The growth and maturity of Netflix as a corporation and consumer mainstay has been quite a ride. Now, being one of the largest sources for entertainment in America, Netflix has new challenges to face.
A major hinderance to the company is that the costs of acquiring new subscribers increased by about 50% from the previous year, $15.62 per person compared to $10.87 last year. Also by adding larger video distribution services, it is continuing to become more and more expensive. This is counter-intuitive to the concept of economies of scale (which states that as an organization gets larger and sells more product, it becomes cheaper per unit to sell).
While costs are rising, competition is licking their lips and looking to sink their teeth into the expanding video streaming market. Verizon and Comcast OnDemand are two of the major players pursuing after the end goal of holding subscribers to their services for media and entertainment. These two companies are able to provide recent TV programs with the click of a button. This is where Netflix lags. Netflix has a lot of dated programs and classic movies but is unable to keep up with the most recent episodes that some subscribers may have missed on TV earlier that week.
Despite all the above, Netflix is by no means showing a weakness in its resolve. The shareholders still have confidence in the company, whose share price is up more than 50% this year even amid an expected 1st quarter loss of $0.27 per share. Also, Netflix has come a long way from its traditional DVD rentals. The company has now expanded into having its own unique shows, which is fitting seeing that it now has just as many subscribers as HBO (roughly 30 million).
All this being said, I think Netflix finds itself where RIM was several years ago…the leader of a growing market but with a lot of up and coming competition. What led to RIM’s downfall was a lack of innovation, as long as Netflix pushes to stay at the head of the competition there should be no concerns.
I know for a fact that the competition is sinking their teeth into the video streaming market, because several of my co-workers from Dish and I switched from Netflix to Blockbuster @Home, because of their enhanced services. We get streaming and discs by mail for a fraction of what Netflix charges for nearly the same service. I say nearly the same because we can also rent video games through Blockbuster @Home, unlike when we were with Netflix. I think RIM is a very fair comparison to Netflix, so we’ll see where they stand a few years from now as the competition continues to take larger bites of the market.