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Netflix
Type Public (NASDAQ: NFLX)
Founded 1997
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 Image:green up.png US$ 996 million (2006)
Operating income Image:green up.png US$ 64.4 million (2006)
Net income Image:green up.png US$ 49.1 million (2006)
Employees 1400+ (2007)
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. Established in
1998 and headquartered in Los Gatos, California, it has amassed a collection
of 80,000 titles and over 6.8 million subscribers. [1] They have over 42
million discs and ship 1.6 million a day, on average. [1] Netflix previously
claimed to spend about $300 million a year on postage. On 25 February 2007,
Netflix announced the delivery of its billionth DVD. [2][3]
Services
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 44
warehouses located throughout the United States.[4] 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
disc in the subscriber's rental queue.
As of July 24, 2007, Netflix's most popular plan costs US $16.99 (plus tax)
per month, which allows a subscriber to check out up to 3 DVDs at a time.
Other monthly plans range from US $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.
Netflix began rolling out its new "Watch Now" feature to a limited number of
customers, with the feature now available to all subscribers. The Watch Now
feature allows subscribers, at no additional cost, to stream near-DVD
quality movies and TV Shows instantly, depending on subscribers' Internet
connectivity. Subscribers will 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. Currently the service has
over 2,000 movies and TV Shows available with over 5,000 expected to be
available later in the year. Major studios including NBC Universal, Sony
Pictures, MGM, 20th Century Fox, Paramount Pictures, Warner Brothers, Lion's
Gate, and New Line Cinema are all distributing films under this service.[5]
It is available only to PCs running Windows XP or Vista and web browser
running Internet Explorer version 6 or higher.
Besides movie rental service, Netflix also sells DVDs to its subscribers.
The purchase is delivered via the same system and billed using the same
payment method as the rentals.
The phone number for Netflix customer service, which is available 24 hours a
day, 7 days a week, is 1-888-NETFLIX (638-3549). [6] The telephone number
for customer service was added to the Netflix website in December 2006,
after Netflix CEO Reed Hastings was unable to locate a telephone number on
the company's website during an interview on 60 Minutes.[7] When calling
this number, callers will find a standard interactive voice response system
and will have an option to speak to a representative if automated options
are not sufficient. There is another phone number 1-800-585-8131 which
appears on the "How It Works" page when a user is not logged in. [4].
Corporate history
Netflix began operations in 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).[8] It did not introduce the monthly subscription concept
until late 1999.[9] 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.
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. 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%.[10] (see Netflix Prize for more).
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 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."[11] 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.[12]
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. 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.[13]
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.
Netflix experienced a significant service outage beginning on July 23, 2007
and lasting until July 24, 2007. A simple page informed visitors when
service restoration was expected, but after missing several deadlines, the
company finally published a page with no expected restoration time, and the
customer service telephone number.[14]
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 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.[15] 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.[16] 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.[17] Blockbuster's subscriber base
after one year was roughly a third of Netflix's size and growing. Netflix
founder Reed Hastings commented in a January 2005 interview that rival
Blockbuster threw "everything but the kitchen sink at us." [18].
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.
Netflix v. 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.[19] 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.[20]
In response, 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.[21] "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.
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.[22] This would force Netflix to obtain copies from mass merchants
or retailers, instead of dealing with the company. [23] Netflix has
speculated that this might result in higher costs and/or smaller quantities
purchased. [24] As of June 2007, Netflix continues to rent Weinstein DVDs.
They now have Unknown (30 Jan 2007), School For Scoundrels (13 Feb 2007),
and Harsh Times (13 Mar 2007), 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.
On June 25, 2007, Blockbuster and Netflix resolved the parties' pending
patent litigation, ending their year long dispute. Both companies declined
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 has planned to
close 282 stores this year to shift focus to its online service. The company
has already closed 290 stores last year.
Controversies
"Throttling" and the Chavez lawsuit
Netflix's allocation policy — referred to by many as "throttling" — gives
priority shipping and selection to customers who rent the fewest discs per
month. Higher volume renters may see some of their shipments delayed, sent
across country, or sent out of order.[27] 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."[28] 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,[29] 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.)[30]
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.[31] 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.[32] 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 12 or
more months.[33]
References
1. ^ a b Netflix Facts. Netflix. Retrieved on 2 March 2007.
2. ^ "Netflix delivers 1 billionth DVD", MSNBC, 25 February 2007.
3. ^ "Netflix Delivers 1 Billionth DVD", Fox News, 27 February 2007.
4. ^ a b How It Works. Netflix. Retrieved on 2 March 2007.
5. ^ The Associated Press (2007-01-16). Instant viewing -- Netflix delivers
over the Web. CNN. Retrieved on 2007-01-16.
6. ^ Netflix Customer Service phone number, Netflix
7. ^ Stahl, Lesley. "The Brain Behind Netflix", CBSNews.com, December 3,
2006.
8. ^ Stephen Czar (1998). DVD Historical Timeline. Retrieved on 30 January
2006.
9. ^ O'Brien, Jeffrey M.. "The Netflix Effect", Wired News, December 2002.
10. ^ Netflix Prize Website. Retrieved on 2006-12-08.
11. ^ "Movies to go", The Economist, July 7, 2005.
12. ^ Dornhelm, Rachel (2006-12-08). Netflix expands indie film biz.
American Public Media. Retrieved on 2006-12-11.
13. ^ Blitstein, Ryan. "Vacation policy at Netflix: Take as much as you
want", San Jose Mercury News, 22 March 2007.
14. ^ Netflix Outage. MSNBC (2007-07-24). Retrieved on 2007-07-27.
15. ^ Fisher, Ken "Caesar". "Netflix sees a bright future, sans Amazon
competition", Ars Technica, 19 June 2005.
16. ^ Lieberman, David. "Netflix, Blockbuster in all-out DVD rental price
war", USA Today, 18 October 2004.
17. ^ Liedtke, Michael. "Netflix Gives Up Profit to Gain Business", Forbes,
July 24, 2007. Accessed July 24, 2007
18. ^ Netflix wins round in online DVD-rental fight, ZDNet.
19. ^ US7,024,381 (PDF version) (2006-04-04) Hastings; W. Reed (Santa Cruz,
CA), Randolph; Marc B. (Santa Cruz, CA), Hunt; Neil Duncan Approach for
renting items to customers
20. ^ US6,584,450 (PDF version) (2003-06-24) Hastings; W. Reed (Santa Cruz,
CA), Randolph; Marc B. (Santa Cruz, CA), Hunt; Neil Duncan (Mountain View,
CA) Method and apparatus for renting items
21. ^ Blockbuster intends to fight claims
22. ^ Blockbuster, Weinsteins sign exclusive deal, viseobusiness.com.
23. ^ How The Weinstein Company ruined Home Entertainment, slashfilm.com.
24. ^ Annual Report, Netflix
25. ^ Form 8-K for BLOCKBUSTER INC, Yahoo! Finance.
26. ^ Blockbuster to shutter 282 stores this year, hollywoodreporter.com.
27. ^ Liedtke, Michael. "'Throttling' angers Netflix heavy renters",
Associated Press, 2005-02-10. Retrieved on 2005-02-11.
28. ^ Terms of Use. Netflix. Retrieved on 30 January 2006.
29. ^ Class action suit
30. ^ Blockbuster Throttling. Hacking Netflix. Retrieved on 17 December
2006.
31. ^ Trial Lawyers for Public Justice. Court Urged To Strike Down Proposed
Netflix Class Action Settlement in Deceptive Advertising Case. Press
release.
32. ^ Netflix. Netflix Claim Form Process. Press release.
33. ^ California Appellate Courts Chavez v. Netflix Inc. Appeal Status
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