() is the first and largest major
Online DVD Rental service, offering
Flat Rate rental-by-mail to customers in the
United States . Headquartered in
Los Gatos ,
California , it has amassed a collection of over 60,000 titles, and has around 5 million subscribers.
The company provides a monthly flat-fee service for rental of
DVD Movies . A subscriber creates an ordered list, called a
Rental Queue , of DVDs to rent. The DVDs are delivered individually by way of the
United States Postal Service from an array of regional warehouses (currently 39
2 in 28 states.) A subscriber keeps 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 another disc in the subscriber's rental queue. If the received disc is damaged or unplayable for some reason, or if the wrong disc was received, the customer can return it for a replacement or have the next item in the rental queue sent instead.
At present (
2005 ), Netflix's most popular plan costs $17.99, which allows a subscriber to check out up to 3 DVDs at once. Other monthly programs with a variety of checkout limits range from US$9.99 for 1 disc at a time to $47.99 for a total of 8, with a price-stepping of $6 per additional disc after the 3 for $17.99 plan.
Netflix began operations in 1998
4 with an online version of a more traditional pay-per-rental model ($4 per rental plus $2 in postage; late fees applied). It did not introduce the monthly subscription concept until late 1999.
5 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.
Unlike most online on-demand entertainment services, such as
EMusic , Netflix's offerings cover the vast range of DVD movies (and increasingly,
Television Series ) with more than 60,000 titles, including titles by major and minor studios (excluding
Pornographic Movie s). Particularly, Netflix has become noted for its extensive collection of
Documentary Film s,
Japanese Anime , and
Independent Film s, many usually hard to find in traditional rental shops. Indeed, "some 35,000 different film titles are contained in the 1m DVDs it sends out every day."
6 The company's published subscriber counts have increased from one million by the fourth quarter of 2002, to almost five million at then of the first quarter of 2006.
Netflix has developed and maintained an extensive recommendation system based on rating and reviews by customers, similar to the system at
Amazon.com ; the company believes this gives it an edge in competing with newcomers like
Blockbuster . Moreover, the growth has been fueled by the fast spread of
DVD Player s in households; as of 2004, nearly two-thirds of U.S. homes have a DVD player. Netflix also operates an affiliate program which has helped it to build online sales for DVD rentals.
Netflix is an example of the odd situation about
Copyright Issues on the
Internet . While it is possible and probably more convenient to directly download movies via the Internet, license issues and the fear of
Piracy prevents such a service. While he believes it would not be an instant success because of complications in copyright handling and relatively slow adoption of
Broadband Internet, Netflix CEO
Reed Hastings has said that Netflix will offer limited
Video On Demand sometime in the future, allowing users to download movies via the Internet and that it may even expand into the
Video Game market.
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 article estimated that the company therefore distributes 1,500
Terabyte s of data per day, almost as much data that travels across the entire Internet in one day.
After incurring substantial losses during its first few years, Netflix posted its first profit during fiscal year
2003 , earning $6.5 million profit on revenues of $272 million. 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 $15.00 per share. On
June 14 ,
2002 , it sold an additional 825,000 shares of common stock at the same price.
Anecdotal reports of disparities in the treatment of Netflix customers with regards to shipping and selection priority had circulated previously, but in September 2004 a consumer " (Netflix executives have used the term "fairness algorithm"). The current Blockbuster Terms and Conditions contains similar language.
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 $4 million, which included up to $2.53 million to cover plaintiff lawyer fees. 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.
7 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. A final hearing on the settlement is scheduled for March 22, 2006.
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.
Blockbuster Video , the world's largest store-rental chain, entered the U.S. online market in August 2004 with a $19.95 subscription. This sparked a
Price War ; Netflix had just raised its flagship 3-disc plan from $19.95 to $21.99 before Blockbuster's launch, but by October had reduced this to $17.99. Blockbuster responded with rates as low as $14.99 for a time, but by August 2005 both companies settled at the (identical) current rates. Blockbuster's subscriber base after one year was roughly a third of Netflix's size. Netflix founder Reed Hastings commented in a January, 2005, interview that rival Blockbuster threw "everything but the kitchen sink at us." Demonstrating the fierce competititive attitude between the two companies, Blockbuster responded to Hastings' comments by literally sending him a kitchen sink.
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Netflix has also cited
Amazon.com as a potential competitor.
8 Amazon.com operates online rentals in the
UK and
Germany but has remained coy about any intentions for the U.S. market.
On April 4, 2006, Netflix filed a alleges Blockbuster's
Infringement of U.S. Patent No. 7,024,381
(issued April 4, 2006, only days before this 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. The second cause of action alleges infringement of Patent No. 6,584,450[http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO1&Sect2=HITOFF&d=PALL&p=1&u=/netahtml/srchnum.htm&r=1&f=G&l=50&s1=6,584,450.WKU.&OS=PN/6,584,450&RS=PN/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.
Blockbuster issued a , senior vice president and general manager for Blockbuster Online.
