Originally created 02/11/02

Netflix ready to exploit DVDs by mail



Quincy Dong used to rent movies from Blockbuster about twice a month, but always hated having to make special trips back to the store to return the videos in time to avoid late fees.

Then last summer Dong switched to www.Netflix.com, a Los Gatos, Calif., company that rents DVDs online and ships them to customers by mail. Now, after Dong and his family have watched the movie, all he has to do is drop the DVD in a mailbox on his way to work.

"They make it too easy," Doug said. "It's so convenient (and) you never get any past due bills. You can shop at your own leisure on the Web page. The only time I go to Blockbuster now is if the kids want to rent games."

With the growing popularity of DVDs - a wave that is starting to push out VHS as the home video format of choice in America - Netflix and other online rental sites are poised to reel in more customers like Dong. Last week, the privately owned Netflix reached an important milestone - 500,000 subscribers, about double what it had a year ago.

Netflix's 50,000-square-foot operations center in San Jose, Calif., handles about 80,000 DVD shipments per day. According to Jupiter Media Metrix, www.Netflix.com burst into the top 10 of the busiest online shopping sites last month, not far behind big names like EBay and Amazon.com, and far ahead of a handful of other online DVD rental sites.

It's the kind of momentum Netflix Chief Executive Officer Reed Hastings hoped was possible when he started the firm in April 1998, when only early technology adopters were buying expensive DVD players and movie studios offered only a smattering of movies on DVD.

"That bet on DVD has now paid off and will continue to pay off in the next few years," said Hastings, 41.

Now, with the company planning to open smaller operations centers in other cities to expand its service, analysts say Netflix's biggest challenge is to keep customers happy while staying ahead of competitors, including potential online Goliaths like Blockbuster and Hollywood Video.

"If you're in California, it's a fabulous service," said Forrester Research analyst Jonathan Gaw. "When you get to the East Coast, it takes three days for the DVD to get there and three days back. They're having greater trouble penetrating the East Coast."

"When Blockbuster decides to get into the business, it will be interesting, " Gaw said. "They've got the brand name, they already have relationships with the studios and I don't see the Netflix operation as being all that difficult to replicate."

DVD players have become the hottest-selling consumer electronics product in the country, particularly during the past holiday season. Various reports show DVD players, which first trickled onto the market in 1997, are in one of every four U.S. households.

Meanwhile, sales of DVD players are outpacing sales of VHS players, and the research firm IDC predicts 70 percent of U.S. homes will have a DVD player by the end of 2005.

To adjust to that change, stores like Blockbuster are reducing shelf space for VHS tapes by 25 percent to make more room for DVD movies and players. Movie studios like MGM and Columbia are increasingly releasing older movies in DVD format only.

Netflix rents only DVDs, with subscribers paying between $14 and $40 per month.

For the typical $20 monthly fee, subscribers can rent up to three DVDs at a time without due dates or late charges. Netflix mails the DVD to the subscriber's home and provides the 34-cent postage each way.

Other online firms like DVD Avenue of Clinton, M.D.; NeoRental of Carson, Calif., and RentMyDVD.com of Newark, N.J., offer similar subscription plans.

And many of the Netflix competitors are also reporting a surge in business. For example, DVDOvernight.com, a Ventnor, N.J., firm that rents movies online for seven days at $4 each, said rentals have increased by about 10 to 15 percent each month for the past year and rose 30 percent in the past month alone.

Hastings said the growth in Netflix's subscriber base is generating a positive cash flow, but he doesn't expect the company to make an actual profit until 2003.

(Distributed by Scripps Howard News Service, http://www.shns.com.)