Video: Netflix’s next move

By Reporter
CNBC
updated 6/23/2006 1:03:33 PM ET 2006-06-23T17:03:33

Netflix has a business model that's not long for this world. The online video rental company depends on customers playing DVDs and sending them back and forth in the mail. But in the day of digital downloads, waiting by the mailbox will seem old-fashioned at best.

So Netflix is investing $5 million to $10 million — this year alone — in new technologies.

“It’s definitely part of a larger strategy,” said Paul Bond a writer for Hollywood Reporter. “Netflix — their bread and butter is delivering DVDs by US Mail. And they don't plan on stopping that service anytime soon. They just plan on enhancing it.

One employee said the new service will be available before the end of the year. Netflix says, “Not so fast” and rushed to file with the SEC, clarifying that this box isn't the only option in the works. And it insists there's no definite timing — its hands are full with other projects.

“The hurdle Netflix has to clear is not only technological, but the business rights to all those movies,” said Bond.

Last year Netflix dumped plans for online movie downloads because of problems with licensing restrictions. And in 2004 Netflix teamed with TiVo for movies-on-demand, but so far, nothing's come of that deal yet.

So the company is being careful not to raise Wall Street expectations for technologies that are many years out.

For now, Netflix is counting on its DVD-by-mail business. Company CEO Reed Hasting insists he'll grow his five million customers to 20 million by 2012.

The company says it intends to lead in downloading. But for now, it says, "We believe DVD will remain the popular format for many years."

“The DVD rentals in terms of Netflix as a percentage of total revenues will reprint the majority of total revenues for the next 10 years,” said Jim Friedland an analyst at Cowen & Company

But when Netflix goes broadband, that part of its business will be up against the big boys. Studios including Disney and Warner Brothers are teaming up to sell digital downloads to your computer, through Web-based services MovieLink and CinemaNow.

Just this week AT&T announcing a service to play digital downloads on your television — HomeZone. Even Apple's jumping into the game — negotiating to sell movie downloads for $9.99 on its iTunes music store. And industry insiders speculate Amazon is working on a similar download site.

“There's no question that the way movies are delivered over the long term will change,” said Friendland. “We think DVDs will eventually transition to the transmission of movies digitally.”

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