Netflix: Box-Office Star

By Kim S. Nash  |  Posted 2004-01-16 Print this article Print

DVD renter Netflix uses customer-tracking software and elbow grease to keep the crowds coming.

Some people say the fate of cinema is invisible downloadable bytes. Netflix says the near future is plastics— shiny, silver and round.

DVD rentals have made the six-year-old company with a $1.3-billion market capitalization a star. Eventually, Netflix plans to offer video downloads. But for now its key advantage is a network of 21 ultra-efficient, if low-tech, fulfillment centers run largely on proprietary software.

Since it opened in April 1998, Netflix has honed and rehoned operations, including its computer technology, business model and shipping methods. Sales doubled in 2001, again in 2002 and are expected to double again when Netflix reports 2003 results this month. The company with 1.5 million customers also expects to book its first year of profits: somewhere between $5.1 million to $6.8 million.

Last year, Netflix patented its business model of letting a customer possess up to a certain number of rented items at once, on a rolling basis, for a regular fee. The model includes a queue, or wish list, of items the customer wants to rent someday, separating the decisions of what to rent from when to rent.

Netflix's most popular plan is a $19.95-per-month deal for an unlimited number of DVD rentals and up to three discs at a time. Netflix offers 15,000 titles. There are no late fees and the company pays postage both ways.

Lindsey Robb of Boston, a subscriber since 2001, watches seven or eight DVDs per month. "I tell a lot of friends to join now because it's too good to last."

Some speculate that a big competitor such as Blockbuster may buy Netflix or that it will be stomped by Wal-Mart, which started a similar service 18 months ago for $4.41 per month less. So far, though, Wal-Mart has only an estimated 10,000 subscribers, while incumbent Netflix added 200,000 customers in the last three months of 2003 alone.

Having shipping centers across the U.S. means 60% of Netflix's subscribers get their discs in one day—as long as snow, rain and gloom of night don't stop the U.S. Postal Service, which delivers Netflix's signature red envelopes. Rivals don't match that reach. Blockbuster has one fulfillment center and Wal-Mart uses just six.

The typical 8,000-square-foot Netflix shipping center requires eight to 15 workers. There are no robotic arms or radio-frequency tags. Critical tools are mundane: hip-high metal carts for moving discs around and bar-code guns linked to custom-inventory and customer-tracking software written by Netflix programmers. Set-up of a center costs $60,000.

Da-Dum. Da-Dum.

Wal-Mart is new to DVD rental but concerned investors frequently ask Netflix CEO Reed Hastings how he'll compete. He usually says the online operation of the huge retailer, known for its bullet-train logistics, isn't a threat. Wal-Mart is "successful at nearly everything they've done. Walmart.com is not Wal-Mart," he said at a recent investor conference. "Walmart.com has struggled in essentially everything they've done. In our market, it's the same."

Still, moviegoers know not to underestimate a beast.

In "Jaws," the Richard Dreyfuss character warns a pompous mayor to protect his town from the giant shark, saying, "You are going to ignore this particular problem until it swims up and bites you on the ass."

The shark died, of course. Wal-Mart's not likely to.

Senior Writer
Kim has covered the business of technology for 14 years, doing investigative work and writing about legal issues in the industry, including Microsoft Corp.'s antitrust trial. She has won numerous awards and has a B.S. degree in journalism from Boston University.

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