Netflix to Deliver Movies to the PC - Unmasp - experience exhibiting blog

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Netflix to Deliver Movies to the PC

SAN FRANCISCO, Jan. 15 — Wikipedia, the online encyclopedia, lists more than five dozen personalities whose obituaries were published prematurely. Someone may want to add Netflix to that list.
The impending death of the company, with its online system for renting DVDs delivered by mail, was predicted late in 2002, when Wal-Mart said it would enter the business; again last year, when Apple and Amazon announced movie-downloading services; and again last week, after the introduction of a series of products and services intended to bring Internet video to television sets.
But Wal-Mart left the online rental business in 2005 and now refers customers to Netflix. Meanwhile, none of the movie-downloading services have gained much traction with consumers, the notion of taking Internet video content to TV sets remains a work in progress, and Netflix keeps signing up new customers at a fast clip. It was expected to end 2006 with 6.3 million subscribers and nearly $1 billion in revenue, or about 12 percent of the $8.4 billion annual DVD rental market.
“We’ve gotten used to it,” Netflix’s chief executive, Reed Hastings, said of the doomsday predictions. But Mr. Hastings also said he understood why questions about his business kept coming up. “Because DVD is not a hundred-year format, people wonder what will Netflix’s second act be.”


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Credit...Illustration by The New York Times
But having a second act to talk about is not likely to end questions about Netflix’s future. Netflix shares dropped 6.3 percent on Friday to $22.71 after a JPMorgan Securities analyst downgraded the stock, citing increased competition. They are down more than 12 percent since Jan. 1. And the company said last year that the service would cost it about $40 million in 2007, an outlook that has not sat well with some investors.
“There’s clearly a strong demand for watching movies,” said Brian Pitz, an analyst with Banc of America Securities. “But the company’s earnings are going to be more negatively impacted,” said Mr. Pitz, who has a sell recommendation on Netflix shares.
Netflix is also entering a more crowded market that includes not only the likes of Apple and Amazon, but also MovieLink, CinemaNow and video-on-demand services offered by cable companies. And while Netflix’s DVD rental business has thrived in part because of the company’s superior logistics, that competitive edge will not mean much in the world of digital distribution.

First-time users of the service must download a special piece of software, which, if all goes well, also takes only a few seconds. (When a reporter tried the system at home, however, the process stalled because of a mismatch between the version of Microsoft’s antipiracy software expected by the Netflix viewer and the one loaded in the PC, and it took about 15 minutes to fix the problem with the help of a customer-support specialist. A Netflix spokesman said the problem was known, but occurred only rarely.)

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Credit...Jessica Brandi Lifland for The New York Times
Like most other electronic distribution services, Netflix’s system will work initially only with a limited catalog — about 1,000 movies and television shows, only a tiny fraction of the more than 70,000 titles that Netflix offers for rent. It offers titles from NBC Universal, Sony Pictures, MGM, 20th Century Fox, Paramount Pictures, Warner Brothers and others.
The service, which will be introduced over six months, works only on recent versions of Windows and Internet Explorer. Over time, Mr. Hastings hopes to expand the catalog of titles and make the service available on other hardware and software combinations, including set-top boxes, television screens and portable devices.
“The market is microscopic,” Mr. Hastings said. “DVD is going to be a very big market for a very long time.”

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In the case of online movies, two forces, one technological and one commercial, are keeping the market from developing more quickly. On the technological front, it is still difficult to deliver various Internet video formats to a TV screen. And on the commercial front, movie studios are leery of piracy and, more important, are fearful of cannibalizing their existing distribution businesses.
Frances Manfredi, senior vice president for cable distribution at NBC Universal, said her company wanted to provide video content “where consumers want it, when they want it, how they want it.” But, she added, “we really recognize that the traditional distribution businesses of cable and syndication are our primary businesses, certainly with respect to revenue generation.”
Ms. Manfredi said the agreement with Netflix, which includes classic TV shows like “Kojak” and “Columbo,” as well as more recent ones like “The Office,” and “Law & Order Special Victims Unit,” and some 350 movies including “The Motorcycle Diaries,” would deliver new revenue without hurting existing businesses.

Facing competition from Netflix, and from growing DVD sales at big-box retailers, Blockbuster shares began a steady slide in late 2003, from more than $22 to a low of $3.20 in March last year. In 2005, the company eliminated late fees — an irritant to many customers, and the issue that had prompted Mr. Hastings to found Netflix. The move cost Blockbuster hundreds of millions in revenue.
But Blockbuster’s own online rental service, introduced in 2004, has finally taken off.
With aggressive promotion of a new service called Total Access, which costs the same as Netflix’s service for three movies, and allows subscribers to exchange movies in stores, Blockbuster has added a staggering 700,000 subscribers since Nov. 1. After the company announced that it ended 2006 with 2.2 million subscribers, Blockbuster shares now stand at $6.43, up from $5.48 at the beginning of the year.

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“I wouldn’t be surprised to see our online subscribers double by the end of 2007,” John F. Antioco, the chief executive of Blockbuster, said. Mr. Antioco said Blockbuster was planning to offer a digital distribution service later this year. “We have everything that Netflix has, plus the immediate gratification of never having to wait for a movie.”
It is unclear whether Blockbuster’s growth has been at the expense of Netflix, though a first glimpse into that may be offered next week, when Netflix reports fourth-quarter earnings.
In the meantime, he said, Netflix’s digital delivery service represents insurance against technological obsolescence, and against more predictions of Netflix’s demise.
“We have seen so many Silicon Valley companies follow a single generation of computing,” Mr. Hastings said. “Investors are rightfully scared of single-model companies.”

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