Netflix (NFLX): Another Savvy Partnership

Netflix (NFLX) originally found success by making the movie rental business more convenient that ever before. They caught the heavyweights in the industry including Blockbuster (BBI) napping, as they were too late to adopt and rental by mail model. The result has been sustained growth by Netflix, stealing market share away from both Blockbuster and Hollywood Video and other chains, all without the necessity for a brick and mortar store presence. Noting the rise of broadband internet and the ability to download and stream larger files than before, Netflix was the first to offer rental movies directly onto your computer screen thus bypassing the wait time of the mail service. Today, Netflix is announcing another way to reach a great number of customers with convenience in mind.

The latest partnership for Netflix announced today is to put a video on demand feature directly into Microsoft’s (MSFT) Windows Media software on all Vista machines. Netflix had previously teamed up with Microsoft’s Xbox systems so that users could stream movies, even high-definition movies, providing further access to the millions of Xbox owners. Access to that system cost nothing additional to a normal Netflix subscription, and we assume the Vista partnership will be the same way. In comparison, there are many times more Vista computers out there than Xbox’s. The goal is clearly to get as many people exposure to Netflix as possible and show just how simple it can be to sign up and rent.

Netflix is managing to upstage their competitors at every turn it seems, as Blockbuster is simply trying to stay above water, staving off bankruptcy rumors earlier this year. Netflix’s CEO Reed Hastings, has recently said that he believes the stiffest competition will come from grocery and convenience store kiosks, “By the end of the year, kiosks will likely be our number one competitor as video stores fall inversely.”

Ockham reiterates the Fairly Valued valuation on Netflix shares, as of our report this week. The stock is by no means cheap selling at 24 times expected fiscal 2009 earnings, but there is always a premium for growth. Furthermore, the industry trends seem to be in Netflix’s favor for the time being as they continue to take market share and come up with partnerships to give better ease of access to clients. There may be competition from these kiosks but they have obvious limitations, including smaller selection and the necessity for a physical location to return the movie. Netflix is doing the right things by bringing their product into consumers living rooms, one partnership at a time.

Netflix: Another Savvy Partnership

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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