Last Updated: April 21, 2008: 11:34 AM EDT
Email | Print    Type Size  -  +

Netflix lives!

Video downloads haven't made the DVD-by-mail business obsolete.

By Michael V. Copeland, senior writer

gal_hastings.03.jpg
Netflix CEO Reed Hastings says it will be at least five years before digital downloads kill the disc business.

SAN FRANCISCO (Fortune) -- Like the Energizer bunny, Netflix keeps going and going and going. The online movie rental service is expected to prove doomsayers wrong yet again when it announces first-quarter earnings after the markets close Monday.

As always, plenty of folks expect Netflix to stumble: some 40% of the public float represents short sales, or bets that company shares will head south. But skeptics could be in for a surprise: with a spate of recent analyst upgrades and key rival Blockbuster more focused on its bricks and mortar stores and its head-scratching takeover bid for Circuit City, Netflix appears to be be gaining momentum.

Analysts on average expect the Los Gatos, Calif. company to report earnings of 21 cents a share on $326.9 million in revenues, according to Thomson Financial.

A Silicon Valley venture capitalist once described Netflix (NFLX) as an "ice cube in the sun." That was almost three years ago, and Netflix, No. 46 on Fortune's list of fastest-growing companies for 2007, appears to be rock solid. Last year was tremendous for the company, with net income up 36% to $67 million on $1.2 billion in sales. Analysts estimate overall sales will increase 13% in 2008 and 14% in 2009.

What that venture capitalist got wrong, and Netflix CEO Reed Hastings has right, is that digital downloads are not going to wipe out DVDs anytime soon, no matter what Steve Jobs and his iTunes team would have you believe. With Blu-ray recently winning the format war for high-definition DVDs, you can expect a long life ahead for the business that Netflix pioneered.

Hastings will tell you it will be at least five to seven years before digital technology improves enough to ensure the demise of physical discs. However wide that window is, Netflix is pulling ahead of its chief competitor, Blockbuster (BBI, Fortune 500), in the DVD mail rental business; Netflix's subscriber base has grown, and Blockbuster's has flattened. That trend is likely to continue as Blockbuster turns its attention back to its retail stores (even as another movie-rental chain, Movie Gallery, tries to get out from under bankruptcy).

And while its focus is definitely physical discs, Netflix is prepping for a future without them. Last year it began rolling out its digital service, which streams movies onto a PC at the click of a Web button (and soon to a TV via a set-top box). It's a very small part of Netflix's business at the moment but will grow as demand does.

The advantage Netflix has is that its core DVD business allows it the time to find the right model and the right partners (game console makers, for example) for its all-digital business, even while those that bet too early on downloads are feeling the heat. To top of page

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
Sponsors

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.