Name: Netflix

After disrupting the store-based model of Blockbuster and similar chains with its DVD-by-mail subscription service, Netflix has introduced a video-on-demand service on its website. It has also worked with manufacturers of televisions and set-top boxes to stream its catalogue direct to TV screens.

Stock Symbol: NFLX
URL: www.netflix.com
Location: Los Gatos, CA
Telephone: (408) 540 3639
Year Founded: 1997
Number of Employees: 1,644 (as of December 31, 2008)

Executive Leadership:

CEO: Reed Hastings

Bio: Bachelors degree from Bowdoin College, Masters in computer science from Stanford University. Before founding Netflix, Hastings founded Pure Software which was acquired by Rational Software in 1997.

Chief Product Officer: Neil Hunt

Bio: Bachelors degree from the University of Durham, UK. Doctorate in computer science from the University of Aberdeen, UK. Formerly director of engineering at Rational Software.

Board Members and Advisors:

Richard Barton, Zillow

A. George “Skip” Battle, Ask Jeeves, (retired)

Charles Giancarlo, Silver Lake

Timothy Haley, Redpoint Ventures

Reed Hastings

Jay Hoag, Technology Crossover Ventures

Michael Schuh, Foundation Capital

Greg Stanger, private investor

R&D

Total R&D spending: $89.93 million

R&D as a percentage of revenue: 6.6 percent

Ratio of employees engaged in R&D: not disclosed

Technology:

Netflix operates a subscription-based movie and TV-show rental website. Netflix delivers DVDs to customers through the US mail, and can stream some of its catalog on-demand to website visitors via an embedded video player. A key component of their technology is a software recommendation algorithm that tries to maximize the number of movies rented by each customer by suggesting movies they might like, mainly based on their previous ratings and other users ratings. Netflix has been using the Cinematch system, introduced by Netflix in February 2000, to make recommendations. These predictions are, according to Netflix, accurate to within half a star on a five-star viewer rating scale in 75% of the cases, and half of Netflix users who rent suggested movies rate them with the highest rating. However, Netflix wanted to improve the system and started the Netflix Prize, a 5-year contest with a $1 million prize for a 10% improvement. The 2009 winner, Belkor’s Pragmatic Chaos achieved a 10.06% improvement over Cinematch’s algorithm.

Market:

Netflix currently has more than 10 million subscribers. Amazon and Wal-Mart entered the DVD rental market, but were not successful in capturing market share from Netflix. Amazon sold off the business in 2008 and Wal-Mart has shut down its service and is now using Netflix’ services on its website. The main competitor in the DVD rental market remains Blockbuster (50 million customers served daily in over 18 countries). Other competitors include Redbox, which offers new release DVD rentals through its network of self-service kiosks; video package providers with pay-per-view and video-on-demand (VOD) content including cable providers, such as Time Warner and Comcast; direct broadcast satellite providers, such as DIRECTV and Echostar; and telecommunication providers such as AT&T and Verizon. Competitors also include entertainment video retail stores, such as Best Buy, Wal-Mart and Amazon.com; and Internet movie and television content platforms, such as Apple’s iTunes, Amazon.com, Hulu.com and Google’s YouTube.

Strategy:

Netflix has started to expand from the business of solely sending DVDs to their customers into streaming content to customer’s home devices as they expect that Internet delivery of content to the home will eventually surpass DVD. There are three primary business models for Internet delivered content: ad supported delivery, such as Hulu.com and YouTube; pay-per-view or transactional, such as Amazon’s Video on Demand and Apple iTunes; and, subscription, such as Netflix’ service. Netflix states that it is their intent to focus exclusively on the subscription segment of Internet delivered content.

Netflix is partnering with consumer electronics companies to release a number of devices which can instantly stream movies and TV episodes from Netflix directly to members’ TVs. These devices currently include Blu-ray disc players and new Internet TVs from LG Electronics; Blu-ray disc players from Samsung; the Roku digital video player; Microsoft’s Xbox 360 game console; TiVo digital video recorders; and, soon, Internet TVs from Sony and VIZIO.

Challenges and Next Steps:

The biggest challenge Netflix faces is the growing competition from companies in the video-on-demand and internet delivery of content segment, especially from companies like Hulu and Vudu.

Hulu brings together a large selection of videos from nearly 190 leading content companies, including several major broadcast networks. Users can choose from more than 1,700 current primetime TV hits. Hulu is free through an advertising supported business model.

Vudu is a high-definition on-demand video service that cooperates with major studios and more than twenty independent and international distributors to offer approximately five thousand movies, HD films, and TV shows. Via their broadband Internet connection, Vudu users have the ability, on a studio-specific basis, to rent or buy titles and begin viewing them instantly.

Furthermore, Netflix relies heavily on its proprietary technology to process deliveries and returns of DVDs and to manage streaming of movies and TV episodes; any failure of this technology or adverse developments, such as a strong increase in delivery cost or strong decrease in DVD retail prices, could adversely affect its business. In terms of next steps, Netflix says it wants to continue to implement its strategy by providing value for subscribers, develop technology to enhance the subscriber experience and operate efficiently, and build mutually beneficial relationships with movie and TV studios.

Compiled by René Reinsberg