Want to get rich? Invest in the company that can dominate your entertainment
Today's Financial News - Posted January 14, 2009
Blockbuster (NYSE:BBI) and Netflix (NASDAQ:NFLX) are locked in battle. Netflix already won the first round. But now the companies are playing for keeps. Billions of dollars are on the line.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): Last night, I sat down at the kitchen table and realized I was a bit lopsided. I checked to see if the chair was broken. It checked out. I sniffed my glass of water to make sure it wasn’t tainted. It was alcohol free.
It turns out my overstuffed wallet was the culprit. My worn-out leather companion has slowly grown to nearly two inches in thickness. The growth cannot because of an accumulation of greenbacks. You have a better chance of finding a moth infestation than more than forty bucks in cash in my back pocket.
The culprit was a collection of gift and membership cards. As I started digging through the mess, I uncovered memories I had long forgotten, like my membership to a local gym. I called to see if it was still active. The kind lady that answered the phone told me the gym closed over two years ago. No wonder I have not been going.
As my stack of “throw-away” cards grew to over an inch in thickness, I hesitated when I got to my Blockbuster (NYSE:BBI) membership card. I hadn’t used the thing in at least a year, but had a tough time convincing myself that would be a long-term trend. After all, I am recently married and that means I will be spending a lot more time at home, snuggling on the couch. Ugh…
In the end, I decided to experiment and toss the rectangular piece of plastic into the hopper that will ensure it is buried for all of eternity. I think I made the right decision.
The Internet killed the video star
Blockbuster is in a ferocious industry battle. The video-rental company was doing fine, even leading its industry, until Netflix (NASDAQ:NFLX) came along and changed the rules of the game. No longer do consumers have to get in their cars and shell out four or five bucks for a movie that is due back in a couple of days. Thanks to Netflix, they are delivered straight to a subscriber’s door.
Blockbuster enjoyed nearly half of the industry’s “store” business, but cannot get anywhere close to a leadership position in the industry’s new monthly subscription business. Netflix dominates with nearly three-quarters of the $2.2 billion industry’s total sales.
Blockbuster has tried to keep up with the mail-based subscription industry, but as it was not able to obtain a position as a first-mover, its brand is rarely associated with the industry. Just as brands like Kleenex, Google and Xerox became synonymous with their products so has Netflix. It has become a strong and relentless competitive advantage for the company.
But now the industry is changing once again and Blockbuster is desperate to take the lead. Check out any of the latest in television or set-top products at the Consumer Electronics Show and you will see one thing. Almost all of them have Internet connections. A broadband-enabled TV is the way of the future.
At least that is what Blockbuster hopes.
Earlier today, the company announced a deal with Sonic Solutions (NASDAQ:SNIC), a $35 million company specializing in digital video software and products. Through Sonic’s CinemaNow video library and Blockbuster’s own digital content offerings, the companies are working to beat Netflix to the downloadable movie leadership position.
Netflix has the advantage. It has been offering online video downloads since 2007. Subscribers can download videos to their computers, Xbox systems and the company has a deal with TiVo (NASDAQ:TIVO) that sends movies straight to a TV set.
Blockbuster wants to follow the same route, but offer the content to even more digital devices hooked to the Web. It is going to be an interesting battle.
Playing for keeps
The real question is not what devices or technology the company’s should use. What investors need to know is if there is room for more than one player in this industry.
Just like the satellite-radio industry, the world of downloadable movies has high fixed costs and little in the way of variable costs. That means if the subscribers are spread over too many competitors, individual profits will remain low and we will see a wave of consolidation. Again, just look at Sirius XM (NASDAQ:SIRI).
But if one company emerges as the winner, it will be able to fend off competition because newcomers will not be able to afford the initial technology costs. That is why Netflix and Blockbuster are fighting so hard while this industry is in its infancy. The winner will secure a huge long-term revenue stream.
Right now, it is anybody’s battle to win. Netflix has the better brand, but it appears Blockbuster has the superior technology. Traders would be wise to look beyond these two companies and look at the firm’s making it all happen, like Sonic or even TiVo.
For investors looking to break into an industry of the future, this is a fantastic opportunity. Share prices are cheap and the profit potential can only grow from here. All you have to do is pick the winner.
Next Article: A grim day on Wall Street has some upside
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