<<(1) The importance of Walmart is not its 75K subs; it's the elimination of a low-priced competitor. To that end, both NFLX and BBI benefit from reduced competition.>>
I'm surprised by the market's reaction to today's results. From a growth perspective, NFLX's Q2 sucked. Netflix reported 3,018,000 subs as of 3/31/05 and 3,196,000 subs as of 6/30/05. This implies sub growth of less than 60K/month, even after including the approx. 75K subs brought in from Walmart.
In contrast, BB Online reported 750K subs as of 3/8/05. Assuming that BB Online is able to hit its guidance of 1,000,000 subs as of 6/30, BB Online is growing at over 65K subs/month, with no help from Walmart.
So in less than 1 year of operation, Blockbuster Online is likely capturing more than 50% of new Online entrants. Pretty impressive.
Also, Netflix's ability to earn a profit in the face of an extremely competitive environment not only validates Blockbuster's entry into Online but also bodes well for Blockbuster going forward, given that the competitive climate will continue to ease. With Walmart's exit, it's now a 2-player market. Within a few months, Online Pricing will likely increase, creating a nice cash-generation environment for both Blockbuster and Netflix.
I maintain that the best way to play this industry is to: (1) Short MOVI, and (2) Go Long BBI. MOVI has no online presence, no subscription offerings, and will have to compete with a revitalized Blockbuster that offers No Late Fees, Online, and MoviePass.
Meanwhile, Blockbuster's accomplishments continue to be heavily discounted. Blockbuster's cash-bleed days are just about over, as heavy investments in Online, etc. have already been made. In addition, in less than 1 year Blockbuster Online has gone from a standing start to capturing 50%+ of new Online entrants. At this point, there's less Online competition, and pricing will soon increase and lead to much better cash flow.
Disclosures:
Short MOVI: Message 21311138
Long BBI: Message 20547823
No position in NFLX. |
