Netflix

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Netflix, Inc.

Type	Public (NASDAQ: NFLX)
Founded	1997^[1]
Headquarters	Los Gatos, California, USA
Key people	Reed Hastings, founder and CEO Barry McCarthy, CFO, Secretary Leslie J. Kilgore, CMO
Industry	Electronic commerce
Products	Online DVD rental
Revenue	US$ 1.2 billion (2007)
Operating income	US$ 91.2 million (2007)
Net income	US$ 66.9 million (2007)
Employees	1400+ (2007)
Website	Netflix.com

Netflix (NASDAQ: NFLX), is the largest online DVD rental service, offering flat rate rental-by-mail and online streaming to customers in the United States. Established in 1997 and headquartered in Los Gatos, California, it has amassed a collection of 90,000 titles and over 6.7 million subscribers.^[2] ^[3] They have over 55 million discs and ship 1.6 million a day, on average.^[2] Netflix previously claimed to spend about $300 million a year on postage. On February 25, 2007, Netflix announced the billionth DVD delivery.^[4]^[5] The company 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.^[6]

1 Services
- 1.1 Watch Instantly
2 Set-top Box
3 Corporate history
4 Competitive environment
- 4.1 Netflix vs. Blockbuster
5 "Throttling"
- 5.1 The Chavez lawsuit
- 5.2 The "Releasing This Week" Page
6 Further reading
7 References
8 Watch
9 External links

[edit] Services

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 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 via the United States Postal Service from an array of regional warehouses. Currently, there are over 100 shipping points located throughout the United States.^[7] A subscriber can keep 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 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 costs US $16.99 (plus tax) per month, allowing a subscriber to check out up to 3 DVDs at a time. 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, unlimited exchange. For the three-out plan and up, each rental slot costs the subscriber approximately US $6 a month. Netflix also sells gift subscriptions for various intervals, although the recipient needs a credit/debit card.

Besides movie rental service, Netflix also sells used DVDs to its subscribers. The purchase is delivered via the same system and billed using the same payment method as the rentals.

[edit] Watch Instantly

Netflix began rolling out its new "Instant Viewing" feature to a limited number of customers, with the feature now available to all eligible subscribers. The Watch Instantly feature allows subscribers, at no additional cost, to stream near-DVD quality movies and TV Shows instantly, depending on subscribers' Internet connectivity. Previously, subscribers would get 1 hour of media for approximately every dollar they spend on their subscription. A $16.99 plan, for example, would permit the subscriber 17 hours of media streaming. On January 14, 2008, this restriction was lifted. Virtually all subscribers can get unlimited hours of media streaming with no additional cost. Only subscribers with a plan of $4.99/two DVDs per month won't be provided unlimited access to this streaming service. This move is a response to the introduction of Apple's new movie rental service.^[8]

Currently the Watch Instantly service has over 10,000 movies and TV shows available^[9]. Major studios including Universal Pictures, Sony Pictures, MGM, 20th Century Fox, Paramount Pictures, Warner Brothers, Lions Gate Entertainment, and New Line Cinema are all distributing films under this service.^[10] It is available only to PCs running Windows XP Service Pack 2 or Vista running Internet Explorer version 6 or higher. The ability to view movies on other OS/Web browser combinations is currently being developed. Recent updates to the service have limited streamed video outputs to lower resolution displays (WMP11 requirement and component video outputs causes cryptic DRM reset error).

[edit] Set-top Box

On May 20 2008, Netflix released a set-top box to stream Netflix's Watch Instantly movies. The device is manufactured by Roku and costs $99, providing unlimited access to Netflix streaming catalog for those with 1-at-a-time unlimited plans and above. The firmware is upgradeable, allowing for new features to be added.

Earlier in the year, on January 3, 2008, Netflix had announced plans to allow users to download movies over broadband directly to an HDTV set-top box, produced by LG Group. That player was expected to be available by the second half of 2008.^[11]

[edit] Corporate history

Netflix headquarters in Los Gatos

Netflix was founded in 1997 by Marc Randolph and Reed Hastings, who had worked together at Pure Software. The site was 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).^[12] Netflix introduced the monthly subscription concept in September, 1999^[13] and dropped the single rental model in early 2000. Since then it has built its reputation on its model of flat-fee unlimited rentals with no due dates, late fees, shipping or handling fees, or per-title rental fees.

Netflix has developed and maintained an extensive recommendation system based on rating and reviews by customers, similar to the system used by Amazon.com. The company believes this gives it an edge in competing with newcomers like Blockbuster Video. On October 1, 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%.^[14]

Unlike most online on-demand entertainment services, such as Movielink, Netflix's offerings cover the vast range of DVD movies (and increasingly, television series) with 80,000 titles, including titles by major and minor studios (excluding most 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."^[15] 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 and Sherrybaby. As of late 2006, Red Envelope Entertainment has also expanded into producing original content with filmmakers such as John Waters.^[16]

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. 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.^[17]

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 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's growth has 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 online affiliate program which has helped it to build online sales for DVD rentals.

[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. Netflix has also cited Amazon.com as a potential competitor.^[18] 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 canceled as Netflix concentrates on the U.S. market.^[19] Zip.ca currently serves as a Canadian equivalent to Netflix. Posren and Tsutaya discas would be Japanese equivalents.

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. On July 22, 2007, Netflix announced that they would be dropping two of their more popular plan's prices by $1 in an effort to better compete with Blockbuster's online-only plan offerings.^[20] Blockbuster's subscriber base after one year was roughly a third of Netflix's size and growing.^{[citation needed]} Netflix founder Reed Hastings commented in a January 2005 interview that rival Blockbuster threw "everything but the kitchen sink at us."^[21]

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 the MVP "Basic" plan. Blockbuster started Movie Pass in 2004, which lets customers keep 2-3 DVDs at a time for US$25-30 a month without restrictions or due dates. Hollywood's MVP "Premium" offers the same benefits for a comparable price. Both still require the customer to travel to the store to rent and return movies, and their selection is not as diverse.

The domain netflix.com attracted at least 194 million visitors annually by 2008 according to a Compete.com survey. This is five times the numbers of blockbuster.com.^[22]

[edit] Netflix vs. Blockbuster

On April 4, 2006, Netflix filed a patent infringement lawsuit in which they 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 violates two patents held by Netflix. The first cause of action alleges 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.^[23] The second cause of action alleges 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.^[24] 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 Blockbuster saying that it wouldn't have a major impact on its future financial performance.^[25]^[26] Blockbuster also said that the company planned to close 282 stores that year to shift focus to its online service. The company had already closed 290 stores in 2006.

In Fall of 2006, Blockbuster signed a deal with The Weinstein Company, that gives them exclusive rental rights for the studio's films, starting January 1, 2007.^[27] This would force Netflix to obtain copies from mass merchants or retailers, instead of dealing with the company.^[28] Netflix has speculated that this might result in higher costs and/or smaller quantities purchased.^[29] As of June 2007, Netflix continues to rent Weinstein DVDs. They now have Unknown, School For Scoundrels, and Harsh Times, among others. The First Sale Doctrine allows Netflix and other video rental businesses to rent movies released by the Weinstein Company, but the long-term effects of the Blockbuster/The Weinstein Company deal remain uncertain.

[edit] "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 shipments delayed, sent across country, or sent out of order.^[30] 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."^[31] However, not all shipments come from the subscriber's local distribution center. Shipments from distant centers are often delayed, as well.

[edit] The Chavez lawsuit

In September, 2004, a consumer class action lawsuit, Frank Chavez v. Netflix, Inc,^[32] 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.)^[33]

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 judgment. 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.^[34] 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.^[35] On September 6, 2006, an appeal was filed in California Appellate Courts, 1st Appellate District. The settlement benefit will not be distributed until the appeals process is completed, which could take a year or more.^[36]

[edit] The "Releasing This Week" Page

The Netflix Website had a long existing page called "Releasing This Week" (RTW). It allowed Netflix customers to easily view new DVDs that Netflix released for rental each week.^{[citation needed]}

On December 21, 2007, the link to the page was removed without notice and replaced by a slider system showing only four older movies at a time. This new page is called "Popular New Releases" but does not list the most recently released movies.^[37]

The list of new releases pages are still on the server and are still active, though no menu or links options exist in the browser to access the page. The direct link is now available here.

On January 1, 2008, a Netflix employee posted on the blog the unofficial reasoning for removing the RTW page. Subscribers were using the RTW page to add movies to their queue. They would then move those movies to the top of the queue, and complain if there was a wait for the movies. By removing the RTW page, customers would be hindered in queuing new releases and therefore be unable to complain that they were not immediately available. Critics have suggested that this is just another Netflix effort to enact "throttling."^[38]

[edit] Further reading

Phillips, Matt. "For Some Netflix Users, Red Envelopes Gather Dust", The Wall Street Journal, 2006-06-18. Retrieved on 2007-12-26. "Some members admit that when browsing the Netflix backlog, they overestimate their appetite for off-the-beaten-track films. The result: Sometimes DVDs languish for months without being watched."