Netflix: Never Mind the Mailbox

The DVD rental outfit's plan to provide movie downloads failed to stir investors Tuesday

Netflix (NFLX) CEO Reed Hastings on Jan. 16 unveiled the company's long-awaited plan to offer movie and TV downloads over the Internet amid continuing shifts in the video rental industry.

By offering a mail-order DVD rental service, the upstart from Los Gatos (Calif.) has grabbed customers away from movie rental giants like Blockbuster (BBI). So far Netflix's sales have exploded by more than 528% in the past four years to nearly $256 million in the third quarter of 2006.

But now rivals are clamoring to beat Netflix to the punch in the dawning market for Internet movie downloads. In one example, Apple (AAPL), which already dominates the music download market, has already sold television and music video downloads for some time via its online store iTunes (see, 9/11/06, "Don't Nix Netflix Just Yet").

Netflix is finally joining the fray with a download service that provides around 1,000 movies and TV shows to subscribers with monthly membership at no additional cost. At the same time, those subscribers will also have snail mail access to the company's catalog of more than 70,000 DVDs. Netflix is bringing its service out in phases and expects to wind up the launch by late June.

Netflix's plan focuses on movie download rentals. In contrast, iTunes sells videos that you pay a fee to own forever. (Apple could not immediately provide a comment.)

Hastings is also aiming to use technology that lets users view their video downloads instantly, rather than waste precious time downloading huge video files. Once customers do a one-time software installation -- the company's press release says that takes less than a minute -- the company figures that most people will be able to start playing Netflix movies in their Web browser within 15 seconds. The more bandwidth you have, the higher quality the video displayed on your computer, ranging from the quality of current Netflix previews to DVD quality with a three-megabit-per-second connection.

The hours available for instant watching will vary based on subscribers' monthly plans. For example, subscribers on the entry-level $5.99 plan will have six hours of online movie watching per month. Subscribers on Netflix's plan of $17.99 for unlimited DVD rental will have 18 hours of online movie watching per month.

Eventually, Hastings plans to make his service available to any computer screen with an Internet connection, ranging from cell phones to plasma screens. He also hopes he can expand the size of his film download selection. So far studios supporting the new feature include NBC Universal, Sony Pictures, Metro-Goldwyn- Mayer Studios, 20th Century Fox, Paramount Pictures, Warner Bros., New Line Cinema, and Lions Gate.

After the news investors bid up Netflix' stock 0.8% on Jan. 16 to $22.90 in early afternoon Nasdaq trading. Netflix has plummeted from its 2006 high of $33.12 reached Apr. 25, as market players wonder how long the rental DVD can hold up.

Hastings maintains that the DVD will stay alive and useful for many years to come. "While mainstream consumer adoption of online movie watching will take a number of years due to content and technology hurdles, the time is right for Netflix to take the first step," Hastings said in a press release Jan. 16.

Hastings had already announced plans to offer the movie downloads this January and set aside up to $10 million for the project in 2006.

    Before it's here, it's on the Bloomberg Terminal.