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Hoover's Profile: Netflix, Inc.
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(NASDAQ (GS):NFLX)
Company Financials
Income Statement
Balance Sheet
Cash Flow Statement

Contact Information
Netflix, Inc.
100 Winchester Cir.
Los Gatos, CA 95032
CA Tel. 408-540-3700
Fax 408-540-3737

Type: Public
On the web: http://www.netflix.com
 Employees: 1,644
Employee growth: (38.4%)

In a blend of technologies from multiple eras, Netflix steers couch potatoes away from the video store and straight to the mailbox. Its Web site (Netflix.com) offers DVD rentals (100,000-plus titles) to more than 10 million subscribers for a monthly fee. The movies are delivered to customers the old-fashioned way: through the US Postal Service. Netflix does not charge late fees or have due dates, and the company's service employs user ratings to predict individual preferences and make movie recommendations. Netflix has a network of distribution centers in major US cities. An agreement with TiVo allows TiVo customers with its latest DVR models to tap an online Netflix library of some 12,000 movies and TV shows.

Key numbers for fiscal year ending December, 2008:
Sales: $1,364.7M
One year growth: 13.2%
Net income: $83.0M
Income growth: 24.0%

Officers:
Chairman, President, and CEO: Reed Hastings
CFO and Secretary: Barry McCarthy Jr.
VP Information Technology: Michael (Mike) Osier

Competitors:
Blockbuster Inc.
Movie Gallery
Redbox

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Company News: Netflix
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Company History: Netflix, Inc.
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Incorporated: 1997 as NetFlix.com, Inc.
NAIC: 532230 Video Tape and Disc Rental

Netflix, Inc. is the world's leading DVD (Digital Video Disc) rent-by-mail company. The firm has more than 1.1 million subscribers who typically pay a monthly fee of $19.95 for unlimited rentals, provided they have no more than 3 discs out at one time. The company offers more than 15,000 titles and maintains an inventory of more than 5 million discs. To speed delivery, Netflix has opened more than 20 regional shipping centers around the United States, and most DVDs are received by customers a day or two after ordering them on the company's Web site. More than a third of the publicly traded company is owned by Jay Hoag's Technology Crossover Ventures.

Netflix was founded in Scotts Valley, California, in August of 1997 by Reed Hastings and Marc Randolph, both veteran "new technology" entrepreneurs, to rent and sell DVDs over the Internet. Randolph had previously helped found a computer mail order company called MicroWarehouse and then served as vice-president of marketing for Borland International, while one-time math teacher Hastings had founded Pure Software, which he had recently sold for $700 million. Hastings, who supplied the firm's startup cash of $2.5 million, had reportedly hit upon the idea for rental-by-mail when he was forced to pay $40 in fines after returning an overdue videotape of the film Apollo 13.

The DVD format, which can store a high-quality copy of an entire feature film on a single five-inch disc, had been introduced in the spring of the year and less than a thousand titles were then available. Although the hardware needed to play DVDs was fairly expensive and owned by relatively few Americans, Hastings and Randolph thought the disc had the clear potential to replace bulkier, lower-resolution videotape as the consumer format of choice.

Key to the firm's initial strategy was the fact that few video stores carried DVDs, making renting them in person a hit-or-miss affair. The company was also able to take advantage of the small size and light weight of the discs, which could be shipped to users very cheaply. The firm experimented with more than 200 mailing packages before finding one that could safely ship a disc (in a plain case without cover art and inserts) for the cost of a single first-class stamp. A stamped return mailer was also enclosed. NetFlix.com (with a capital "F," as the name was originally rendered) promised to virtually guarantee titles would be in stock, with reasonably quick delivery offered through the U.S. Postal Service. The company pledged to buy more than 1,000 copies of new releases which could be reserved in advance for shipment on the day they were made available in stores.

The company opened for business on April 14, 1998, with 30 employees and 925 titles for rent, which comprised nearly the entire catalogue of DVDs in print. The firm offered some "soft-core" Playboy titles but shied away from hardcore pornography to avoid the potential for legal problems in certain states. NetFlix initially offered a seven-day DVD rental for $4, plus $2 shipping, with the cost going down when additional discs were rented. Discs could be kept longer for an additional fee. New DVDs were also offered for sale at a discount of up to 30 percent. Consumers could decide to purchase a rented disc once they got it home by having the balance of the retail price charged to their credit card. The firm's Web site offered a number of informational features including movie reviews, and once a customer had rented several titles a profile would be generated that automatically suggested additional films of interest based on the characteristics of ones already chosen.

To promote its debut, the company sponsored a sweepstakes to win an "L.A. Weekend" all-expense-paid trip to Los Angeles as a cross-promotion with Warner Brothers for the newly available DVD of the film L.A. Confidential. The initial response to NetFlix's service was strong, and its Internet site was briefly forced to shut down 48 hours after it went up. NetFlix was one of the first companies to rent DVDs by mail, with only a handful of other competitors in operation, including Magic Disc, DVD Express, and Reel.com.

A month after the company opened its virtual doors, it announced a promotional venture with Toshiba America to offer three free DVD rentals to purchasers of new Toshiba DVD players, and similar offers were soon made to buyers of Pioneer DVD players and select Hewlett-Packard and Apple computer models that included DVD drives. Later in the year, Sony was also signed up, with additional companies following later.

The company got a tremendous promotional boost in September 1998 when it made available 10,000 copies of a DVD of President Bill Clinton's Grand Jury testimony in the Monica Lewinsky affair. They were sold for just two cents each, plus $2 shipping and handling. The offer was widely covered in the news media, though the success was marred slightly by a mix-up at the manufacturing plant, which shipped pornographic DVDs in place of a few copies of the disc.

In December, NetFlix announced it would stop selling DVDs, directing customers interested in purchases to the Web site of e-commerce heavyweight Amazon.com, which had recently begun offering DVDs as well. In exchange for bowing out of this business area, NetFlix would be promoted on Amazon's highly-trafficked site. The firm cited the relatively modest sales figures, the sizable competition, and the huge effort which would be required to remain competitive. By this time, NetFlix's library had grown to 2,300 titles, and home DVD player sales were taking off, though prices remained high and only 1 percent of U.S. households owned the devices.

In January 1999, NetFlix began partnering with online movie information provider All-Movie Guide, which would direct people looking up a title NetFlix carried to the firm's Web site. March saw well-known film critic Leonard Maltin sign on to write an exclusive monthly film column for the site, with five "must-rent" DVD titles listed each time. The company was now buying 10,000 or more copies of some popular titles and had a total inventory of more than 250,000 discs. Its staff had grown to 110.

In July, NetFlix CEO Reed Hastings announced the company had secured $30 million in new financing from Group Arnault, a French luxury goods investment firm that was also starting to back e-commerce ventures. The money would be used to fund new brand-building and marketing endeavors. A number of new competitors were now emerging, and the Group Arnault backing was seen as crucial to establishing NetFlix's dominance of the DVD rental category. Shortly afterwards, the firm announced a new cross-promotional initiative with Musicland Stores Corp., as well as plans to offer free rental coupons in the box of most new DVD players sold. The summer brought good news when electronics chain Circuit City announced the abandonment of DIVX, a limited-use DVD rental program that it had backed but which had found little support among consumers.

In late September, NetFlix introduced a new service, the Marquee Program, which allowed members who paid $15.95 per month to pre-select four DVDs, with no late fees or due dates. Customers could also rent new discs each time they returned one and put themselves in a queue for checked-out titles in which they were interested, much as a library had an advance reservation system for popular books. CEO Hastings commented that the new program was possible because the company had achieved the economics of scale, with 10,000 orders processed each day by its own proprietary software system. Despite its growing popularity, for fiscal 1999 the company reported losses of $29.8 million on revenues of only $5 million. Like many Internet startups, NetFlix was still spending heavily to entice customers to its Web site, betting that it would become profitable after the brand was better established.

In February 2000, NetFlix introduced a new service, CineMatch, which compared rental patterns among its customers and looked for similarities in taste, using this information to recommend titles to people whose profiles were similar. It could also be programmed to combine the attributes of two users, such as a married couple, and recommend titles that both might like. The information gleaned from the CineMatch system, which required customers to rate 20 films using a five-star scale, was also shared with movie studios to help them plan marketing campaigns. Early the next year, the company changed the Marquee Program to offer unlimited rentals for $19.95 a month, with a maximum of four titles out at a given time, though this was later dropped to three. Shipping and handling were included in the price. At the same time, the firm phased out single-title rentals, as 97 percent of its business was now derived from the Marquee Program. The company was currently distributing more than 100,000 DVDs per week.

In May 2000, NetFlix announced plans for an initial public offering of $86.25 million worth of common stock but withdrew it in July. Investors had become increasingly skeptical of the e-commerce business model, and NetFlix's lack of profits was a red flag to many. CEO Hastings characterized the firm's future goal as moving beyond DVD rentals to streaming video, stating, "What NetfFlix is about is owning a transition stage as rental converts to video-on-demand." During the year, the company continued to expand, with more than 7,000 titles available by year's end to a customer base of 250,000.

In December, a major goal was achieved when revenue sharing agreements were reached with Warner Home Video and Columbia Tri-Star. In exchange for a percentage of rental receipts, the movie studios gave NetFlix better prices on large quantities of DVDs, which the firm needed to have on hand to fulfill requests for new releases. A number of other studios, including Dreamworks and Artisan, were soon signed up as well. The company also unveiled its first television ads at this time, running them in a limited number of markets that had high per capita numbers of DVD players.

In January 2001, NetFlix signed a deal that gave it exclusive distribution of the DVD version of a recent arthouse hit, Croupier, which it would have for three months before the title was available elsewhere. Other such deals were reportedly in the works. An important aspect of NetFlix's business was the availability of titles that were not found in mainstream video stores like Blockbuster, and the company had great success tapping into the underserved markets for independent and foreign films. One particular area of success was in renting so-called "Bollywood" films from India. The firm offered about a thousand titles in this category, and these circulated frequently. NetFlix also found that subscribers were renting many lesser-known films after they had been suggested by the company's recommendation system. Because they were not paying for each movie individually, NetFlix customers could take a chance on an interesting-sounding title that they didn't already know.

During the winter of 2001, NetFlix secured additional venture capital funds, and CEO Hastings began predicting profitability by the fourth quarter of the fiscal year, when the company's subscriber base was expected to reach 500,000. During the spring, the company began offering a free six-week trial membership via the popular movie information Web site the Internet Movie Database and began selling off overstocked titles through retailer Wherehouse and e-tailer Half.com. In September, NetFlix partnered with electronics and DVD retailer Best Buy to create a co-branded DVD rental service in the company's 1,800 stores and on its Web sites. Best Buy also owned several other retail chains, including Sam Goody, Media Play, and Suncoast.

Following the September 11, 2001 terrorist attacks, the company's monthly subscription rate doubled, due as much to fearful Americans seeking refuge at home as the dropping price of DVD players, which now could be purchased for less than $100. Despite its rapidly growing customer base, the company lost $21.1 million for the year on revenues of $74.3 million.

In February 2002, NetFlix announced it had attained the long-anticipated subscription figure of 500,000. This included some who chose the recently-added "NetFlix Lite," which cost $13.95 a month and limited users to two rentals at a time. In March, the company revived its plans for an initial public offering (IPO), and when it sold 5.5 million shares in late May it raised $82.5 million, more than some had expected. In conjunction with the IPO, the firm also quietly amended its name to Netflix, Inc., making the "F" lower case. The money was targeted to paying down $14.1 million in debt and covering promotional expenses.

Earlier in the year, the firm had opened new regional distribution sites near Los Angeles and Boston to speed delivery to those areas. These had quickly proven their worth, and by June other sites were open in the Atlanta, Denver, Detroit, Houston, Minneapolis, New York, Seattle, and Washington, D.C., metro areas. Netflix spent approximately $60,000 on each site for computers, bar-code scanners, and printers, and the centers were set up to handle 50,000 orders per day. The locations were situated so that the firm could achieve overnight first class mail delivery to as many customers as possible. Netflix's per-capita subscription rate was much higher in San Francisco, almost 5 percent, and this was largely attributed to the overnight response to customer orders. In contrast, subscribers on the East Coast had to wait approximately four days for an order to reach them, reducing the number of DVDs they could receive each month. Each distribution site did not maintain a full inventory, and when an order for an out-of-stock disc was received the firm's computers would find the closest location of a copy and automatically generate a shipping order to forward it.

During the summer, the company also experimented briefly with a bricks-and-mortar DVD rental store in Las Vegas, a 600-square-foot operation called Netflix Express which was located in a supermarket. The test site was shuttered in less than a month. Netflix now had 670,000 subscribers and offered 11,500 different titles. The firm had also signed revenue-sharing agreements with more than 50 film distributors, who received approximately 20 percent of the company's subscription fees.

As Netflix garnered more media attention and its subscriber numbers soared, the competition began to heat up. Over the summer, arch-rival Blockbuster began to offer an unlimited, no-late-fee subscription service for DVD rentals in some stores and bought an online DVD rental company which was renamed FilmCaddy. Netflix was also being targeted by retail behemoth Wal-Mart, which had started its own unlimited online DVD rental service. It was priced at $18.86, undercutting Netflix by just over a dollar. Wal-Mart claimed it had 12,000 titles available, comparable to what Netflix then offered. Another major player, Columbia House, was reportedly eyeing a similar plan as well. With these threats, and with Netflix's subscriber cancellation rate, or "churn," inching upward, the company's stock price dropped by more than half.

Responding to these challenges, Netflix announced it would open a dozen more distribution facilities by the end of 2003, servicing major metro areas like Chicago, Dallas, and Portland, Oregon, with overnight delivery. The firm was targeting 5 million subscribers by 2009 and had plans to begin distribution to Canada in the near future. Annual figures for 2002 showed double the previous year's revenues, $152.8 million, and losses of just $1.56 million, a dramatic improvement over 2001. The subscriber churn rate was also dropping, to 6.3 percent for the final quarter of the year. The company was now spending $33 to acquire each new member, which compared favorably with America Online's more than $100.

Netflix hit the one million subscriber mark in February of 2003, by which time it had also opened five additional shipping centers. Its stock price was on the rebound and in the spring hit $22 a share, almost 50 percent more than it had commanded at the IPO. June saw the firm report its first profitable quarter to date, and it also became one of the first Silicon Valley companies to count stock options as expenses, a move that came in the wake of the public outcry over a number of corporate accounting scandals. The company gave stock options to all of its salaried employees, and this was expected to add $2 million in costs in the latter half of the fiscal year. Also in June, Netflix was awarded U.S. patents for its software systems that tracked DVD rentals and compiled customer requests. By mid-summer, the company had more than 1.1 million subscribers and a library of 15,000 titles to choose from.

After more than five years in business, Netflix, Inc. was still in growth mode, only just having turned the corner to profitability and still fending off challenges from several heavyweight competitors. It had the advantage of an early start, a strong distribution system, customer loyalty, and the newly received patents for its software programs. The company was also starting to look like one of the rare e-commerce firms that would establish itself as a permanent part of the business world.

Principal Competitors

Blockbuster, Inc.; Wal-Mart Stores, Inc.; Hollywood Entertainment Corp.; Amazon.com, Inc.; Best Buy Co., Inc.

Further Reading

Barker, Robert, "Can Netflix Keep Spinning Gold?," Business Week, April 21, 2003, p. 112.

Barlas, Pete, "Blockbuster Borrows From Netflix's Playbook, But Stays Offline," Investor's Business Daily, August 12, 2002, p. 4.

Brass, Kevin, "NetFlix Sheds Its DVD Sales Arm, Cedes to Amazon .com," Video Store, December 13, 1998, p. 8.

Burr, Ty, "DVD-by-Mail Company Bites at Blockbuster," Boston Globe, May 4, 2003, p. N1.

Cohen, Alan, "The Great Race," Fortune Small Business, December 1, 2002, p. 44.

Espe, Eric, "Retailer's Plan: 'DVD' and Conquer," Business Journal, July 20, 1998, p. 3.

Fitzpatrick, Eileen, "NetFlix Drops Per-Movie Rentals, Offers Monthly DVD Subscription," Billboard, February 26, 2000, p. 79.

Garrett, Diane, "NetFlix, Pair Doing DVD Rev-Share," Video Business, December 11, 2000, p. 1.

Goldstein, Seth, "Manufacturer Deals Helping NetFlix Thrive; 'Ghostbusters' Packs in the Special Features," Billboard, May 15, 1999.

------, "Online Retailer Netflix Expects Profitability by 4th Quarter, Plans Ad Blitz," Video Store, February 25, 2001, p. 10.

Liedtke, Michael, "Netflix Gets Thumbs Up in Stock Market Debut," Associated Press Newswires, May 23, 2002.

------, "Netflix Plot Thickens as New Players Enter the Picture," Associated Press Newswires, October 3, 2002.

Seitz, Patrick, "Netflix Is Moving to Get Big Fast," Investor's Business Daily, July 2, 2002, p. 8.

------, "Netflix Making Gains, but Skeptics Remain," Investor's Business Daily, May 28, 2003.

Taylor, Chris, "The Movie Is in the Mail: Netflix Is Riding a Boom in Online DVD Rentals, but Will Blockbuster Muscle in on the Business?," Time Magazine, March 18, 2002, p. 67.

Thompson, Nicholas, "Netflix's Patent May Reshape DVD-Rental Market," New York Times, June 26, 2003, p. 4.

Tourtellotte, Bob, "Netflix Subscriber Turnover Spooks Investors," Reuters News, October 2, 2002.

Walker, Nancy, "Now Showing, in Your Mailbox; Netflix Grows as Movie-Watching Habits Change," Washington Post, August 11, 2002, p. H1.

Weintraub, Arlene, "Netflix' Pix Beat Mortar and Bricks," Business Week Online, May 16, 2002.

Wingfield, Nick, "With This Internet Service, You've Got Videos by Mail--Netflix.com Provides Movies for a Monthly Fee--Customers Need to Rent Earlier Than Usual," Wall Street Journal Europe, September 25, 2001, p. 28.

"Wrong Discs Ship to Some Clinton DVD Customers," DVD Report, October 12, 1998.

— Frank Uhle


Wikipedia: Netflix
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Home > Library > Miscellaneous > Wikipedia
Netflix, Inc.
Type Public (NASDAQ: NFLX)
Founded 1997[1]
Headquarters United States Los Gatos, CA, USA
Area served United States United States
Key people Reed Hastings, founder and CEO
Barry McCarthy, CFO, Secretary
Leslie J. Kilgore, CMO
Industry Electronic commerce
Products Online DVD and Blu-ray Disc rental, proprietary Microsoft VC-1 video download
Revenue Green Arrow Up.svg US$ 1.365 billion (2008)
Operating income Green Arrow Up.svg US$ 91.2 million (2007)
Net income Green Arrow Up.svg US$ 66.9 million (2007)
Employees 2000+ (2008)
Website Netflix.com

Netflix (NASDAQ: NFLX) is an online DVD and Blu-ray Disc rental service, offering flat rate rental-by-mail and online streaming to customers in the United States.[2] Established in 1997 and headquartered in Los Gatos, California, it has amassed a collection of 100,000 titles and approximately 10 million subscribers.[3] The company has more than 55 million discs and, on average, ships 1.9 million DVDs to customers each day.[3] Netflix previously claimed to spend about $300 million a year on postage. On February 25, 2007, Netflix announced the billionth DVD delivery.[4] Two years later, on April 2, 2009, the company announced that it had mailed its two billionth DVD, and awarded the recipient with a complimentary lifetime membership. It topped the ForeSee Results’ Top 100 Online Retail Satisfaction Index with an American Customer Satisfaction Index score of 86, well over the industry average of 75.[5]

Contents

Services

The discs are returned to Netflix in the same envelopes in which they are sent to customers.

The company provides a monthly flat-fee service for the rental of DVD and Blu-ray movies. A subscriber creates an ordered list, called a rental queue, of movies to rent. The movies are delivered individually via the United States Postal Service from an array of regional warehouses. Currently, there are more than 50 shipping points located throughout the United States.[6] The subscriber can keep the rented movie as long as desired, but there is a limit on the number of movies (determined by subscription level) that each subscriber can have on loan simultaneously. To rent a new movie, the subscriber must mail a previous one back to Netflix in a prepaid mailing envelope. Upon receipt of the disc, Netflix ships the next available disc in the subscriber's rental queue.

A new Netflix security prepaid mailing envelope, designed to prevent tearing or unauthorized access

As of July 24, 2007, Netflix's most popular plan cost US $16.99 (plus tax) per month, allowing a subscriber to rent up to three movies at a time, with unlimited exchanges. Other monthly plans range from US $4.99, for one disc at a time and a limit of two per month, to US $47.99 for eight with unlimited exchanges. For the three-out and eight-out plans, each rental slot costs the subscriber approximately US $6 a month. Netflix also sells gift subscriptions for various renting intervals, although the recipient must register using a major credit or debit card.

Netflix offers their subscribers access to Blu-ray Discs for an additional fee depending on subscription package citing the additional cost of Blu-ray titles as the reason for the fee. This is a change from the original Blu-Ray fee implemented November 21, 2008. The new Blu-Ray pricing came into effect for billing cycles ending April 27, 2009.[7]

In addition to its movie rental service, Netflix formerly sold used movies. The purchase was delivered via the same system and billed using the same payment methods as rentals. This service was discontinued at the end of November 2008.[8]

Watch Instantly

Netflix has a "Watch Instantly" feature available to eligible subscribers. The feature enables subscribers, as part of their monthly subscription, to stream proprietary Microsoft VC-1 videos at lower or higher qualities than that available on DVD (typically affected by the user's broadband bandwidth, and more often by the processing power of their computer if using the newer Netflix/Microsoft Silverlight player). Initially, the feature offered subscribers one hour of media for approximately every dollar they spent on their subscription. (A $16.99 plan, for example, entitled the subscriber to 17 hours of streaming media.) In January 2008, however, Netflix lifted this restriction. Virtually all subscribers now are entitled to unlimited hours of streaming media at no additional cost. Only subscribers with a plan of $4.99/two DVDs per month, one DVD at a time, aren't provided unlimited access to the streaming service. (They are allowed two hours.) The new terms of the service are a response to the introduction of Apple's new video rental services.[9]

Currently the Watch Instantly service features more than 17,000 movies and recorded television shows available[10]. Major studios including NBC Universal, MGM, 20th Century Fox, CBS/Paramount, ABC-Disney, Warner Brothers, Lions Gate Entertainment and New Line Cinema are all distributing films and television shows via the service.[11][12] On October 1, 2008 Netflix announced a partnership with Starz Entertainment to bring 2,500+ new movies and television shows to Watch Instantly in what is being called Starz Play.[13] According to CEO Reed Hastings, the Watch Instantly feature will become available to users outside of the United States during the second half of 2010.

Web Browsers Supported by Platform:

  • Windows. Windows XP Service Pack 2, Vista running Internet Explorer 6 (or higher) or Firefox 2 (or higher).[14]. New viewer requires use of the Microsoft Silverlight technology and a 1.2 GHz CPU.
  • Mac OS X. An Intel-based Mac with OS 10.4.8 or later. Browser support is Safari 3 (or higher) or Firefox 2 (or higher).[14]. Mac Netflix was added October 27, 2008, which requires use of the Microsoft Silverlight technology.[15]

Reliability concerns: Recent updates to the service have limited streaming media outputs to lower resolution displays (WMP11 requirement and component video outputs causes cryptic DRM reset error).[citation needed]

Other software options:

Profiles

In June 2008, Netflix announced plans to eliminate its online subscriber profile feature that fall.[16] Profiles allow one subscriber account to contain multiple users (e.g. husband and wife, or two roommates) with separate DVD queues, ratings, recommendations, friend lists, reviews, and intra-site communications for each. Netflix contended that elimination of profiles would improve customer experience.[17] However, likely as a result of negative reviews and reaction by Netflix users,[18][19][20] Netflix reversed its decision to remove profiles eleven days after its announcement.[21] In announcing the reinstatement of profiles, Netflix defended its original decision, "Because of an ongoing desire to make our website easier to use, we believed taking a feature away that is only used by a very small minority would help us improve the site for everyone." Then explained its reversal, "Listening to our members, we realized that users of this feature often describe it as an essential part of their Netflix experience. Simplicity is only one virtue and it can certainly be outweighed by utility."[22]

Video game consoles

See also: Xbox Live#New Xbox Experience

At E3 2008, Microsoft announced a deal to distribute Netflix videos over Xbox Live[23]. This service was launched on November 19, 2008[24] to Xbox 360 owners with a Netflix Unlimited subscription and an Xbox Live Gold subscription[25] allowing them to stream movies and TV shows directly from their Netflix Instant Queue from an application on the Dashboard.[26]

In October 2009, Sony Computer Entertainment and Netflix announced that the service would also be available on the PlayStation 3 from November 2009. The set-up will be similar to that on the Xbox 360, allowing Netflix subscribers to stream movies and TV shows from their Instant Queue to watch on the console. Unlike on the Xbox 360, the Netflix application will be available on a Blu-ray disc initially (available free to subscribers) but it is expected that a downloadable application will be made available in the future. Also, as the PlayStation Network only has a single, free level of membership, users do not have to pay for use of the service other than the initial Netflix subscription.[27] Netflix CEO Reed Hastings hopes to bring streaming movies to the Xbox 360, PS3 and Wii consoles. [28]

Manufacturing Partners

Netflix is now forming partnerships with electronics manufacturers to instantly stream movies directly to their devices. In May 2008 they released a set-top-box to stream Netflix's Watch Instantly movies. The device is manufactured by Roku and provides unlimited access to the Netflix streaming media catalog for subscribers with one-at-a-time unlimited plans and above.[29]

In October 2008 Netflix agreed to instantly stream movies to two of Samsung's Blu-ray Disc players.[30] They soon after announced a partnership to instantly stream movies to TiVo DVRs.[31]

In November 2008 they announced a partnership to instantly stream movies via Xbox 360 video game and entertainment systems.[32] In January 2009 Netflix announced a similar partnership with Vizio and LG to instantly stream movies directly to their high definition televisions.[33]

In September 2009, Netflix CEO Reed Hastings expressed his desire to expand his company's video-streaming service to Nintendo's Wii and Sony's PlayStation 3 video game consoles as well as Apple's iPhone and iPod Touch mobile devices once the Xbox 360 exclusivity deal expires.[34] A PlayStation 3 service was officially announced in October 2009 to be launched in November 2009[27] Reports have surfaced that a Wii service will be introduced as early as the 2009 holiday season.[35]

No game system or device is needed to stream movies directly to a TV. All new LCD and Plasma TV's will readily accept input from a desktop or other CPU. This quality is comparable with the other streaming systems. Older Tube TV's will require a video card and will offer a reduced picture quality.

See also: List of Netflix Instant Watch Devices
  • Insignia Blu-ray Disc players
  • LG Blu-ray Disc players and TVs (LH50 series LCD and PS80 plasma)
  • Microsoft Xbox 360
  • Roku set-top box
  • Samsung Blu-ray Disc players
  • Sony TVs and PlayStation 3
  • TiVo DVRs (HD, HD XL or Series3)
  • Vizio TVs (announced)

Corporate history

Netflix headquarters in Los Gatos

Netflix was founded in 1997 in Scotts Valley, California by Marc Randolph,[36] and Reed Hastings , who previously had worked together at Pure Software, along with Mitch Lowe. Hastings was inspired to start the company after being hit with late fees for renting Apollo 13[37]. The Netflix website launched in April 1998 with an online version of a more traditional pay-per-rental model (US $4 per rental plus US $2 in postage; late fees applied).[38] Netflix introduced the monthly subscription concept in September, 1999,[39] then dropped the single-rental model in early 2000. Since that time the company has built its reputation on the business model of flat-fee unlimited rentals without due dates, late fees, shipping or handling fees, or per-title rental fees.

Netflix developed and maintains an extensive personalized video-recommendation system based on ratings and reviews by its customers, similar to the system used by Amazon.com. The company believes this gives it an edge in competing with newcomers such as Blockbuster Video and Apple Inc. On October 1, 2006, Netflix offered a $1,000,000 prize to the first developer of a video-recommendation algorithm that could beat its existing algorithm, Cinematch, at predicting customer ratings by more than 10%.[40]

"Some 35,000 different film titles are contained in the 1 million DVDs it sends out every day."[41]

Netflix has played a prominent role in independent film distribution. Through a division called Red Envelope Entertainment, Netflix licenses and distributes independent films such as Born into Brothels and Sherrybaby. As of late 2006, Red Envelope Entertainment has also expanded into producing original content with filmmakers such as John Waters.[42] Netflix announced plans to close Red Envelope Entertainment in 2008, in part to avoid competition with its studio partners.[43][44]

Netflix initiated an initial public offering (IPO) on May 29, 2002, selling 5,500,000 shares of common stock at the price of US $15.00 per share. On June 14, 2002, the company sold an additional 825,000 shares of common stock at the same price. After incurring substantial losses during its first few years, Netflix posted its first profit during fiscal year 2003, earning US $6.5 million profit on revenues of US $272 million. The company is well-known for its worker-oriented culture, including unlimited vacation time for salaried workers and allowing those employees to take any amount of their paychecks in stock options.[45]

Netflix has been one of the most successful dot-com ventures. A New York Times article from September, 2002, said that, at the time, Netflix mailed about 190,000 discs per day to its 670,000 monthly subscribers. The company's published subscriber count increased from one million in the fourth quarter of 2002 to around 5.6 million at the end of the third quarter of 2006, to 10 million in February 2009. Netflix's growth has been fueled by the fast spread of DVD players in households; as of 2004, nearly two-thirds of U.S. homes had a DVD player. The DVD is the most successful product in the history of the U.S. in amount of growth measured by the number of units owned in individual U.S. homes. Impressively the DVD only took 5 years to reach 50% entrance into U.S. homes. Netflix capitalized on the success of the DVD and its rapid expansion into U.S. homes, integrating the potential of the Internet and e-commerce to provide services and catalogs that brick and mortar retailers could not compete with.[2] Netflix also operates an online affiliate program which has helped it to build online sales for DVD rentals.

Competitive environment

See also: Online DVD rental

Netflix's success has inspired a number of other DVD rental companies both in the United States and abroad, but none of the purely online companies appear to approach Netflix in terms of market share or revenues. Wal-Mart began an online rental service in October 2002, but left the market in May 2005 and now has a cross-promotional arrangement with Netflix. Netflix has also cited Amazon.com as a potential competitor,[46] which until 2008 offered online video rentals in the UK and Germany (now sold to Lovefilm), but has remained coy about any similar intentions for the North American market.

Netflix had preliminary plans to expand to Canada and the UK in 2005, but the expansion appears to have been postponed or canceled as Netflix concentrates its services on the U.S. market.[47] Zip.ca currently markets itself as a Canadian equivalent to Netflix. Posren and Tsutaya discas would be Japanese equivalents.

Blockbuster Video, the world's largest in-store video rental chain, entered the U.S. online market in August 2004 with a US$19.95 monthly subscription service. This sparked a price war; Netflix had raised its popular three-disc plan from US$19.95 to US$21.99 just prior to Blockbuster's launch, but by October Netflix reduced this fee to US$17.99. Blockbuster responded with rates as low as US$14.99 for a time, but by August 2005, both companies settled at the (identical) current rates. On July 22, 2007, Netflix announced that it would drop the prices of its two most popular plans by US$1.00 in an effort to better compete with Blockbuster's online-only offerings.[48] Blockbuster's subscriber base after one year was roughly a third of Netflix's size and growing, including promotions such as the option to swap DVDs rented online at neighborhood stores and the simultaneous elimination of late fees altogether.[citation needed] Netflix founder Reed Hastings commented in a January 2005 interview that rival Blockbuster threw "everything but the kitchen sink at us."[49]

Many in-store video rental chains now have unlimited rental plans similar to those of Netflix. Hollywood Video started its Movie Value Pass (MVP) service in late 2004, which enables customers to rent up to three movies at a time (due in five days) for US$15 a month. New releases, however, are typically excluded from the service for two to six weeks in the MVP "Basic" plan. Blockbuster started Movie Pass in 2004, which lets customers keep two to three DVDs at a time for US$25–30 a month, all without restrictions or due dates. Hollywood's MVP "Premium" plan offers the same benefits for a comparable price. Both services still require the customer to travel to the store to rent and return the movies, and their respective selections are not as diverse as that offered by Netflix.

The domain netflix.com attracted at least 194 million visitors annually by 2008, according to a Compete.com survey. This is about five times the number of visitors to blockbuster.com.[50]

On March 30, 2009 Netflix announced an increase in the monthly fee it would charge to customers who rent Blu-Ray discs. Customers were notified via email:

Dear [personalization omitted],
You are receiving this email because you added unlimited Blu-ray access to your account for $1 a month. The number of Blu-ray titles has increased significantly and will continue to do so. As we buy more, you are able to choose from a rapidly expanding selection of Blu-ray titles. And as you've probably heard, Blu-ray discs are substantially more expensive than standard definition DVDs.
As a result, the monthly charge for Blu-ray access is increasing for most plans and will now vary by plan. The charge for monthly Blu-ray access on your 3 DVDs at-a-time (Unlimited) plan will increase from $1 a month to $4 a month. The price of your 3 DVDs at-a-time (Unlimited) plan is not changing and remains at $16.99 a month.
The new charge for Blu-ray access will be automatically added to your next billing statement on or after April 27, 2009 and will be referenced in your Membership Terms and Details.
If you wish to continue unlimited Blu-ray access for $4 a month, you don't need to do anything. If not, you can remove Blu-ray access anytime by visiting Your Account.
If you have questions about this change or need any assistance, please call us anytime at 1-888-923-0898.
-The Netflix Team

Netflix vs. Blockbuster

On April 4, 2006, Netflix filed a patent infringement lawsuit in which it demanded a jury trial in the United States District Court for the Northern District of California, alleging that Blockbuster's online DVD rental subscription program violated two patents held by Netflix. The first cause of action alleged Blockbuster's infringement of U.S. Patent No. 7,024,381 (issued April 4, 2006; only hours before the lawsuit was filed) by copying the "dynamic queue" of DVDs available for each customer, Netflix's method of using the ranked preferences in the queue to send DVDs to subscribers, and Netflix's method permitting the queue to be updated and reordered.[51] The second cause of action alleged infringement of Patent No. 6,584,450 (issued June 24, 2003), which covers in less detail the subscription rental service as well as Netflix's methods of communication and delivery.[52] The dispute was ended a year later, on June 25, 2007, with both companies declining to disclose the terms of their legal settlement, except for a statement by Blockbuster that it wouldn't have a major impact on its future financial performance.[53][54] Blockbuster also said that the company planned to close 282 stores that year to shift focus to its online service. The company already had closed 290 stores in 2006.

In Fall 2006, Blockbuster signed a deal with The Weinstein Company, that gave it the exclusive rental rights to the studio's films beginning January 1, 2007.[55] This agreement forced Netflix to obtain copies from mass merchants or retailers, instead of directly from the studio.[56] Netflix has speculated that the effect of the Blockbuster-Weinstein agreement could result in higher rental costs and/or fewer copies of the studio's movies, which would limit the number of each movie's DVDs that would be available to subscribers at any one time.[57] As of June 2007, Netflix continues to make available Weinstein movies, including Unknown, School For Scoundrels and Harsh Times, among others. The first-sale doctrine allows Netflix and other video rental businesses to offer movies released by the Weinstein Company, but the long-term effects of the Blockbuster-Weinstein deal remain uncertain.

"Throttling"

Netflix's allocation policy — referred to by many as "throttling" — gives priority shipping and selection to customers who rent fewer discs per month. Higher volume renters may see some of their selections delayed, routed elsewhere or sent out of order.[58] Netflix currently claims that "the large majority of our subscribers are able to receive their movies in about one business day following our shipment of the requested movie from their local distribution center."[59] However, not all shipments come from the subscriber's local distribution center, and shipments from distant centers are often delayed, as well.

Chavez v. Netflix Inc.

In September 2004, a consumer class action lawsuit, Frank Chavez v. Netflix, Inc.,[60] was brought against Netflix in San Francisco Superior Court. The suit alleged false advertising in relation to claims of "unlimited rentals" with "one-day delivery." In January 2005, Netflix changed its "Terms of Use" to acknowledge what has commonly become known as "throttling." (Mike Kaltschnee, owner of the Hacking Netflix blog, says Netflix calls this practice "smoothing" internally.)[61]

In October 2005, Netflix proposed a settlement for those who had enrolled as a paid Netflix member prior to January 15, 2005. These earlier members would be able to renew their subscriptions with a one-month free membership, and those early members with current subscriptions would receive a one-month free upgrade to the next-highest membership level. Netflix's settlement denied allegations of any wrongdoing, and the case did not reach a legal judgment. Netflix estimated the settlement cost at approximately US$4 million, which included up to US$2.53 million to cover plaintiff lawyer fees. A controversial aspect of the settlement offer was that the customer's account would continue at the renewed or upgraded membership level after the free month provided by the settlement, with customers being charged accordingly unless they opted out after the month-long free period ended. After Trial Lawyers for Public Justice filed a challenge to the proposed settlement[62] and the Federal Trade Commission filed an amicus brief urging the rejection or modification of the settlement, Netflix offered to alter the settlement terms requiring customers to actively approve any continuation after the free month. The final settlement hearing took place on March 22, 2006.[63] but, implementation of the settlement was delayed pending appeal the California Appellate Courts.[64] The settlement was affirmed on 2008-04-21, with the court saying, "the trial court did not abuse its discretion in approving the amended class action settlement agreement, approving the notice given to class members, or determining the amount of fees."[65] Interestingly, the court approved email notice and an online claims submission process.[66] The court said:

The summary notice and long-form notice together provided all of the detail required by statute or court rule, in a highly accessible form. The fact that not all of the information was contained in a single e-mail or mailing is immaterial… Using a summary notice that directed the class member wanting more information to a Web site containing a more detailed notice, and provided hyperlinks to that Web site, was a perfectly acceptable manner of giving notice in this case… The class members conducted business with defendant over the Internet, and can be assumed to know how to navigate between the summary notice and the Web site. Using the capability of the Internet in that fashion was a sensible and efficient way of providing notice, especially compared to the alternative Vogel apparently preferred—mailing out a lengthy legalistic document that few class members would have been able to plow through.

The settlement was criticized because it paid out $2.5 million to attorneys for fees and costs, while offering only coupons to the class members.[67][68]

The Terms of Use have since been amended with terms that indicate such a suit would not be possible in the future:[69]

These Terms of Use shall be governed by and construed in accordance with the laws of the state of Delaware, without regard to conflicts of laws provisions. You and Netflix agree that the United States District Court for the Northern District of California and/or the California Superior Court for the County of Santa Clara shall have exclusive jurisdiction over any dispute between you and Netflix relating in any way to the Netflix service or Web site or these Terms of Use. You and Netflix expressly and irrevocably consent to personal jurisdiction and venue in these courts. The parties agree that in any such dispute or subsequent legal action, they will only assert claims in an individual (non-class, non-representative) basis, and that they will not seek or agree to serve as a named representative in a class action or seek relief on behalf of those other than themselves.

"Releasing This Week"

The Netflix website at one time featured a list of titles "Releasing This Week" (RTW) that enabled customers to easily view new DVDs the company planned for rental release each week[70]. On December 21, 2007, the company removed the link to the page without notice and replaced it with a slider system showing only four previously released movies at a time. The new page, called "Popular New Releases", does not list newly released DVDs for rental.[71] The listing of new releases is still active,[72] though no menu option links to the page.

On January 1, 2008, a Netflix employee unofficially stated on the Netflix Community Blog that customers used the RTW page to add newly released movies to the top of their queues, then complained about delays in receiving them after demand outstripped the supply of DVDs on hand. By removing the page, Netflix sought to quell complaints that these movies were not readily available. Critics, however, have suggested this was just another Netflix attempt at "throttling."[73]

Joint Competition Promotion

Netflix and Film Independent have announced jointly they want to discover the next great independent filmmaker. The Netflix FIND Your Voice Film Competition will award one aspiring filmmaker the "means, guidance and resources" to make a full-length, narrative film, plus a $150,000 cash production grant funded by Netflix. Film Independent will provide "advisement and mentorship" to the winning filmmaker throughout the production of the film and will also screen the winner’s movie at the Los Angeles Film Festival. The winner will own all rights to his or her film, which will be given distribution online at Netflix. As part of the grand prize, the winner will also receive a four-week camera package donated by Panavision, 25,000 feet of Kodak Color Negative Film or 10,000 feet of Kodak Color Intermediate Film donated by Eastman Kodak Company, up to $75,000 in dailies and prints donated by Deluxe Entertainment Services Group, and a digital intermediate package with a maximum value of $150,000 provided by EFILM Hollywood. First-time filmmakers who have not yet created and publicly screened a full-length narrative feature film of 70 minutes or more are eligible. There is no fee to apply to the competition, but a maximum of only 2,000 submissions will be accepted. The winner of “Netflix FIND Your Voice Competition” will be selected from among the five finalists by a panel of judges consisting of independent film professionals, chaired by Josh Brolin. [1]

Netflix API

On October 1 2008, Netflix launched an Application Programming Interface (API) [74]. The Netflix API [75] allows access to data for all Netflix titles as well as access on a user's behalf to manage their movie queue. The Developer Network includes a forum for asking and answering questions. The Netflix API is free and allows commercial use. A variety of services have been created around the Netflix API or have integrated the API. Examples include Rotten Tomatoes and the New York Times, which allow users to click to add titles to their Netflix queue or begin watching on Watch Instantly from their pages,[76] and Jinni, which additionally enables search within Watch Instantly and import of some user information like reviews.[77]

The API has allowed many developers to release Netflix applications for mobile devices including one for the Android platform. Netflix also recently announced an official Nokia app that allows some trailer streaming.

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