By Vincent Trivett

The long-awaited "Netflix (NFLX) killer(s)" seemed to have finally arrived.

On Monday night, Coinstar (CSTR), the owner of the Redbox DVD kiosks, announced it will enter into a joint venture with Verizon (VZ) to supplement the physical DVD-rental business with streaming. Coinstar also bought out a DVD kiosk rival and posted profits that blew away expectations and have nearly tripled since the end of 2010. Coinstar executives say they are poaching physical DVD customers from Netflix.  

Wednesday morning, Amazon (AMZN) announced a content deal with Viacom (VIA) that will give Amazon Prime subscribers free access to Viacom's huge library of content for the same $79 per year, slightly less than the price of Netflix. 

This is where the market says it's time to sell off Netflix like any of the millions of subscribers who decided to get their movies elsewhere. Right? 

Maybe. On Tuesday, after the announcement of the joint venture between Coinstar and Verizon, Coinstar's stock exploded by almost 20% on the day. Netflix wasn't absolutely crushed by the news, but it's definitely not a positive. Netflix stock gained almost 4% before gradually falling 1.06% below the previous day's close. On Wednesday, Netflix closed down about 3%.

Netflix has been slowly climbing out of the trough since the catastrophic drop that occurred after the sudden 60% price increase and botched splitting of the streaming and mail-order programs. Since the beginning of the year, Netflix is up 79%, vastly outperforming the Nasdaq ($COMPX).

The brand is severely tarnished, but Netflix has a lot going for it despite that.

The last earnings report surpassed even the company's own expectations. The subscriber revolt of the summer and fall seems to have been stemmed. Marketing expenses have plummeted. Costs for streaming content -- the main reason subscribers wouldn't leave -- is getting higher, though. There are rumors that the proposed Apple (AAPL) iTV would include Netflix. If that turns out to be true, Netflix's dominance is almost guaranteed.

The "first mover advantage" also works in Netflix's favor. It built this whole industry and its subscriber base of more than 20 million before meeting any viable competitors. Verizon's FiOS TV, by contrast, has 4.2 million customers. Like Amazon, Netflix is showing willingness to forgo short-term profits in favor of expansion. From its privileged position, Netflix can afford to expand its catalog aggressively, keep its current subscribers, and raise its paltry sub-5% profit margin.

Jettisoning the customers
In the third quarter of 2011, Netflix lost 800,000 customers. Subscribers continued to leave in the fourth quarter, but there was a net increase in streaming customers. The ones that it lost were mostly DVD streaming customers. Many who quit the DVD service stayed with the continued streaming. Still, more than half of the profit contribution came from domestic DVD subscriptions.

Note that when the company split up the streaming and DVD services, the legacy Netflix brand was pegged to the streaming service. It made no sense to call the mail-order service "Qwikster" when it takes longer to order movies by mail than it does to stream on demand. This can be a sign that Netflix sees its future in streaming. In a conference call, CEO Reed Hastings told analysts that the company has no intention of even marketing the DVD service and that DVD subscriptions are expected to contract "forever." In the long term, getting rid of the lower margin DVD business and losing the larger workforce that it requires could improve profitability.

Content is king