from them.
However, movie studios, like the retailers, are interested in retail DVD sales and are pushing to restrict access to new film rentals (DVDs, Video-on-Demand) after a few weeks of delay. For example, Warner Brothers has a 28-day sell-through window before its films are available for rental through Netflix.
2. Netflix’s Advantage in Delivering New Online Content Immediately
Consumers are increasingly shifting toward online movie streaming. With restrictions from retailers and movie studios on the availability of new release DVDs, Netflix is diverting its efforts to make its online streaming catalog richer. We believe that this strategy would benefit Netflix in the long run, and help it retain as well as gain more subscribers.
Netflix Subscriber Growth
We expect Netflix subscribers to grow from 12 million in 2009 to 28 million by the end of Trefis forecast period.
You can modify the forecast above to see how there would be a 10% upside to Netflix’s stock if subscriber growth were about 10% higher than we forecast as a result of more rental customers preferring Netflix service to DVD rental kiosks.
For additional analysis and forecasts, here is our complete model for Netflix’s stock.