How Netflix Succeeded Where Blockbuster Failed

Minyanville

The more traditional rental business was too late to the streaming video party.

Constant evolution and increased device support allowed red envelopes to trounce blue snapcases.

At this point, no one would confuse the winner of the 13-year Netflix (Nasdaq: NFLX) versus Blockbuster (NYSE: BBI) war. One continues to grow as the other attempts one last-ditch effort after another. But last week, as Netflix reported its first-quarter earnings and Blockbuster continues to shutter locations and flirt with Chapter 11 -- despite a recent sharp uptick in the market -- the online retailer delivered news indicating that it not only won the war, but it's delivered a flaming bag of Wild Wild West VHS tapes on Blockbuster's doorstep.

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Netflix finished up a stupendous quarter, earning $0.59 per share -- topping Wall Street targets by a nickel. The retailer gained a record 1.7 million new subscribers and closed out the three-month period with almost 14 million customers. Revenue for that quarter neared $500 million and represented a 25% year-over-year growth. Churn rate dropped, gross margin grew, and the company projects a stronger second quarter.

In a press release, CEO Reed Hastings referenced one of the main factors to its success. He said, "It is clear that our performance, and the overall appeal of the Netflix service, is being driven by subscribers watching instantly. On that score, we reached a milestone in the quarter as more than half of all members -- 55% and growing -- enjoyed movies and TV episodes streamed from Netflix over the Internet."

Yes, 55% of Netflix subscribers have watched more than 15 minutes of content streamed to their computer or Netflix-supported device. And the number of those devices continues to grow. The retailer has only recently added the Nintendo Wii and its 30 million American users to the fray, but its service is also compatible with the Xbox 360 (Nasdaq: MSFT), PlayStation 3 (NYSE: SNE), TiVo (Nasdaq: TIVO), and decks from Panasonic (NYSE: PC), Insignia, and Seagate (Nasdaq: STX). Also, along with the highly anticipated Boxee Box, Netflix aims to add support to Apple (Nasdaq: AAPL), Android, and Windows 7 mobile devices.

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That means Netflix's Instant Streaming will become more ubiquitous than it already is. In fact, the company doesn't see its chief competition coming from Redbox (Nasdaq: CSTR), Amazon (Nasdaq: AMZN), or Blockbuster, but from the advances in on-demand services from cable. According to Ryan Lawler of GigaOM, Hastings said during the earnings call, "There are a lot of competitive threats… But cable, satellite, and telcos improving their products is probably the biggest threat."

It's the at-home streaming aspect that's Netflix's bread and butter. Already two steps behind the tastes of the home viewer, Blockbuster stumbled so late to the video streaming game that Netflix had already commanded the service with dependability and name recognition -- giving it a lead that Blockbuster could never reach. Especially when the latter brings back late fees and sets up rental kiosks using SD cards rather than discs.

Netflix's image may have taken a hit with recent class action suits alleging privacy invasion and a scheme to restrain trade, but the service remains very popular. Even with titles from Warner Bros. (NYSE: TWX), Fox (Nasdaq: NWS), and Universal (NYSE: GE) being held 28 days after release, it's unlikely customers will cancel their subscriptions over the matter. If anything, it'll only hurt the studios

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