With Netflix reporting a doubling of its fourth-quarter profit, the upstart is looking tougher than ever.
According to the company, Los Gatos, Ca.-based Netflix's fourth-quarter profit doubled to $4.8 million from $2.3 million in the same period a year ago. Revenue rose 77 percent to $143.9 million for the final quarter of 2004 from $81.2 million this same quarter a year ago.
"2004 was a spectacular year for Netflix. We delivered strong revenue and earnings. We grew to more than 2.6 million subscribers, and we achieved our lowest churn ever in the fourth quarter, despite intense competition," said Reed Hastings, co-founder and chief executive of Netflix. "We do online DVD rental better than anyone on the planet, and we continue to enhance our service everyday ... In 2005, you can expect us to maintain rapid subscriber growth and our category leadership position."
The five-year-old Netflix lays claim to a first-to-market advantage that has garnered it more than 2 million customers who avail themselves of a library of 30,000 DVD titles that range from movies to documentaries to old television shows.
They don't however do porn, on the basis that it would not wash well with family renters and would come back to haunt them.
The movie categories range from classics, sci-fi, action, romance and comedy to gay and lesbian (general theme and not too racy). For a flat fee, customers can watch as many movies as they can possibly fit in for a month, no limit or late fees, with one catch: subscribers can only have three films out a time. When subscribers send back films, Netflix sends them new ones. The company mails them to you, you watch, and then you mail them back in a postage-paid envelope.
Now, however, the paradigm is undergoing some upheaval as all the renters are in a price war aimed to gain market share while there is market share to be gained.
In November, Netflix said it was lowering its monthly service fee by 18 percent, from $21.99 to $17.99, in a move that Hasting said was designed to add millions of news subscribers.
Currently, however, Blockbuster is $3 less.
Announcing the Netflix price discount several months ago, Hasting took the chance to note how the company had changed the movie rental business.
"Netflix is changing the way people rent movies," Hastings said. "We've eliminated the hassle of due dates and the frustration of late fees that plague in-store movie rentals. By providing the convenience of fast and free delivery of movies combined with a personalized online experience, our members get the movies of their choice delivered to their doorstep without ever having to trudge to a video store or pay a late fee."
The trouble is, of course, while Netflix pioneered the paradigm it is now the the rule for all the online renters.
Still, stop people at random and ask them if they use Netflix, and those who do are like walking billboards for the company. The service seems to reach its perfect equilibrium for those who are heavy movie watchers and spin the service a great deal, constantly sending in and checking out new movies.
Two friends interviewed by United Press International, Jim Green, a San Franciscan visiting the nation's capital, and Dan Turrentine, a D.C. native, had differing opinions of the Netflix service.
"Netflix is really cool. It's this idea where you get movies in the mail and you get a monthly bill," said Green, explaining it to Turrentine.
Turrentine, however, noted: "Part of the fun of movies is going to the movie store. I'm a much more social person."
Green said, "Why wouldn't you want pizza delivered, instead of having to go out and pick it up?"
There has been some suggestion in chat rooms and elsewhere that Netflix opens itself up to become a social network or community, like Friendster, so Netflix users can compare and swap favorites lists.
Washingtonian Alexandria Walden can't decide about Netflix.
"I did the free trial month. In the beginning I was on top of it every week (renting a lot), but then I started doing it less often. So three movies every two weeks just isn't worth it."
She said, "I didn't want to pay 20 bucks a month, even if they just lowered it (to $17.99)."
Walden added, "It's hard, based on my budget, to have an actual bill each month, that comes with other bills, like your phone bill and other necessities, then one is for movies. It's different if you just decided to go rent one on a Friday night, but a bill for movies? It's just hard just justify that."
But, she noted, "It's easier to search. Instead of walking around the aisles, you can search by categories ... I totally dig the fact that they send you the envelope and pay for the postage so you don't have to search for stamps. You can just dump it in the mailbox on your way out the door."
She said, "It's especially good for in the winter when I don't want to be out traveling and there's more time to be spent at home in your living room."
One advantage that Blockbuster Inc. may boast is using its many stores as a distribution network for its online rental business. While slow off the mark, it is too early to write Blockbuster off as a online rental service. A global brand, Blockbuster has more than 9,000 stores in 26 countries.
At a Consumer Technology Ventures conference in Redwood City, Ca. in October, Blockbuster's senior vice president and online general manager noted that in almost every case, no matter where a customer is located, "we can do next-day delivery" of movies.
For all the online DVD renters, the next big challenge will be keeping up with downloadable movies, which once worked out further as a commercial paradigm will become the new killer ap, wherein movie buffs can indulge in the legendary promise of -- "any movie ever made, anytime."
Shares of Netflix were trading at $11.78 midday Tuesday, up 5.75 percent for the day but still well off the company's 52-week high of $39.77 a share.
(reported with correspondent Holli Chmela.)