NetFlix’s DVD rental business is booming despite the recession. In the first quarter of 2009, NetFlix added more subscribers than any time in their history, according to an article in the Wall Street Journal on 6/23/09. Consumers rented a half-billion movies from NetFlix in 2008 and their business is still growing. However, the forward thinking CEO of NetFlix, Reed Hastings, feels that their current business model of renting DVDs through the mail is destined for failure and that the future of their business will be tied to movies viewed online. Hastings predicts that they will start to see a decline in their DVD mail rental business in four to nine year from now.
Making More Movies Available Online
To counter a predicted decline in their DVD mail rental business, NetFlix is scrambling to make more movies available online. NetFlix began offering movies online in 2007. Their technology allows consumers to watch movies instantly without downloading them. Now 20% of NetFlix subscribers use this service to view movies online and this has helped them increase their subscriber base by 25% to 10.3 million. The economics of the online rental business are very favorable, since it costs NetFlix 80 cents to send a movie through the mail and only 5 cents for the bandwidth that allows a consumer to view an average length movie online, according to the WSJ.
NetFlix has very little competition in the DVD rent-by-mail business, since Blockbuster scaled back that portion of their business in 2007. NetFlix offers 100,000 movies that can be rented through the mail. However, one of the biggest challenges NetFlix faces as it branches into the online movie rental business are the Hollywood studios. They presently have access to only 12,000 movie titles that can be rented online. In order for NetFlix to deliver movies online, they have to license them from the studios, which will put them in competition with television subscription services such as HBO and Showtime, according to the WSJ.
Competing in the Movie Licensing Arena
To compete with the TV subscription services, NetFlix will need to ramp up their spending on licensing, which amounted to $100 million in 2008. It’s unclear whether NetFlix has the resources to compete in the licensing arena. Licensing deals can also be very complex. Last year NetFlix added a few thousand new titles to their online library though a deal with Starz Entertainment, but then ran into some legal issues with Sony Pictures related to that deal, per the WSJ.
Impressive Strategic Planning
NetFlix is in a tricky position as they try to grow their online business, while also trying to preserve their DVD rental business. I’m impressed with their CEO’s proactive strategic planning to counter a predicted decline in their rent-by-mail business, while that business is still booming. This type of foresight should serve the company well as they try to expand their business moving forward.
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