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Earning’s Edge – Netflix

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Netflix (NFLX) shares tumbled over 12% in regular trading Monday after the company said it would lower prices for its subscription plans in the hopes of trumping rival Blockbuster (BBI). Later the same day, the company posted better-than-expected results, but investors took the stock down anyway; an additional 2% after-hours. What’s happening?

Netflix Chief Executive Reed Hastings joins the guys for this conversation. Here are excerpts from what was said.

What's your plan not only to survive but thrive in this highly competitive environment?

“We invented the category of on-line DVD rental,” says Hastings. “And it’s just been tremendous. There are 10 million subscribers who rent movie’s on line in America.. and we have over 2/3 of that market.”

He adds” Blockbuster wants to grow their share so we’re feeling a bit of an intense war, but the reason it’s intense is because we both see that this is just the beginning for online DVD rental.”

How do you stay relevant when technology is changing so rapidly?

“We always knew that our strategy was to build a big subscriber base in DVD by mail and to evolve into online video.” says Hastings. “We’ve launched a ‘watch now’ option where subscribers can watch online video today from Netflix. We have the technology today - and the subscriber base and we’re really excited.”

How do you stay alive in a price war?

“The Blockbuster store base is shrinking,“ explains Hastings. “They’ve closed about 10% of their stores last year. And they’re looking to close that many this year. (They have) falling cash flow and they have to re-do their…”

(interrupts) I’m not saying their situation is great.. but how deep can you discount?

Hastings says “We have made some real investments in consumer value in cutting prices but there are compensating effects. Now we’re going to spend a little less on marketing because the category is pretty developed.”

He adds, “So it’s more that we’re shifting from spending on marketing to providing consumers with a better value. But it is an intense competitive battle. Blockbuster is putting every nickel into it."

Ultimately, how do you win?

“The way we’re thinking about winning is to combine both the DVD by mail and the online video into one subscription,” replies Hastings. “So we’ll have one subscription with two delivery methods. And most of the competitors other than Blockbuster, for example Yahoo!, they will have have online video only. We think by intermixing it with DVD we get huge benefits because DVD has so many titles.”

Dylan Ratigan asks the guys what they think of NFLX?

Eric Bolling doesn’t like the stock. He prefers Echostar (DISH) and Cablevision (CVC).

Guy Adami and Pete Najarian think NFLX could become a buy in the future, but not yet.

Jeff Macke tells Hastings he thinks Netflix needs to develop a strategic partnership to keep the company alive.

Symbol
Price
 
Change
%Change
CVC
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DISH
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NFLX
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Trader disclosure: On July 23rd 2007, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (EMC), (INTC), (HAS); Najarian Owns (CLX), Najarian Owned (CLX) on 7/20/07; Bolling Owns (BP), (XOM), Gold, Silver, Copper, Platinum; Bolling Is Short Crude Oil