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Analyst Says Netflix Vulnerable to Streaming Competition

21 Apr, 2009 By: Erik Gruenwedel


Shares of Netflix Inc. April 21 closed down more than 6% after an analyst warned the Los Gatos, Calif.-based online DVD rental pioneer was susceptible to burgeoning threats from streaming services such as Hulu.com and YouTube.

Barton Crockett, analyst with Lazard Captial Markets, in a research note said the draw of Netflix’s popular Watch Instantly free streaming service could “be meaningfully eroded” in the near term as Hulu, CBS-owned TV.com and YouTube aggressively bow free ad-supported content.

YouTube last week inked streaming deals with Sony, MGM and Lionsgate, among others.

Netflix shares fell $3.01 to close at $46.60 per share, which still represents a 56% increase since the beginning of the year.

Separately, a Netflix spokesperson denied an online report it has experienced a surge in cracked and defective Blu-ray Disc rentals.

About 10% of the service’s 10 million monthly subscribers pay a premium to rent Blu-ray titles.

The issue surfaced April 16 when Wired.com ran a story proclaiming that hundreds of Netflix’s subscribers had received unplayable BD titles due to chips and cracks and that the problem was escalating at “an alarming rate.”

Netflix spokesperson Steve Swasey said the service ships two million discs per day from 55 distribution centers, of which Blu-ray represents a fractional percentage.

“The amount of damage to Blu-ray Discs is insignificantly small compared with our total ships,” Swasey said.

He said a BD disc incorporates a much thinner (0.1mm protective coating) than standard DVD (0.6mm) and that both types of discs are shipped in identical red-label envelopes.

“It’s part of the efficiency of Netflix,” he said.

Swasey said it was unclear to him whether the Netflix subscribers cited in the Wired story had contacted customer service. He said customer service had revealed to him nothing extraordinary about defective BD rentals compared to DVD.

“Obviously we make good whether it is a DVD or Blu-ray rental,” Swasey said.

He said rumors about defective Blu-ray rentals may have spiked after Netflix said it would begin charging subscribers of BD movies upwards of 24% more per month to rent the high-definition format.

The rate hikes take effect April 27 for all Blu-ray subscribers and immediately for DVD subscribers electing to receive BD content for the first time. Netflix has said Blu-ray titles cost 30% more than standard DVD.

Vincent Sorvino, general manager at XRentDVD.com, a Santa Ana, Calif.-based adult by-mail service, said he hadn’t heard about problems regarding Blu-ray rentals, which account for 5% of his service’s monthly and weekly subscriptions.

“If anything, we have more defective DVD discs,” Sorvino said.

Netflix reports first quarter results April 23.

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