Netflix Benefits from Recession

Many industrial groups got hurt pretty badly in this one and a half year long recession. Banks, homebuilders, retailers, just to name a few. However, the recession has also proven to be an opportunity for others to bloom in this environment because when the wallet got tight, we cut our spending: we postpone purchase of a new car, borrow books from library, eat out less, and stay at home more. And when we are at home, we eat home cooked meals and watch movies on TV, movies that we rented from Netflix or Blockbuster.

Netflix (NFLX), the DVD rental company which does its business exclusively online, has seen robust growth in its subscriber base. Late last month, the Los Gatos, California based company reported a record subscriber growth, surpassing the 10 million mark for the first time to reach 10.3 million at the end of the first quarter. Profit also skyrocketed nearly 70% from the same period a year ago. NFLX stock was traded at $23.10 on December 1, 2007, when the recession officially started. On April 30, NFLX share price reached $45.30, nearly doubled from its December 2007 price, though the stock gave up some of its gains this month.

So what has propelled Netflix’s gain in market share? According to CEO Reed Hastings, Netflix attracts a lot of new customers with its Unlimited DVD Rental Plans which allows a subscriber to pay only $8.99 a month to rent unlimited number of DVDs (but with 1 DVD out at-a-time) and exchange DVDs as often as you want. In addition, with the unlimited plan, subscribers can also watch movies on their computers instantly with no additional costs. Comparing to a movie ticket (the average ticket price in U.S. is $7.18 in 2008 according to National Association of Theater Owners), $8.99/month for unlimited movies is much affordable these days.

A big mac and saving private ryan please On the other hand, Netflix’s chief rival, Blockbuster, didn’t get too much love from investors. Currently traded at around $0.80 a share, the stock has lost nearly 80% of its value since December 1, 2007. Blockbuster also offers through its Total Access Plan unlimited DVD rentals in a month with 1 DVD out at-a-time, but the price is higher at $11.99 per month. The extra benefit of this plan is that subscribers can exchange movies at Blockbuster store for free. At the end of March, Blockbuster announced that it joined force with TiVo to deliver movies to subscribers via TiVo, allowing subscribers to view more recent hits as Netflix does. But can that reverse Blockbuster’s fortune, whose stock has been struggling for years?

And both are facing competition from Redbox, the movie kiosk operator. At just $1 per night with no late fee, Redbox offers an attractive alternative to enjoy latest releases at cheap (you can also find Redbox Codes to rent movies for free).

What’s your favorite place to rent DVD?

Creative Commons Licensephoto credit: Valerie Everett

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