Netflix Battle Is a Blockbuster Movie

08/07/2007 12:00 am EST

Focus:

Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, says the knock-down, drag-out fight between the two rental-pix giants could offer good opportunities—when the bloodletting runs its course.

It's a typical Hollywood drama: two titans battling, drawing blood. And audiences are loving it.

Only in this case the two titans are the major DVD distributors, Netflix (NASDAQ: NFLX) and Blockbuster (NYSE: BBI). They are locked in a heated price war for customers, and movie audiences are applauding because it means they are getting great deals.

The battle, of course, is taking its toll on both companies and their shareholders, and everyone's worried about how long it will last. "At current speed, they are both headed for a major crash," says Jefferies & Co. analyst Youssef Squali.

[That’s] why both stocks are down more than 30% since January. Investors hate uncertainty. But uncertainty can also spell opportunity.

I agree with Cantor Fitzgerald analyst Derek Brown that both companies will survive. They'll morph into very different companies five years from now. The price war will subside—sooner rather than later—and the stocks of both companies will go up as a result.

It looks like Blockbuster may already be cracking. A customer using the $17.99 Total Access plan, which allows three movies out at a time, now can't return more than five movies a month to stores. (After that, the customer would have to pay a new fee of $1.99.)

"Last week they showed their hand a little bit, and they should be increasingly more rational over the next two or three quarters," Squali says.

Once the price wars are behind them, both companies can [focus] again on getting where they want to be in five years. Netflix hopes to offer its full range of entertainment via the Internet for viewing on TV, but the service won't be ready for broad implementation for five or ten years. One major obstacle: Hollywood studios.

Will this online delivery render Blockbuster's brick-and-mortar video stores useless? I wouldn't bet on that, because a retail expert named James Keyes recently took the helm at the company. He helped revive the ailing 7-Eleven convenience-store chain, which had looked like it was on the road to ruin in the late 1980s and early 1990s.

Last Wednesday, InsiderScore.com reported that Keyes purchased $3 million worth of Blockbuster stock for an average price of $4.42. (Blockbuster closed above $4.00 while Netflix closed just below $17 Monday—Editor.)

I know insiders typically buy for the long term—they are not traders—but I'll take this as a sign that Blockbuster may be backing off in the price war sooner rather than later. For investors who don't mind being early and sitting in a position that goes nowhere for months, now's the time to buy both stocks.
If that's not you, then wait for more signs Blockbuster is pulling back from [the price] battle before buying. You'll miss some of the upside, but there will be less frustration in the meantime.

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