Though its business may not be the stuff of Hollywood drama, Netflix is the perfect response to the dot-com age, when an excessive reliance on immature technologies like digital downloading led to widespread ruin. The five-year-old Los Gatos, Calif., firm has placed a bet that all the talk of piping digital movies and TV shows directly into the home via fat broadband pipes is just that: a pipe dream.
Netflix’s alternative proposition is simple. Users pay $20 a month to choose from a selection of 13,500 DVDs on its sparse Web site, netflix.com. The company then mails out the discs through the U.S. Postal Service in a one-ounce red envelope. Subscribers return the discs at their leisure in an enclosed pouch, and then the company sends them the next movie on their wish list. If it’s not available, they’re put on a waiting list. There are no late fees or lines at the local rental store, and members can keep up to three discs at a time.
CEO Reed Hastings, 42, was one of the icons of the erstwhile tech craze, hitting the jackpot in the mid-’90s when his first company, Pure Software, went public. USA Today featured him on the front page in his green Porsche with the headline boom! you are rich! Today Hastings seems a bit less flamboyant. He says Netflix will someday get into the business of distributing movies over the Internet and cable net–works, but he’s in no hurry. “The U.S. mail, with its 800,000 employees delivering to 100 million homes six days a week, is the ultimate digital distribution network.”
During the dot-com boom, bits of quaint wisdom like that weren’t well received by more ambitious investors. Trendier companies like Webvan and Kozmo.com were boldly trying to change the face of American commerce by building armies of vans and bike messengers to deliver various supermarket goods to people’s doorsteps. Wall Street was impressed. In 2000, investment bank Credit Suisse First Boston bypassed Netflix to take Kozmo.com public instead. But Kozmo’s IPO was delayed due to a cratering stock market, and six months later it halted operations. Meanwhile, Netflix made several missteps (like attempting to offer movie showtimes online in competition with Moviefone) but conserved its cash and finally went public last year, one of the few tech companies to do so. (At $17, its stock is up slightly from the IPO price of $15.) It says it will make a profit for the first time this year.
Last month Netflix reached what Hastings calls “a great psychological mark” by signing up its 1 millionth member. (The highest concentration of customers is clustered around cities like San Francisco, where 5 percent of households are members.) Unfortunately, the success of Netflix’s model has also attracted competition: Blockbuster and Wal-Mart are now offering DVD-rental services, though both have yet to significantly market their offerings.
Using the U.S. Postal Service isn’t the only characteristic that qualifies Netflix as a Luddite company. Its distribution centers are decidedly low-tech, at least on the surface. At the San Jose center, employees sit at one set of desks in the morning to unpack and scan the bar codes on the packages of discs returned that day. Then they move en masse to another set of computers running specialized software that prints out address labels for the next subscribers. Tim Dillon, vice president of operations, says the company has chosen to concentrate on the software that tracks the 5 million discs in the Netflix system.
Hastings says the company is waiting for the day that digital distribution of films into homes becomes a reality. When that happens, he promises to transform the company from moving discs through the mail to movies over broadband. “That’s why we named it Netflix, not DVD-by-Mail.” But he thinks the broadband revolution will take at least 10 years. For now, Hastings and his crew are content to embrace what works, even if it looks as old-fashioned as some of the movie stars who watch silently over their distribution centers.
