Netflix () 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 100,000 titles and approximately 8.2 million subscribers.^[1] The company has more than 55 million discs and ships 1.9 million of them to customers each day, on average.^[1] Netflix previously claimed to spend about $300 million a year on postage. On February 25 2007, Netflix announced the billionth DVD delivery.^[2][3] It 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.^[4]

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.

A new Netflix security prepaid mailing envelope, designed to prevent tearing or unauthorized access

As of July 24, 2007, Netflix's most popular plan cost US $16.99 (plus tax) per month, allowing a subscriber to rent up to three DVDs at a time, with unlimited exchanges. 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 with unlimited exchanges. For the three-out and eight-out plans, each rental slot costs the subscriber approximately US $6 a month. Netflix also sells gift subscriptions for various renting intervals, although the recipient must register using a major credit or debit card.

In addition to its 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 subscriber's rentals.

Watch Instantly

Netflix has a "Watch Instantly" feature available to all eligible subscribers. The feature enables subscribers, at no additional cost, to stream near-DVD quality movies and recorded television shows instantly, depending on the subscriber's internet connectivity. Initially, the feature offered subscribers one hour of media for approximately every dollar they spent on their subscription. (A $16.99 plan, for example, entitled the subscriber to 17 hours of streaming media.) In January 2008, however, Netflix lifted this restriction. Virtually all subscribers now are entitled to unlimited hours of streaming media at no additional cost. Only subscribers with a plan of $4.99/one DVD per month aren't provided unlimited access to the streaming service. (They are allowed two hours). The new terms of the service are a response to the introduction of Apple's new video rental services.^[6]

Currently the Watch Instantly service features more than 10,000 movies and recorded television shows available^[7]. 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 using the service.^[8] Currently, the service is available only to PCs operating on the Windows XP Service Pack 2 or Vista running Internet Explorer version 6 or higher. The ability to view movies on other OS/Web browser configurations is still in development. The Xbox 360 console will be able to incorporate streaming in the late fall of 2008. Recent updates to the service have limited streaming media outputs to lower resolution displays (WMP11 requirement and component video outputs causes cryptic DRM reset error).

Set-top movie player

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 US $99, providing unlimited access to the Netflix streaming media catalog for subscribers with one-at-a-time unlimited plans and above. The firmware is upgradeable to enable the addition of new features in the future.

Earlier in the year, on January 3, 2008, Netflix announced plans to enable subscribers to download movies over broadband directly to an HDTV set-top box, produced by LG Group. The set-top player is expected to be available to consumers by the latter half of 2008.^[9]

Elimination of profiles

On June 19, 2008, Netflix announced plans to eliminate its online subscriber profiles feature on September 1, 2008. The feature was designed primarily to better serve multiple users on a single account, whereby each individual user maintains a unique profile DVD queues, ratings, recommendations, friend lists, reviews and intra-site communications. Netflix stated that elimination of the profiles would help the company improve its website for its customers. Netflix states that:

Following the announcement reaction to the elimination from users of the feature was primarily negative ^[10]}} ^[11]}} and confusing for the rest of the service's users as to the actual intentions of the announcement.

The action would have resulted in a loss of all reviews, ratings, lists and queues on the sub-profile on the related accounts .^[12] Netflix offered no option to migrate these lists to the base account, or to a new account. In response to the planned change, an internet petition was formed by users of the option to protest the move by Netflix, vowing a cancellation of subscriptions if the profiles were eliminated.^[13]

Eleven days after announcing the profiles change, Netflix reversed its decision to remove them. The company's official response noted: "Because of an ongoing desire to make our website easier to use, we believed taking a feature away that is only used by a very small minority would help us improve the site for everyone. Listening to our members, we realized that users of this feature often describe it as an essential part of their Netflix experience. Simplicity is only one virtue and it can certainly be outweighed by utility."^[14]

Corporate history

Netflix headquarters in Los Gatos

Netflix developed and maintains an extensive personalized video-recommendation system based on ratings and reviews by its customers, similar to the system used by Amazon.com. The company believes this gives it an edge in competing with newcomers such as Blockbuster Video and Apple Inc.. On October 1, 2006, Netflix offered a $1,000,000 prize to the first developer of a video-recommendation algorithm that could beat its existing algorithm, Cinematch, at predicting customer ratings by more than 10%.^[17]

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 more than 80,000 titles, including titles by major and minor studios (excluding most pornographic movies). Particularly, Netflix has been noted for its extensive collection of documentary films, Japanese anime, and independent films ? titles that are often difficult to find in traditional neighborhood video rental stores. Indeed, "some 35,000 different film titles are contained in the 1 million DVDs it sends out every day."^[18] Netflix has recently begun to play 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.^[19]

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, the company 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.^[20]

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 count increased from one million in 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 had a DVD player. Netflix also operates an online affiliate program which has helped it to build online sales for DVD rentals.

Competitive environment

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 market share 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,^[21] which offers online video rentals in the UK and Germany, but has remained coy about any similar intentions for the North American 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 its services on the U.S. market.^[22] Zip.ca currently serves as a Canadian equivalent to Netflix. Posren and Tsutaya discas would be Japanese equivalents.

Blockbuster Video, the world's largest in-store video rental chain, entered the U.S. online market in August 2004 with a US$19.95 monthly subscription service. This sparked a price war; Netflix had raised its popular three-disc plan from US$19.95 to US$21.99 just prior to Blockbuster's launch, but by October Netflix reduced this fee 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 it would drop the prices of two of its more popular plan by US$1 in an effort to better compete with Blockbuster's online-only offerings.^[23] Blockbuster's subscriber base after one year was roughly a third of Netflix's size and growing, including promotions such as the option to swap DVDs rented online at neighborhood stores and the simultaneous elimination of late fees altogether. Netflix founder Reed Hastings commented in a January 2005 interview that rival Blockbuster threw "everything but the kitchen sink at us."^[24]

Many in-store video rental chains now have unlimited rental plans similar to those of Netflix. Hollywood Video started its Movie Value Pass (MVP) service in late 2004, which enables customers to rent up to three movies at a time (due in five days) for US$15 a month. New releases, however, are typically excluded from the service for two to six weeks in the MVP "Basic" plan. Blockbuster started Movie Pass in 2004, which lets customers keep two to three DVDs at a time for US$25-30 a month, all without restrictions or due dates. Hollywood's MVP "Premium" plan offers the same benefits for a comparable price. Both services still require the customer to travel to the store to rent and return the movies, and their selection is not as diverse as Netflix.

The domain netflix.com attracted at least 194 million visitors annually by 2008, according to a Compete.com survey. This is about five times the number of visitors to blockbuster.com.^[25]

Netflix vs. Blockbuster

On April 4 2006, Netflix filed a patent infringement lawsuit in which it 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 violated two patents held by Netflix. The first cause of action alleged 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.^[26] The second cause of action alleged 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.^[27] 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 a statement by Blockbuster that it wouldn't have a major impact on its future financial performance.^[28][29] Blockbuster also said that the company planned to close 282 stores that year to shift focus to its online service. The company already had closed 290 stores in 2006.

In Fall 2006, Blockbuster signed a deal with The Weinstein Company, that gave it the exclusive rental rights to the studio's films beginning January 1, 2007.^[30] This agreement forced Netflix to obtain copies from mass merchants or retailers, instead of directly from the studio.^[31] Netflix has speculated that the effect of the Blockbuster-Weinstein agreement could result in higher rental costs and/or fewer copies of the studio's movies, which would limit the number of each movie's DVDs that would be available to subscribers at any one time.^[32] As of June 2007, Netflix continues to make available Weinstein movies, including Unknown, School For Scoundrels and Harsh Times, among others. The First Sale Doctrine allows Netflix and other video rental businesses to offer movies released by the Weinstein Company, but the long-term effects of the Blockbuster-Weinstein deal remain uncertain.

"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 selections delayed, routed elsewhere, or sent out of order.^[33] 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."^[34] However, not all shipments come from the subscriber's local distribution center, and shipments from distant centers are often delayed, as well.

The Chavez lawsuit

In September 2004, a consumer class action lawsuit, Frank Chavez v. Netflix, Inc,^[35] 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.)^[36]

In October 2005, Netflix proposed a settlement for those who had enrolled as a paid Netflix member prior to January 15, 2005. These earlier members would be able to renew their subscriptions with a one-month free membership, and those early members with current subscriptions would receive a one-month free upgrade to the next-highest membership level. Netflix's settlement denied allegations of 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. A controversial aspect of the settlement offer was that the customer's account would continue at the renewed or upgraded membership level after the free month provided by the settlement, with customers being charged accordingly unless they opted out after the month-long free period ended. 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 amounted to a "marketing tool" for Netflix, due to the windfall in revenues that could be expected from members who failed to opt-out at the end of the free term.^[37] The Federal Trade Commission also filed an amicus brief urging the 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 such that customers would be required to actively approve any continuation after the free month provided by the settlement. The final settlement hearing took place on March 22, 2006. After the settlement was agreed upon, Netflix offered registration on its website, with a deadline of June 26, 2006, to apply.^[38] On September 6, 2006, an appeal was filed in the California Appellate Courts, 1st Appellate District. The settlement benefit cannot be distributed until the appeals process is completed, which could take a year or more.^[39]

The "Releasing This Week" Page

The Netflix website at one time featured a page listing videos "Releasing This Week" (RTW) that enabled customers to easily view new DVDs the company planned for rental release each week. On December 21, 2007, the link to the company removed the page without notice and replaced it with a slider system showing only four previously released movies at a time. The new page, called "Popular New Releases", does not list newly released DVDs for rental.^[40] The listing of new releases is still on the Netflix server and is still active, however no menu or links options exist on the website to officially access the page. (The "secret" direct link is here.)

On January 1 2008, a Netflix employee posted on the blog the unofficial reasoning for removing the RTW page, stating that subscribers were using the RTW page to add movies to their queue, then moving the RTW movies to the top of their queue and complaining that there was a delay in receiving the movies after demand allegedly outstripped the supply of DVD copies available for shipping. By removing the RTW page, Netflix hindered customers' abilities to easily queue new releases, seeking to quell complaints that the movies were not readily available. Critics, however, have suggested this is just another Netflix effort to enact "throttling."^[41]

References

External links

Contact Information

• Netflix.com
• Customer Service: 1-888-638-3549
• Instant Watch Technical Support: 1-866-402-2616
• Scene Unseen Movie Reviews official site

for More Information

• 1 Free Month of NetFlix
• Netflix Class Action Lawsuit (2005)
• An Analysis of Netflix's DVD Allocation System (2003)
• 'Throttling' angers Netflix heavy renters
• Video: ''60 Minutes'': Lesley Stahl interviews Reed Hastings (December 1, 2006)

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