Video rental king Netflix Inc. (Nasdaq: NFLX) years ago usurped Blockbuster Inc. (NYSE: BBI)’s throne as the No. 1 video rental outlet, but now it’s focused on cementing its status as the market leader as other video rental companies struggle to play catch-up.

Blockbuster, still king of brick-and-mortar rental stores, learned first hand the threat an innovative upstart can pose when it ran up against Netflix’s DVD-by-mail business model.

With movie theater tickets costing upwards of $10 (and that’s not including the popcorn or sodas), Netflix’s $8.99 1-DVD plan with unlimited exchanges and streaming video access represents a decidedly better deal for consumers that are tightening their spending amid rising unemployment and waning confidence.

Netflix celebrated its 10 millionth subscriber in February, noting that it added more than 600,000 net subscribers since the beginning of the year. In its second quarter ended June 30, Netflix said it had a total of 10.6 million subscribers, with paid subscribers representing 98% of the membership. The company expects its total membership to rise to between 11.6 million to 12 million by the end of the year, upping its previous quarter’s guidance of 11.2 million and 11.8 million.

Churn, a measurement of customer cancellations, rose to 4.5% in the second quarter from 4.2% a year ago, Netflix said.

“It could be the economy,” Netflix Chief Executive Officer Reed Hastings said of increasing churn in an interview with The Motley Fool. “It could also be that we make it very easy for subscribers to put their accounts on hold if they go on vacation or don’t have enough money for a month or two. When a subscriber goes on hold, we count that as a cancellation. What you can look at – as a good stable indicator – are net additions. And net additions continue to grow.”

Netflix’s top and bottom lines continue to grow as well. Revenue grew to $408.5 million in the second quarter, up from $337.6 million in the same period a year ago. Profit grew to $32.4 million in the second quarter, up from last year’s $26.5 million.

As subscribers, sales and profit rise, so too does Netflix’s stock. Shares of Netflix have jumped more than 45% since the start of the year, and managed to sidestep the doldrums experienced by the markets in March.

Still, it’s no time for Netflix to rest on its laurels, lest it suffer the same fate as Blockbuster. That’s why CEO Hastings is quietly preparing for the death of DVDs themselves. Ultimately, consumers will one day dump the plastic discs in favor of movies delivered straight over the Internet, Hastings told The Wall Street Journal.

So Hastings, who is a self-proclaimed student of companies that stumble by failing to adapt to technology shifts, is quickly trying to shift Netflix’s business so that more videos are available online.

While Hastings is having success in getting Netflix instant video onto devices, the biggest challenge facing his company is convincing Hollywood executives to license their content. While 12,000 choices may seem like a lot, many are older AAA movies or TV shows, or newer movies that weren’t commercially successful. New releases of hit movies usually take months or even years to appear in Netflix’s streaming video catalog.

That’s because Netflix is competing with pay cable channels such as Time Warner Inc.’s (NYSE: TWX) HBO and Viacom Inc.’s (NYSE: VIA) Showtime, which gain exclusive rights to show movies and generally have larger audiences. To get the movies and TV shows consumers want, Netflix will have to boost its licensing spending from the roughly $100 million it spent last year, an anonymous source told The Journal.

“Netflix has yet to show that it has the resources and profitability to be in the markets where licensing is the business policy,” said Warren Lieberfarb, former head of Time Warner’s Warner Bros. home video division.

The company has had some success in the licensing department earlier this year when it inked a deal with Liberty Media Corp. (Nasdaq: LMDIA) to show movies from its Starz pay cable channel.

Netflix’s library of 100,000-plus DVD titles is made possible by the “first-sale doctrine” of U.S. copyright law, which allows buyers of DVDs to lend them out without the consent of studios.

Too Little, Too Late?

It’s difficult to say when Blockbuster’s fall from grace began, but it was somewhere between its well-publicized late fee fiasco and the proliferation of Netflix.

Blockbuster’s operating income at the end of its second quarter in 2004 was $105.3 million. That was just before Netflix entered mainstream consumer consciousness. Blockbuster’s operating income at the end of its second quarter this year was a loss of $1.5 million.

In spite-of an 8.3% industry-wide increase in rental revenue, Blockbuster’s revenue fell 13.3%.

The company blamed the drop partly on reduced inventory as it tries to generate more cash to handle its debt load, the Los Angeles Timesreported.  Although Chief Executive Officer Jim Keyes told analysts in a conference call a renegotiation of a revolving line of credit meant stores would be fully stocked and more aggressively marketed, he admitted last week that didn’t happen.

“Temporarily during the first and second quarter, we put our plans for increased availability on hold,” Keyes said on the call. “We made this change with the recognition that we were also facing new and very aggressive competition who are better capitalized and would likely take share from us as we pulled back.”

Still, Blockbuster is doing everything it can to stay afloat, from closing stores to kiosk deployment.

“We’re deploying as many as 10,000 vending machines by the middle of next year,” Keyes told Bloomberg News in a telephone interview, adding that his company is focused on increasing cash flow rather than boosting sales in a “very challenging credit market.”

Blockbuster’s $250 million revolving line of credit is due on Sept. 30, 2010, and the company has more than $350 million of long-term debt outstanding that it must pay by the end of next year, according to a research note written by Wedbush Morgan Securities Inc. analyst Michael Pachter. Blockbuster had $99 million in cash and equivalents as of July 5, down 36% from $154.9 million on January 4, Pachter said.

“[Blockbuster needs] the credit markets to loosen up and they need to refinance,” Pachter told Bloomberg. “They’re not on track to repay this debt in the time frame they need to, so they’ve got to extend the terms.”

Pachter downgraded his rating on Blockbuster stock from “outperform” to “hold” last week. Blockbuster shares have tumbled more than 44% since the start of the year.

The Little Red Box That Could

Blockbuster was effectively rendered obsolete by Netflix’s quick response to changing technology. But Coinstar Inc.’s (Nasdaq: CSTR) Redbox Automated Retail LLC, which offers consumers new release DVDs for $1 per night, is hoping to avoid a similar fate.

Kiosk vendor Redbox, initially funded by McDonald’s Corp. (NYSE: MCD) and Coinstar in 2002, saw Coinstar acquire its remaining shares in February. The company’s $1-a-night DVD rentals are found in places like McDonalds restaurants, grocery stores, and numerous locations owned by retail giant Wal-Mart Stores Inc. (NYSE: WMT) that that serve at least 15,000 customers a week.

Redbox plans on having 21,000 to 22,000 kiosks throughout the United States by January, up from 13,700 a year earlier. The company’s sales, which were $188.9 million in the second quarter, account for 57% of Coinstar’s overall sales, up from 41% in the same quarter last year. Coinstar’s stock has risen more than 62% since the beginning of the year.

At a time when consumers are strapped, Redbox is perfectly positioned for those looking to save money. But now Hollywood is looking to stunt Redbox’s growth.

Tinseltown accuses Redbox of depressing DVD prices and depriving studios of the same revenue-sharing opportunities they now enjoy with traditional DVD rental houses such as Blockbuster, Reuters reported.

Three studios – News Corp.’s (Nasdaq: NWS) 20th Century Fox Home Entertainment, Warner Bros. and General Electric Co.’s (NYSE: GE) NBC Universal – are vowing to withhold their DVD distribution to kiosks like Redbox until 28 days after they are released.

To counter, Redbox has filed a lawsuit against at least one of the studios, 20th Century Fox.

“At the expense of consumers, 20th Century Fox is attempting to prohibit timely consumer access to its new release DVDs at Redbox retail locations nationwide,” said President Mitch Lowe. “Despite this attempt, Redbox will continue to provide our consumers access to all major new releases including 20th Century Fox titles at our more than 15,000Redbox DVD rental locations.”

Speaking to the LA Times, Lowe said Redbox isn’t a threat to Hollywood, but instead an additional source of income. However, Papi Capital analyst Richard Greenfield disagrees, writing that Redbox’s pricing is a “substantial risk” to the movie industry.

“It sets an ultra-low price point for movie content that will impact consumers’ decision-making process about all forms of movie-related commerce – theater-going, DVD purchase, video-on-demand,” Greenfield wrote.

Of course, distribution withholding and lawsuits aside, if Netflix’s Hastings is right and DVDs do walk the path of oblivion like CDs are now, Redbox will need to adapt and find a way to enter the already-crowded Internet video market.

Source: Hot Stocks: Netflix Finds Success in Innovation, While Other Video Rental Companies Fight For Survival ]]> http://www.contrarianprofits.com/articles/hot-stocks-netflix-finds-success-in-innovation-while-other-video-rental-companies-fight-for-survival/19974/feed 1 http://www.contrarianprofits.com/articles/investment-news-briefs-wednesday-july-29-2009/19518 http://www.contrarianprofits.com/articles/investment-news-briefs-wednesday-july-29-2009/19518#comments Wed, 29 Jul 2009 14:45:07 +0000 Money Morning Staff http://www.contrarianprofits.com/?p=19518 Goldman Goes to Defends Energy Trading; Consumer Confidence Falls on Job Worries; Home Price Erosion Continues to Slow; Congress Works to Ban Incentive Pay, Give Shareholders a Voice on Bonuses; IBM Expands Its Data-Crunching Business;

• Goldman Sachs Group Inc. (NYSE: GS) representatives are yesterday (Tuesday) defended their commodities trading business on Capitol Hill, where regulators may set limits on speculators in the sector. The Commodity Futures Trading Commission (CFTC) said that the energy trading community may have played a major role in the volatility of energy prices over the last few years, and may need to expand its oversight of the practice. “The American people are tired of excessive speculation and bubble economies caused by Wall Street greed,” Senator Bernard Sanders, an…

• Widespread foreclosures caused home prices to fall in 134 U.S. metropolitan areas. Foreclosure filings eclipsed 250,000 in January, their tenth straight month above that figure, Bloomberg reported.

• Aluminum Corps of China Ltd. (ADR: ACH), China’s state-owned aluminum group, will invest $19.5 billion in debt-heavy Australian mining company, Rio Tinto PLC (RTP). More than $12 billion will be spent on mining assets and the rest will buy bonds convertible into shares, Reuters reported. The deal will give China unprecedented access to much-needed commodities and raw materials.

• Media conglomerate Viacom Inc. (VIA) said its fourth-quarter profit fell 69% as the recession sapped advertising revenue. “It is clear that while as cable network owners we are in a more favorable media segment than most, advertising (comparisons) are likely to get worse before they get better,” Chief Executive Philippe Dauman said on a conference call, the Associated Press reported.

• Fourth-quarter profit for Coca-Cola Co. (KO) fell 18%, but beat analysts’ expectations. The company reported net income of $995 million, or 43 cents a share, down from $1.21 billion, or 52 cents, a year earlier. “They’ve been very focused on taking costs out now that they have a strong product portfolio,” Erin Smith, an analyst with Argus Research in New York, told Bloomberg.

• Sources told Reuters that General Motors Corp. (GM) is talking with China’s SAIC Motor Corp. about selling part of its stake in their decades-old joint venture. The 50-50 venture builds and markets Buick, Cadillac and Chevrolet models in China.

• A $27 billion (A$42 billion) stimulus plan was rejected by Australia’s Senate yesterday (Thursday). Australia is heading toward its first recession in 18 years. Adamant on passing the stimulus, the government will make further concessions before the measure is voted on again, Bloomberg reported.

Source: Global Investment News Briefs Friday, February 13th, 2009

• South Korea’s government announced plans for a 14 trillion won ($10.8 billion) economic stimulus aimed to create an extra 200,000 jobs, extend tax breaks for factory investments and increase infrastructure spending and development. Relief measures announced this year now total 33 trillion won, according to the finance ministry, Bloomberg reported.

• Initial public offering plans for buyout firm Kohlberg Kravis Roberts & Co. have again been delayed, this time because its Amsterdam-listed affiliate suffered big investment losses. With KKR’s delay, there hasn’t been a U.S. IPO in nearly three months, Reuters reported.

• DryShips Inc. (DRYS), Greece-based dry bulk ships carrier, posted a 71% gain in quarterly profits. The company dodged the cash drought by employing its vessels for long-term contracts, securing revenue as most companies are losing it, Reuters reported.

• Oil prices fell nearly 6% yesterday (Monday) as weak demand continued to drive investors from the market.  Light, sweet crude fell $3.90, or 5.75%, yesterday to settle at $63.91 a barrel. Black gold has plummeted nearly 57% from its record high of $147.27 a barrel reached in July.

• The Institute for Supply Management said yesterday (Monday) that its manufacturing index fell to 38.9 in October – the lowest reading since September 1982. Manufacturers have been crushed by mounting job losses and weak consumer demand.

• Viacom Inc. (VIA) announced yesterday (Monday) that third-quarter profit fell 37% from a year ago even though revenue rose 4% to $3.4 billion. Net earnings fell to $401 million, or 65 cents per share, down from $641 million, or 96 cents per share last year. The loss was largely the result of a $19 million operating loss in “filmed entertainment.” Viacom is parent to Paramount Pictures.

• October sales for General Motors Corp. (GM), Ford Motor Co. (F), Toyota Motor Corp. (TM), Honda Motor Co. (HMC) and Nissan Motor Co. (NSANY) all fell in the midst of tighter credit and a weaker global economy. GM sales of cars and light trucks fell 45% from last year. Ford down 30%. Toyota slipped 23%. Honda skidded 25%. And Nissan sales dropped 33%.

Source: Global Investing Roundups Tuesday, November 4th, 2008

About 17 million viewers joined India’s burgeoning television market in the first half of 2008. Television advertising responded to the broader audience, growing 26% in the first six months of the year.

The media and entertainment market in India is expected to grow by 18.5% by 2012, according to consultancy firm PwC. That’s the fastest among the BRIC countries (Brazil, Russia, India and China), as China’s rate of growth over the next four years is projected at 14.6%.

Annual revenue for television in India is expected to double to $11.6 billion in that time, as well, according to Media Partners Asia.

“In the long term, the media and advertising outlook for Asia is tremendous as wealth is created and people get educated and you see the emergence of a wealthy middle class,” Reuters quoted Murdoch as saying earlier this week.

News Corp. aims to exploit that remarkable growth potential with a $100 million investment through Star India, a wholly owned subsidiary of the company. Star India broadcasts entertainment and music on channels such as Star One and Star Plus. It also has a 26% stake in Media Content & Communication Services India, an operator of three news channels.

The move could be a precursor to an expansion into India’s movie business as well. The Indian film industry, known as “Bollywood,” produces about 1,000 movies a year, making it one of the most prolific in the world. Warner Group (TWX), The Walt Disney Co. (DIS), Sony Pictures Entertainment (ADR: SNE), and Viacom Inc. (VIA) already have already undertaken joint ventures in India and News Corp.’s 20th Century Fox movie studios won’t want to stand on the sidelines much longer.

News Corp. also plans to nearly triple the size of its editorial staff at its Indian Dow Jones from 25 employees to 70, although government regulations make it difficult to do business, particularly in print.

“We don’t see ourselves taking a stake in print… because they are not available and because we won’t want to take just a 26% stake,” Murdoch said.

Foreign investment in news publishing and broadcasting is limited to 26% by the government.

Still, Murdoch remains positives about India’s prospects.

“We are happy here,” he said “The slower expansion of the economy may slow growth a bit, but in the long term there is a lot of growth to be had.”

Source:  News Corp. Expands Presence in India with $100 Million Investment

But while Yang insists the deal will generate an extra $800 million a year in revenue, shareholders and analysts alike are skeptical the company will be worth the $33 a share Microsoft Corp. (MSFT) was offering just months ago.

In accordance with the deal reached last week, ads from both Google and Yahoo will appear on Yahoo’s search results. Yahoo has acknowledged that Google is more efficient in targeting online search audiences, estimating the larger search engine generates up to 70% more revenue per click for its ads. And it hopes that access to Google’s AdSense technology will enhance its own targeting capabilities.

According to Yahoo, the deal could boost cash flow by $250 million to $450 million in the first 12 months of implementation.

Google, on the other hand, will receive added revenue from having its ads posted on the country’s No. 2 search engine.

“Clearly, it is time to move on, and we believe that this agreement with Google does so by strengthening our competitiveness,” Yang said in a statement.

What Yang would like to move on from is a $44.6 billion failed takeover bid from Microsoft that would have netted Yahoo shareholders $33 a share.

Yahoo- which has suffered through eight straight quarters of declining profits- rejected Microsoft’s offer Feb. 11, saying it substantially undervalued the company’s worth. The original $31-per-share offer valued Yahoo at a 62% premium on Feb. 1.

After its second bid was rejected, a frustrated Microsoft turned its back and walked away. This infuriated Yahoo shareholders who had seen the bid as the company’s last chance to regain profitability. A contingent led by Carl Icahn instigated a proxy battle, seeking to oust Yahoo’s current board of directors and replace it with candidates of his choosing.

Icahn owned 10 million Yahoo shares and options to buy 49 million as of May 15, Bloomberg News reported. Investors BP Capital LLC Chairman T. Boone Pickens and hedge-fund manager John Paulson are reportedly backing his slate of nine directors, which includes himself and former Viacom Inc. (VIA) chief Frank Biondi Jr. The attempted coup has major ramifications for the Google deal in that it will be void should Icahn win the battle.

Also, if Microsoft- which Icahn has worked desperately to woo back into discussions- changes its mind and makes another off for the company, it will have to pay Google $250 million to end the partnership.

In addition to interference from activist investors, the deal will also have to clear regulatory hurdles as it couples the nations two largest search engines. Both companies have said the deal does not require regulatory approval, but that they would delay its implementation for up to three and a half months to give the U.S. Department of Justice a chance to review it.

“This collaboration between two technology giants and direct competitors for Internet advertising and search services raises important competition concerns,” Sen. Herb Kohl (D-Wisc.), chairman of the Senate Antitrust Subcommittee, said in a statement. “The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee.”

Microsoft has said in the past that a deal between Yahoo and Google would consolidate more than 90% of the search ad market.

However, even if the deal goes through, Yahoo is basically relying on its biggest rival for growth. Both Merrill Lynch & Co. Inc. (MER) and Citigroup Inc. (C) have cut their estimates on Yahoo’s stock price saying advertisers will likely shift more spending over to Google.

Yahoo’s stock fell as low as $21.83 a share, Friday, down more than 7% from Thursday’s close. Even if the deal lives up to Yang’s billing, it seems unlikely the stock will reach the $33 a share Microsoft had offered any time in the near future.

“This [deal] just reaffirms the view that Yahoo, and particularly Jerry Yang and [cofounder] David Filo, blew it,” Mark May, an analyst at Needham & Co. told Bloomberg. “It’s going to be hard for Yahoo to come back from blowing what might be, looking back, the major milestone in Yahoo’s corporate history.”

Source: Yahoo Grasping at Straws with Google Deal