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Netflix (NFLX)
Netflix won't win Oscars, but will win over investors
Netflix may not win an Oscar, but it might win the popular vote when it comes to movie rentals. The Los Gatos, CA-based company has seen its share of problems, but has so far managed to shrug them off and push forward with innovative solutions to keep growing. But with its success comes competitors, which now include Apple, Amazon.com and Blockbuster. Can the trend-setting and innovative company stay ahead of the curve, or will the clamor of consumer demands cause it to turn into a horrible B movie?
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Oscar season is over, but movies rentals show no sign of slowing down. Netflix has approximately 7 million subscribers to its movie rental service, and is expecting that number to jump by 2.5 million over the course of 2008. That's a lofty goal, but investors seem to be buying it. Shares of the online movie rental company were up nearly 10% in Wednesday morning trading, and are up 20% so far in 2008. This is big news for a company that almost lost its shirt back in 2004, when growth seemed to disappear and share prices fell by nearly 75% in a matter of months. The key to the company's resurgence has been its constant push for innovation.
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The company faced some major pressure in 2007 when rival Blockbuster (BBI: Charts, News, Offers) started a big push on its online movie rental business. While Netflix had been once of the first companies to launch its line of business, the fact that Blockbuster had a physical presence across the country through its network of rental stores gave it an advantage when it came to targeting the sort of customer who needs instant gratification. The announced Blockbuster plan would allow people to return movies by mail or by taking it to the actual store, the latter option giving the renter the option of picking up another movie right there. Some felt that the announcement would spell doom for Netflix, but that just hasn't been the case. In order to stay competitive and attractive Netflix reduced the price on some of its rental packages in late July 2007. Its base plan costs $8.99/month. The price drop did not sway investors to jump ship, and shares rapidly increased from $17.10 to $26.26 (53%). The company bumped up its fourth quarter and annual guidance (2007).
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Netflix has no been sitting on its laurels; in fact, the company has been looking for other cutting edge opportunities to distance itself from rivals and give people access to more on demand features. The prospect of consumers being able to download and watch movies online has been around for some time, but lining up movie distributors for the deal is a tough call. Online movie downloads are almost solely the domain of legitimate websites like Apple's (AAPL: Charts, News, Offers) iTunes, or through downloading movies from less-than-legal websites where users don't pay the studios. In January the company announced that it was partnering with LG, a South Korean electronics company, to launch a system in which consumers can download and watch movies directly on their television. The service will require a box to be linked to the consumer's set. The move could help the company retain customers who are tired of waiting for movies to be delivered through the mail, and will also allow less technically savvy people watch movies on their TVs rather than a smaller computer monitor.
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By constantly staying on its toes, Netflix has been able to run at the front of the pack for on demand media content. Even with Apple entering the fray company executives have indicated that they aren't losing sleep, though this could be the sort of hubris that let IBM (IBM: Charts, News, Offers) overlook upstart Microsoft (MSFT: Charts, News, Offers). The company upped its 1Q guidance, full-year outlook and subscriber targets on Wednesday. It now expects first quarter revenue of $324-328 million, revenue of $1.35-1.39 billion for the year, and up to 9.5 million subscribers. The company also recently bought back $100 million-worth of shares.
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