Novice Investing - Netflix Blocks Blockbuster's Threat

Date: Monday 01st 2008f December 2008 05:14:27 PM

Netflix Blocks Blockbuster's Threat - 12/26/2005

By: Novice Investing Staff

After more than 16 months of launching its DVD online rental, Blockbuster Inc. (BBI) finally hit 1 million subscribers mark. This means that Blockbuster has stolen 1 million customers away from Netflix, right? Not so fast. A glance at Blockbuster and Netflix's stock performance seems to indicate the opposite.

Over the past twelve months, Blockbuster share price fell from $ 10.65 to $ 3.54. Meanwhile, Netflix has zoomed 300% from $ 8.91 to $ 27.73. What gives? It is probable that while Blockbuster has amassed 1 million online subscribers, the majority of the subscribers came from Blockbuster's brick-and-mortar stores. How about Netflix? Well, for the past twelve months, it has gained an additional 1.5 million online subscribers. Total subscriber count stood at 4.1 million for fiscal year 2005.

Blockbuster is at a disadvantage. Reasons are plenty. It has a larger cost structure since it has more than 5500 domestic stores. The company is also embroiled with management turmoil with Chief Executive John Antioco threatening to leave the company earlier in the year. Furthermore, it has heavy debt load. As of Sept 2005, it has $ 365 Million of long term debt and $ 906 Million debt coming due. Cash stood at $ 190 Million. Meanwhile, it has struggled to consistently post a profit. Contrast this with Netflix, which has $ 181 Million of cash and no long term debt.

What should Blockbuster do? To compete with Netflix, It has to combine both offline and online DVD rental concept effectively. Netflix seems to have a moat for DVD online rental business. Blockbuster cannot compete mainly based on pricing which it has failed to do in its online quest. Time is running out for Blockbuster. It cannot play catch-up with Netflix. As balance sheet weakens, Blockbuster cannot afford to wait around until it turns a profit. It is a do or die time for Blockbuster.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Blockbuster Inc. (BBI) or any other securities.

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