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This Pioneer Business Will Go Bankrupt

By Tom Dyson, publisher, The Palm Beach Letter
Tuesday, March 6, 2007


You choose as many DVDs as you want from a database of 50,000 movies and TV shows. Everything's done on the Internet. You can browse through lists of new releases, comedies, adventures, foreign films, and even other subscribers' recommendations. You get descriptions of the movies by simply holding your mouse arrow over the titles.

Then they send you the movies you pick, three at a time, in any order you desire. Take as long as you like to watch the movies. When you're done, pop them in the mail. Each movie comes with a prepaid envelope. They'll send you the next movie in your queue only when they've received an old one back.

This service costs $15 a month. The pioneer is called Netflix (NFLX).

I subscribed to Netflix about a year ago. We thought the concept was fantastic and, at first, we were very happy with our service. We loved the surprise of a new movie in our mailbox, and it was so much easier than renting movies from the store.


But after a few weeks, we began to notice a few flaws:

For one thing, the turnaround felt a little slow. No matter how fast we turned the movies around, we never managed to get more than three movies a week.

But damaged DVDs were the big problem. One time, we set up a Friday night movie. We bought popcorn and beer and invited the neighbors over. Halfway through the movie, the DVD jammed and the ending wouldn't play. One minute, we were in the grips of a great movie. The next minute, the lights were on and the neighbors were putting on their coats.

We received damaged DVDs five times in five months. At first, I'd fire off unpleasant e-mails to Netflix' customer service. They never replied. They just resent the movie. The sixth time it happened, I closed my account and joined Blockbuster's (BBI) new DVD service called "Total Access."

Total Access is exactly the same concept as Netflix... DVDs in the mail... except Blockbuster has added some major improvements:

It costs the same... $15 a month... but the turnaround is much faster. I don't know how Blockbuster does it, but now we're getting five movies a week in our mailbox. The movie database is just as large, and Blockbuster's website works fine. And in the six months since we became members, we haven't received one damaged DVD from Blockbuster.

Like Netflix, Blockbuster movies come with prepaid envelopes, so you can send them back by mail if you want. But with Blockbuster, you have a second option: Return your movie to your local Blockbuster store. The store will scan it for you and instruct the system to send out the next movie in your queue, right away. This speeds up the turnaround by about a day.

But here's the best part: When you take your movie back to your local Blockbuster, you can choose a new movie off the shelves – anything you want – for free. This movie is subject to the same rules as regular rentals, the same late penalties, and you have to return it to Blockbuster the normal way... but you pay nothing to rent it.

Now we're getting 10 movies a week and we're struggling to watch them all. We've even cancelled our cable subscription and we still don't have time.

Blockbuster is facing some serious business challenges right now from the Internet. In the last five years, the stock has fallen from $30 to $6. I don't know if its Total Access service is profitable or not, or if it'll solve any of its long-term business problems, but I can tell you this:

With Blockbuster you get triple the movies Netflix sends, for the same price, with fewer damaged discs. If Blockbuster keeps Total Access going for another couple of years, Netflix will go bankrupt.

Good investing,


Market Notes


Blockbuster launched its Total Access service on November 1, 2006. The chart below shows how the stock prices of Netflix and Blockbuster have performed since then.

As you can see, the stock market seems to agree with my assessment... Blockbuster is crushing Netflix.

However, Netflix is fighting back. In January 2007, Netflix introduced free 'streaming.' This new service allows you to pick any movie and watch it instantly on your computer. It's free for subscribers. You can't save it or 'burn' it to DVD, but you do get instant gratification. Will it catch on? We'll see...

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