Will Netflix DVDs go the way of AOL CDs?

On the heels of my questioning the future of Netflix's DVDs-by-mail model, the largest retail seller of DVDs, Walmart, is planning its own movie download service as well, and is facing a rumored Apple plan to begin offering movie downloads at iTunes.
Written by Donna Bogatin, Contributor

UPDATE The largest seller of DVDs, Walmart, is planning a movie download service; Apple is rumored to begin offering movie downloads at iTunes in September.

Just when AOL commits to cease clogging our mailboxes with useless CDs, Netflix takes up the slack with old school “junk mail” hawking “traditional” DVD movie rentals.

In my mailbox today, courtesy of Netflix: oversized, fire-engine red 11” by 14” envelope touting “Here’s Your Netflix Start-Up Package: Everything you need for hassle free DVD rentals!” What is Netflix’s ace direct marketing piece comprised of?

1) Personalized “Up to 10 Free Rental Coupon”
2) “Free Gift” New Release Calendar
3) “Free Gift” Top 200 List of Most Popular Films as Chosen by Netflix Members

The collateral asks that I “go to www.netflix.com right now, enter coupon code, and start picking movies.”

The Netflix direct mail campaign contributes to the company’s $43.95 per gross subscriber addition acquisition cost, up from $38.47 earlier in the year.


Netflix claims the following “Fun Facts”:

• Netflix ships about 17,000 tons of DVDs each year. If placed side by side, the discs would form a line about 30,000 miles long.
• If you stacked every DVD we ship in a single pile, the stack would grow by 4,500 feet each day and would be taller than Mt. Everest within a week.

Netflix supports its physical DVD distribution scheme with a nationwide infrastructure of 37 shipping centers.

At the same time, Netflix is hoping it will “eventually” be transitioning to digital downloading. Last June, Netflix filed a “Regulation FD Disclosure” with the SEC confirming a $5 to $10 million investment in “developing its approach to on-line movie delivery.”

In response to recent speculative reports, Netflix today clarified remarks made by one of its employees at a film industry meeting last week.

In remarks during a panel discussion at a meeting of the Independent Film & Television Alliance on Friday, June 16, 2006, Eric Besner, a member of the Netflix content acquisition organization, said that Netflix is developing a proprietary set-top box that would allow subscribers to download movies for viewing on their television sets.

Netflix said that Besner’s comments have subsequently been interpreted to suggest that Netflix has narrowed its downloading strategy to a set-top box product. In fact, Netflix is evaluating a broad range of options, and no decisions have been made regarding specific delivery options or timing. Netflix had earlier indicated that it would discuss its downloading plans more fully in its fourth-quarter earnings announcement in January 2007 and that it is investing $5 to $10 million this year in developing its approach to on-line movie delivery.

Netflix is also investing heavily on the legal front in a head-on battle with competitor Blockbuster. According to recent Reuters reports:

A federal judge in San Francisco has allowed video rental giant (Blockbuster) to proceed with antitrust claims against online rival Netflix, which has sued Blockbuster for alleged patent violations.

In April, Netflix sued Blockbuster in a bid to shut down 2-year-old Blockbuster Online, saying it knowingly infringed on two Netflix patents.

But Blockbuster said the lawsuit is based on unenforceable patents that Netflix obtained deceptively, in a bid to monopolize online rentals.

Despite the uncertain future of its business model and legal status, Netflix continues to report subscriber and revenue growth. According to the company, Netflix is “the world’s largest online entertainment subscription service”:

Subscribers: Netflix ended the second quarter of 2006 with approximately 5.2 million total subscribers, representing 62% year-over-year growth.

Revenues: Netflix revenue for the second quarter 2006 was $239.4 million, representing 46% year-over-year growth. GAAP net income for the second quarter 206 was $16.8 million, compared to $5.7 million for the second quarter of 2005.

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