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$28.97 -0.33 (-1.13%)
10/3/2008 4:00 PM

Netflix, Inc. (NFLX)

CAPS Rating:
***

The Company is a online movie rental subscriber which provides more than 6,300,000 subscribers access to a comprehensive library of more than 70,000 movie, television and other filmed entertainment titles on DVD.

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Avatar TMFMoby (99.87) Submitted: 1/15/08 2:56 PM : Outperform Start Price: $21.59 NFLX Score: 53.59

Netflix is down about 5% today on word of Apple's announcement that they're entering the online movie rental business.


Consumers aren't buying an increasing amount of high-definition TVs and DVD players so they can view less-than-perfect quality movies on them. A Blu-ray disc holds about 25GB of data, up from a DVD's capacity of 4.7GB. Movies are not exactly getting longer so the only logical reason for the increase in capacity is a large bump in quality. If we haven’t seen an extremely successful video streaming service to date, how do they hope to compete with a physical medium that is now 5x as good? Companies like Sony and Toshiba aren't battling it out in the HD-DVD/Blu Ray war for a format that’s going away in the next 3 or 5 years.


Why should Netflix be sold off when it is one of the chief beneficiaries from this? With HD discs costing ~25% more than regular ones, there will be an increased rental market.


According to Pew Internet Project in February 2007, the US has a broadband penetration of about 47%. Even assuming a broadband connection could stream a DVD quality movie (it can’t) or 5x that in a Blu-ray, that’s still a lot of people who have no option but to use a physical medium. Show me an infrastructure to support this kind of streaming and 75% of the US willing to pay for it and I’ll show you a bad investment in Netflix. Until then you can thank Steve Jobs for a good entry price.





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Avatar Tastylunch (99.63) Submitted: 1/16/08 1:30 AM

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I was under the impression that videos from Apple are going to be downloads and not streams which I would think would mean the quality could be roughly comparable to current Dvds
http://biz.yahoo.com/ap/080115/blockbuster_apple.html?.v=2

If these downloads are of comparable quality to current DVD's then I think Netflix could have a real problem on their hands. However if Apple's videos are of inferior quality compared to current DVDs quality like you are suggesting then I agree with your reasoning.

I don't think American will care enough about the minimal quality difference ( Blu-ray may hold 5x as much data but I don't think the Human eye perceives that much of a graphical clarity difference) between DVD and the next gen (especially HD-DVD) to pay extra money for rentals if they have a near quality more affordable alternative. For their own personal collections is another story...

I don't think either one will kill each other off either direct by mail or download businesses just fork the rental market into two.

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Avatar TMFMoby (99.87) Submitted: 1/21/08 7:37 PM

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My mistake. You're correct that it's a download rather than a stream. Thanks for pointing that out.
Regardless, we're still talking about a lot of data that has to be moved over an infrastructure that simply does not exist. The downloads cannot be of equal quality to that of HD content, otherwise the blu-ray/HD-DVD war wouldn't be going on right now.
I disagree that consumers don't care about the minimal differences. Why else would they be paying for $200 high def DVD players and $1800 for HD and LCD TVs?
Again, Sony certainly doesn't think this media format is going anywhere. According to BusinessWeek's source, Sony paid Warner around $400MM (about 1/3 of NFLX's market cap) for going exclusive Blu-ray. If that's true, you'd better believe they are confident in the medium. By the way, according to Reed Hastings, Netflix carries every HD-DVD and Blu-ray movie ever created, so they are set for success regardless of the winner of the format battle.
High quality digital downloads are the obvious future but not in the next 3-5 years. That's why Netflix is a great investment for that time period.

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