Back to the Future

The evolution of Netflix has been in the planning stages since the turn of the century

Whether it was foresight or sheer power of will, nearly a decade ago Reed Hastings outlined the direction he intended Netflix to go -- and it's a direction his company is still following.

"Reed was very clear back in February 2000 when he said, 'Look, this is all about getting big on DVDs and doing DVDs well," chief marketer Leslie Kilgore says, " 'and then we will eventually expand into streaming.' That's been our strategy ever since. He was clear about that then and has been unwaveringly clear throughout company history."

That's why it never bothered Hastings when media and competitors chided him for pinning his future on buggy-whip era technology. "What we recognized early on was that a DVD through the mail wasn't a low-tech solution," chief content officer Ted Sarandos says. "It was a very elegant solution to (get) a lot of discs to homes by leveraging the infrastructure of the U.S. Post Office to deliver a movie experience to customers roughly overnight."

Sarandos says they consider the current business model -- Internet streaming and downloading bundled with mail delivery -- to be an experiment that will allow them to collect data while it evolves. In the future they might offer different services, bundled or unbundled, at various service levels and price points yet to be determined.

"The idea was that it would always get faster -- and at the same time bandwidth would evolve," Sarandos adds. "It's a joke now, but he named the company Netflix because it was envisioned as an Internet delivery company; and DVDs through the mail was meant as a bridge, the way to get people engaged with the Netflix rating process."

While there are a lot of players delivering movies over the Web -- led by Apple, Amazon and newer entrants such as Hulu and ZillionTV -- Netflix is different from most because it offers a subscription service and delivers more library titles than just the new hit movies that fuel sales for most of its competitors.

"Netflix is one of the stars of the transition from old media to new media," says Nick DeMartino, senior vp media and technology at the American Film Institute. "The original business proposition was kind of a transitional play. They're very mindful of the fact that they can't get too far ahead of the consumer and they can't get behind the consumer."

DeMartino says their strength is in the queue on Netflix.com, which holds a catalog of more than 100,000 movie titles, gives customers the opportunity to list the films they want to see and tracks what they are actually watching. It also helps, DeMartino says, that "They're very good at customer service."

Nelson Gayton, executive director of the UCLA Anderson Entertainment and Media Management Institute, says he has a lot of faith in Netflix "particularly because they have shown this keen ability to understand where the markets are going." He cautions, however, that they have to be on top of "the issue of cannibalization" -- that is, whether or not they are taking away from their own mail delivery customers by switching to digital instead of growing a new customer base.

"That was Blockbuster's fear for a long time in getting into home delivery," Gayton says. "Unfortunately their fear was someone else's opportunity. It was Netflix's opportunity and they have been quite bold in how they look at the consumer market and actually attack it."

Gayton believes Netflix will manage the transition to digital delivery. "I see them up-selling their current customers to a different product offering that's going to make more money for them and obviously offer a better value proposition for the consumer," he says. "So they look at the whole issue of cannibalization in a different way."

Chief talent officer Patty McCord says there are frequent internal discussions about the future. She recalls being on a bus with Hastings and chief product officer Neil Hunt as they were talking "at a very tactical level about a particular feature on the Web site and ... they sort of got fired up. At one point Reed said, 'What if you walked up to the wall that was your television and you reached in and grabbed what you want and then it appeared?' I thought these guys not only can talk about this stuff, they can imagine the technologies that can make this happen. It's real to them. It will happen. It's just a matter of time."
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