Netflix Case Study

It is with sadness and regret that I must now recommend against investing in Netflix (NFLX). I am personally a long-time customer, and former investor. Like most customers, I love the service. Like most investors, I love the management team. When Blockbuster (BBI) first announced its "me too" Total Access service, I laughed right along with all the other true believers, and largely ignored it. But when I learned more about the details of the Blockbuster service, I changed my mind.

I am a devotee of the Warren Buffett and Benjamin Graham school of investing. I like to invest in companies with unbeatable competitive advantages, preferably at a discount. I used to think that the status of Netflix as pioneer, together with its excellent brand reputation and its strong head-start amounted to such an advantage. No longer.

Why the reversal? I learned a few weeks ago about Blockbuster's feature of allowing users of its Total-Access service to swap out DVDs in its brick-and-mortar stores. All of a sudden, all of that expensive real-estate and infrastructure is no longer a liability for Blockbuster - it is an enormous advantage that Netflix simply can't match. At least not for now.

I've read comments that this feature is negligible, and "misses the whole point" of the Netflix business model. I disagree. Much as I love the Netflix service, there are times when a particular movie pops into my head, or is suggested by a friend, which I would like to see right now. Netflix customers are out of luck in this scenario. The best we can hope for is to bump the movie up in our queues and wait a day or two.

Total Access customers, by contrast, have the option to pop over to the local Blockbuster and swap out a movie they've already seen for their "must see tonight" pick. While they are t! here, chances are good they'll pick up some snacks, or may! be a use d DVD or two. In a society obsessed with instant gratification, this advantage cannot be ignored. Blockbuster's management deserves a great deal of credit for this brilliant move. I was so taken by it, in fact, that the day I heard about it I sold all of my Netflix stock (for a gain of 80%, with which I am quite satisfied). Since then, the stock has bounced around, but has yet to pass the price at which I sold it.

By the way, while I sold my Netflix shares, I have not personally switched to Total Access. Blockbuster's selection is too mainstream for me - I prefer