What goes up often comes down on Wall Street, and on-demand movie giant Netflix (NASDAQ: NFLX) has certainly wrapped up the first part of the equation. Shares are up a stunning +250% so far in 2010. But could a start-up renting movies on USB flash drives be the start of a tech revolution that sinks Netflix stock?
Most investors are still digesting Netflix’s rapid ascension in the past twelve months thanks to the growth of its Internet-based streaming video subscription service. Netflix was already the leading video rental service in the United States at the beginning of 2010, thanks to years of its by-mail DVD rentals eroding Blockbuster and Hollywood Video’s retail rental outlet business.
But it was the proliferation of Netflix’s streaming service that have grown share prices so dramatically recently — not its mail-order DVDs. And with subscribers watching Netflix streaming movies on their Google TV (NASDAQ: GOOG) set top boxes and on their Apple (NASDAQ: AAPL) iPhones, that opens up a whole bunch of formats and software that are now Netflix competitors. It’s hard to imagine a future where the home video market isn’t controlled by Netflix, but that’s only if you believe the way in which we watch movies isn’t going to change.
Hollywood movie studios concerned by the diminishing value of their products thanks to Netflix subscribers’ unlimited access to content are sure to be looking to back alternatives. Coinstar Inc. (NASDAQ: CSTR) and its RedBox Entertainment kiosks have kept disc-based rentals alive during Netflix’s rise, but their low cost rentals still rankle film studios hungry for the high single disc rental prices once offered by Blockbuster.
Enter Flix on Stix, a new independent kiosk video rental business based in Corona, California that has been building towards a wide launch over the course of the past year. If the company can get its business off the ground with a variety of kiosks, Hollywood movie studios may have found a solution to the problem of diminishing home video revenue caused by Netflix and RedBox services.
Flix and Stix kiosks will allow users to download movie and video game rentals to a USB drive or SD card device like a mobile phone rather than using a disc. Rentals cost even less than disc rentals at RedBox kiosks—$1 for three days, $2 for six days, $3 for nine days, and $4 for twelve days—but these rentals are built to be impermanent, with the copy protected files self-erasing themselves from the USB drive or SD card used to download them after the paid for time.
The appeal of the Flix and Stix model to studios like 20th Century Fox owner News Corp. (NYSE: NWS) and Universal Studios parent General Electric (NYSE: GE) who are feeling the sting of diminishing DVD sales and unlimited streaming access through Netflix are obvious. No overhead for producing physical product, impermanent goods, and an unlimited stock of new releases at kiosks. It is unlikely, however, that the protected data distributed by Flix and Stix would remain protected for long, meaning that the kiosks could fuel piracy.
Investors should take note of Flix and Stix’s business — not in anticipation of success and an eventual IPO at this point, but rather a business model that may be replicated by Blockbuster and Coinstar in the coming months. Streaming video may still be the future, but competing rental outlets and movie studios may find a way to stymie Netflix’s dominance with an expiring download model.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
