Netflix

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Netflix, Inc.

Type	Public (NASDAQ: NFLX)
Founded	1997
Headquarters	Los Gatos, California, USA
Key people	Reed Hastings, Founder and CEO
Industry	Electronic commerce
Products	Online DVD rental
Revenue	US$688 million (2006)^[1]
Employees	1200+ (2006)
Website	www.netflix.com

Netflix (NASDAQ: NFLX) is the largest online DVD rental service, offering flat rate rental-by-mail to customers in the United States. Headquartered in Los Gatos, California, it has amassed a collection of 70,000 titles and has about five million subscribers. Currently, Netflix spends about $300 million a year on postage to ship 1.4 million DVDs a day.

1 Rentals
2 Corporate history
3 Competitive environment
4 "Throttling" and the Chavez lawsuit
5 Netflix v. Blockbuster
6 Netflix Prize
7 Customer service
8 See also
9 References
10 External links

[edit] Rentals

Netflix has patented its rental and delivery process. The discs are returned to Netflix in the same envelopes in which they are sent to customers. The envelope shown is a former model from around 2000.

The company provides a monthly flat-fee service for the rental of DVD movies. A subscriber creates an ordered list, called a rental queue, of DVDs to rent. The DVDs are delivered individually by way of the United States Postal Service from an array of regional warehouses (41^[2] in 29 states). A subscriber keeps a rented DVD as long as desired but has a limit on the number of DVDs (determined by subscription level) that can be checked out at any one time. To rent a new DVD, the subscriber mails the previous one back to Netflix in a prepaid mailing envelope. Upon receipt of the disc, Netflix ships another disc in the subscriber's rental queue.

As of May, 2006, Netflix's most popular plan costs US$17.99 (plus tax) per month, which allows a subscriber to check out up to 3 DVDs at a time. Other monthly plans range from US$9.99 for one disc at a time, to US$47.99 for eight. For the three-out plan and up, each rental slot costs the subscriber approximately US$6 a month. Sometime around 20 June 2006, Netflix added a new two DVDs per month plan for $5.99 to complement their four DVDs per month (two at a time) plan for $11.99. Netflix also offers gift subscriptions for varying periods.

Netflix has recently begun playing a prominent role in independent film distribution. Through a new division called Red Envelope Entertainment, Netflix licenses and distributes independent films such as Born into Brothels. As of late 2006, Red Envelope Entertainment has also expanded into producing original content with filmmakers such as John Waters.^[3]

[edit] Corporate history

Netflix headquarters in Los Gatos

Netflix began operations in 1998^[4] with an online version of a more traditional pay-per-rental model (US$4 per rental plus US$2 in postage; late fees applied). It did not introduce the monthly subscription concept until late 1999.^[5] Since then it has built its reputation on its policies of having no due dates, late fees, shipping or handling fees, or per-title rental fees.

Unlike most online on-demand entertainment services, such as iTunes, Netflix's offerings cover the vast range of DVD movies (and increasingly, television series) with 70,000 titles, including titles by major and minor studios (excluding pornographic movies). Particularly, Netflix has become noted for its extensive collection of documentary films, Japanese anime, and independent films, many usually hard to find in traditional rental shops. Indeed, "some 35,000 different film titles are contained in the 1 million DVDs it sends out every day."^[6] The company's published subscriber counts have increased from one million by the fourth quarter of 2002 to around 5.6 million at the end of the third quarter of 2006.

Netflix has developed and maintained an extensive recommendation system based on rating and reviews by customers, similar to the system at Amazon.com; the company believes this gives it an edge in competing with newcomers like Blockbuster.

Netflix's growth has also been fueled by the fast spread of DVD players in households; as of 2004, nearly two-thirds of U.S. homes have a DVD player. Netflix also operates an affiliate program which has helped it to build online sales for DVD rentals.

Netflix is an example of the odd situation about copyright issues on the Internet. While it is possible and probably more convenient to directly download movies via the Internet, license issues and the fear of piracy prevents such a service. The CEO of Netflix, Reed Hastings, said that while he believes it would not be an instant success because of complications in copyright handling and relatively slow adoption of broadband Internet, Netflix will offer limited video on demand sometime in the future, allowing users to download movies via the Internet and that it may even expand into the video game market.

Founded by Reed Hastings, Netflix was incorporated on August 29, 1997 and began operations on April 14, 1998. 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, it 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. 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.

[edit] 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 size 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.

Blockbuster Video, the world's largest store-rental chain, entered the U.S. online market in August 2004 with a US$19.95 subscription. This sparked a price war; Netflix had just raised its flagship 3-disc plan from US$19.95 to US$21.99 before Blockbuster's launch, but by October had reduced this 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. Blockbuster's subscriber base after one year was roughly a third of Netflix's size. Netflix founder Reed Hastings commented in a January 2005 interview that rival Blockbuster threw "everything but the kitchen sink at us."

Netflix has also cited Amazon.com as a potential competitor.^[7] Amazon.com operates online rentals in the UK and Germany but has remained coy about any intentions for the U.S. market.

Netflix had preliminary plans to expand to Canada and the UK in 2005, but the expansion appears to have been postponed or cancelled as Netflix concentrates on the U.S. market.^[8] Zip.ca currently serves as a Canadian equivalent to Netflix.

Many video store chains have unlimited rental plans similar to Netflix. Hollywood Video started Movie Value Pass (MVP) in late 2004, which lets customers rent 3 movies at a time (due in five days) for US$15 a month. New releases are usually excluded for two to six weeks from MVP "Basic." Blockbuster began offering Movie Pass in 2004, which allows customers 2-3 DVDs out at a time for US$25-30 a month without restrictions or due dates. Hollywood's MVP "Premium" has the same benefits for a comparable price.

[edit] "Throttling" and the Chavez lawsuit

Netflix's allocation policy — referred to by its critics as "throttling" — gives priority shipping and selection to customers who rent the fewest discs per month. Higher volume renters may see more of their shipments delayed, sent across country, or sent out of order.^[9] 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."^[10] However, not all shipments come from the subscriber's local distribution center. Shipments from distant centers are often delayed, as well.

In September, 2004, a consumer class action lawsuit, Frank Chavez v. Netflix, Inc,^[11] 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.)^{[citation needed]}

In October of 2005 Netflix proposed a settlement for those who had enrolled as a paid Netflix member prior to January 15, 2005. Former members would be able to renew with a one-month free membership, and those still currently members would receive a one month free upgrade to the next highest membership level. Netflix's settlement denied the allegations or any wrongdoing, and the case did not reach a legal judgement. Netflix estimated the settlement cost at approximately US$4 million, which included up to US$2.53 million to cover plaintiff lawyer fees. Not offering registration for it on their website, a controversial aspect of the original settlement offer was that the membership or upgrade provided would continue in place after the free month provided by the settlement, with the customer being charged. On January 5, 2006, Trial Lawyers for Public Justice filed a challenge to the proposed settlement stating that (among other things) the necessity to opt out of the upgraded or renewed accounts at the end of the free month ultimately amounts to a "marketing tool" for Netflix due to the increase in revenues that can be expected from members who fail to opt-out at the end of the term.^[12] The Federal Trade Commission also filed an amicus brief urging rejection or modification of the settlement terms for similar reasons, describing them as appearing "dangerously close to a promotional gimmick." In February 2006 Netflix indicated that it would alter the settlement terms so that customers would be required to actively approve any continuation after the free month provided by the settlement. The final settlement hearing was on March 22, 2006. After the settlement was agreed upon, Netflix opened up registration on their website, with a deadline of June 26, 2006.^[13] On September 6, 2006, an appeal was filed in California Appellate Courts, 1st Appellate District.^[14]

[edit] Netflix v. Blockbuster

On April 4, 2006, Netflix filed a patent infringement lawsuit and a demand for jury trial in the United States District Court for the Northern District of California alleging that Blockbuster's online DVD rental subscription program violates two patents held by Netflix.^[15] The first cause of action alleges Blockbuster's infringement of U.S. Patent No. 7,024,381^[16] (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. The second cause of action alleges infringement of Patent No. 6,584,450^[17] (issued June 24, 2003) which covers in less detail the subscription rental service as well as Netflix's methods of communication and delivery.

Blockbuster issued a press release on April 6, 2006 stating its belief that the claims are without merit and that it intends to fight them.^[18] "Apparently Netflix would prefer to take us on in the courts rather than facing us in the marketplace where the consumer is the judge," said Shane Evangelist, senior vice president and general manager for Blockbuster Online.

[edit] Netflix Prize

On October 2, 2006, Netflix offered a $1,000,000 prize for the first movie recommendation algorithm that could beat its existing algorithm, Cinematch, at predicting customer ratings by more than 10%.^[19]

[edit] Customer service

A phone number for customer service has recently been added to the Netflix website. (as of December, 2006) After Netflix CEO Reed Hastings Appeared on 60 minutes ^[20], and was criticized for not having a number readily available for consumers: 800-715-2120 and 1-800-585-8131. Callers will find a standard IVR system and an option to speak to a representative if automated options are not sufficient.