Netflix Plans for the Future

Reed Hastings has seen the future, and there are no polycarbonate discs in his vision. You might find this surprising, given that he’s the CEO of Netflix. Is there life for Netflix after the DVD? That’s the question that was explored in an article in the Wall Street Journal last month.

Hastings co-founded Netflix, and expects that revenue from the rental of physical DVD discs will start to decline in as little as four years from now. Faced with a certain end to the business that now generates the bulk of the company’s revenues, he has the opportunity to set a new course for Netflix, and he’s working hard at it.

Clearly, the answer is to replace sending physical discs through the US Postal Service with streaming electronic versions of the movies across the Internet. (What will the Post Office do without those half-billion DVDs to deliver each year?) The company is already well on its way with its online service, offering subscribers on-demand access to about 12,000 movies and other videos at no additional charge. According to the WSJ article, about 20% of the 10 million subscribers now use that service on a regular basis.

But Netflix has more than 100,000 titles in its physical collection. Why can’t it just digitize them and start streaming? The answer is that the company does not have the rights to do that. So the current task is to negotiate with the movie studios and other content products. The problem is that the cable and satellite networks already have agreements for the electronic distribution of movies, and it may be hard for Netflix to generate enough revenue to compete with the licensing deals offered by these competitors.

Maybe one way to apply some leverage is to generate some pull. Just search the HDTV Almanac and you’ll find lots of entries about new devices — from set top boxes to flat panel HDTVs — that can connect to the Internet and stream the Netflix titles. Even Windows Media Center now includes a Netflix option on its menu. As more and more of those 10 million Netflix subscribers start using the service, it may create revenue opportunities that will help the company put together an offer that even the studios can’t refuse.