Caveat Emptor: These Two Companies Won’t Last Another Five Years (Part 1)
How do you like those GDP figures?!
Despite all the pessimism in the mainstream media and investment community – and the non-stop fear mongering about another recession – the U.S. economy picked up a head of steam in the last quarter.
Last Thursday, the Commerce Department announced third-quarter gross domestic product (GDP) grew at an annual rate of 2.5% – almost triple the rate in the first half of this year.
“Clearly today’s GDP report is indicative of an economy that is extracting itself from a temporary soft patch, and not one that is rolling into another recession,” said Phil Orlando, Chief Equity Strategist with Federated Investors.
Amen brother! Because I’ve been telling readers for months there’s no way another recession’s knocking on our doorstep.
But I’m not here to boast. Instead, I want to warn you…
You see, all stocks are rallying on the strong economic report. Yet, no matter how fast the economy grows, some companies are still destined to fail.
Why? Because with the passage of time comes inevitable change. Technologies become obsolete. And so do businesses.
With that in mind, over the next two days I’m going to share two companies with you that I’m convinced won’t be around in another five years. Despite seemingly innovative products and compelling growth.
The End is Nigh for Netflix
At the center of the debate, of course, is the recent fumbling of CEO, Reed Hastings.
First he announces a price hike. Then he decides to spin off the DVD-rental business into a new unit with a puzzling name (Qwikster). And then he pulls an about-face and decides to nix the spin-off altogether.
End result? Netflix angered subscribers. And they bailed in droves. The company announced it lost 800,000 subscribers in three months time.
Not to mention, the stock fell off the cliff, too, nose-diving 68% in the last three months.
Call me crazy, but such “accomplishments” aren’t going to earn Hastings any nominations for “CEO of the Year.”
The reason Netflix is ultimately doomed has nothing to do with leadership, though. It’s about a business model that’s becoming increasingly obsolete. I have to admit, it’s a bit ironic, too.
You’ll recall that Netflix rose to fame by pushing another business model to the brink – the traditional movie rental shop. Specifically, Blockbuster.
Netflix’s cheap prices, wide selection, fast and efficient delivery, and lack of brick-and-mortar overhead were too formidable of competitive advantages to overcome. Not even a nasty price war could thwart Netflix’s advances.
Fast-forward and times are changing again. The movie rental business is moving entirely online. Instead of renting DVDs, consumers are streaming videos.
Or, as Netflix said in a recent letter to shareholders, “The internet is transforming video entertainment, stream by stream, consumer by consumer, nation by nation.”
The only problem?
To survive, Netflix needs to ramp up spending in a big way to bolster its selection. But doing so exposes the business. All Wal-Mart and Amazon have to do is start a price war to starve the company out.
At the same time, Netflix is being attacked from behind by Coinstar (Nasdaq: CSTR).
The company’s Redbox DVD-rental kiosks offer similar convenience and affordability. There are currently 28,000 Redbox locations, renting movies for about $1.
As the DVD rental business becomes increasingly obsolete, there’s no need for a monthly subscription plan like Netflix offers. Not when you can go down to the corner store and rent a DVD for a buck.
And that means Netflix’s super efficient distribution system is no longer an advantage. It’s become an unnecessary and draining expense.
Bottom line: The DVD rental business is on a crash course with obsolescence. And so is Netflix because of its inability to adapt fast enough and the presence of much bigger and experienced competitors.
Let us know whether or not you agree by emailing us at firstname.lastname@example.org. Tomorrow, I’ll share another innovative and revolutionary company that I’m convinced is headed for the trash heap, too.
Ahead of the tape,