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Netflix is an online DVD rental service, offering flat rate rental-by-mail and online streaming to customers in the United States. Established in 1997 and headquartered in Los Gatos, California, it has amassed a collection of 100,000 titles and approximately 10 million subscribers. The company has more than 55 million discs and, on average, ships 1.9 million DVDs to customers each day. Netflix previously claimed to spend about $300 million a year on postage.
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Netflix is an online DVD rental service, offering flat rate rental-by-mail and online streaming to customers in the United States. Established in 1997 and headquartered in Los Gatos, California, it has amassed a collection of 100,000 titles and approximately 10 million subscribers. The company has more than 55 million discs and, on average, ships 1.9 million DVDs to customers each day. Netflix previously claimed to spend about $300 million a year on postage. On February 25, 2007, Netflix announced the billionth DVD delivery. It topped the ForeSee Results’ Top 100 Online Retail Satisfaction Index with an American Customer Satisfaction Index score of 86, well over the industry average of 75.
Services
The company provides a monthly flat-fee service for the rental of DVD movies. A subscriber creates an ordered list, called a rental queue, of DVDs to rent. The DVDs are delivered individually via the United States Postal Service from an array of regional warehouses. Currently, there are more than 100 shipping points located throughout the United States. The subscriber can keep the rented DVD as long as desired, but there is a limit on the number of DVDs (determined by subscription level) that each subscriber can have on loan simultaneously. To rent a new DVD, the subscriber must mail a previous one back to Netflix in a prepaid mailing envelope. Upon receipt of the disc, Netflix ships the next available disc in the subscriber's rental queue.
As of July 24, 2007, Netflix's most popular plan cost US $16.99 (plus tax) per month, allowing a subscriber to rent up to three DVDs at a time, with unlimited exchanges. Other monthly plans range from US $4.99, for one disc at a time and a limit of two per month, to US $47.99 for eight with unlimited exchanges. For the three-out and eight-out plans, each rental slot costs the subscriber approximately US $6 a month. Netflix also sells gift subscriptions for various renting intervals, although the recipient must register using a major credit or debit card.
Netflix offers their subscribers access to Blu-ray Discs for an additional $1 per-month subscription fee, citing the additional cost of Blu-ray titles as the reason for the fee.
In addition to its movie rental service, Netflix formerly sold used DVDs to its subscribers. The purchase was delivered via the same system and billed using the same payment method as the subscriber's rentals. This service was discontinued at the end of November 2008.
Watch Instantly
Netflix has a "Watch Instantly" feature available to eligible subscribers. The feature enables subscribers, at no additional cost, to stream near-DVD quality movies and recorded television shows instantly, depending on the subscriber's internet connectivity. Initially, the feature offered subscribers one hour of media for approximately every dollar they spent on their subscription. (A $16.99 plan, for example, entitled the subscriber to 17 hours of streaming media.) In January 2008, however, Netflix lifted this restriction. Virtually all subscribers now are entitled to unlimited hours of streaming media at no additional cost. Only subscribers with a plan of $4.99/two DVDs per month, one DVD at a time, aren't provided unlimited access to the streaming service. (They are allowed two hours). The new terms of the service are a response to the introduction of Apple's new video rental services.
Currently the Watch Instantly service features more than 12,000 movies and recorded television shows available. Major studios including NBC Universal, MGM, 20th Century Fox, CBS/Paramount, ABC-Disney, Warner Brothers, Lions Gate Entertainment and New Line Cinema are all distributing films and television shows via the service. On October 1st, 2008 Netflix announced a partnership with Starz Entertainment to bring 2,500+ new movies and television shows to Watch Instantly in what is being called Starz Play.
Support by platform:
- Windows. Windows XP Service Pack 2, Vista running Internet Explorer 6 (or higher) or Firefox 2 (or higher).. New viewer requires use of the Microsoft Silverlight technology.
- Mac OS X. An Intel-based Mac with OS 10.4.8 or later. Browser support is Safari 3 (or higher) or Firefox 2 (or higher).. Mac Netflix was added October 27, 2008, which requires use of the Microsoft Silverlight technology.
- XBox. As of November 19, 2008, an update to Microsoft's Xbox 360 allows Netflix subscribers to watch movies through their console.
Reliability concerns:
- Recent updates to the service have limited streaming media outputs to lower resolution displays (WMP11 requirement and component video outputs causes cryptic DRM reset error).
Profiles
On June 19, 2008, Netflix announced plans to eliminate its online subscriber profile feature on September 1, 2008. Profiles allow one subscriber account to contain multiple users (e.g. husband and wife, or two roommates) with separate DVD queues, ratings, recommendations, friend lists, reviews, and intra-site communications for each. Netflix contended that elimination of profiles would improve customer experience. However, likely as a result of negative reviews and reaction by Netflix users, Netflix reversed its decision to remove profiles eleven days after its announcement. In announcing the reinstatement of profiles, Netflix defended its original decision, "Because of an ongoing desire to make our website easier to use, we believed taking a feature away that is only used by a very small minority would help us improve the site for everyone." Then explained its reversal, "Listening to our members, we realized that users of this feature often describe it as an essential part of their Netflix experience. Simplicity is only one virtue and it can certainly be outweighed by utility."
Xbox 360
At E3 2008, Microsoft announced a deal to distribute Netflix videos over Xbox Live for all unlimited rentals users with Gold memberships. This update began on November 19, 2008. After the scheduled fall software upgrade, Xbox 360 owners with a Netflix Unlimited subscription and an Xbox Live Gold subscription in the US will be able to stream some 12,000 movies and TV shows directly from Netflix through the instant queue.
Manufacturing Partners
Netflix is now forming partnerships with electronics manufacturers to instantly stream movies directly to their devices. In May 2008 they released a set-top-box to stream Netflix's Watch Instantly movies. The device is manufactured by Roku and provides unlimited access to the Netflix streaming media catalog for subscribers with one-at-a-time unlimited plans and above.
In October 2008 Netflix agreed to instantly stream movies to two of Samsung's Blu-ray Disc players. They soon after announced a partnership to instantly stream movies to Tivo DVRs.
In November 2008 they announced a partnership to instantly stream movies via Xbox 360 video game and entertainment systems. In January 2009 Netflix announced a similar partnership with Vizio and LG to instantly stream movies directly to their high definition televisions.
Corporate history
Netflix was founded in 1997 by Marc Randolph and Reed Hastings, who previously had worked together at Pure Software. The Netflix website launched in April 1998 with an online version of a more traditional pay-per-rental model (US $4 per rental plus US $2 in postage; late fees applied). Netflix introduced the monthly subscription concept in September, 1999, then dropped the single-rental model in early 2000. Since that time the company has built its reputation on the business model of flat-fee unlimited rentals without due dates, late fees, shipping or handling fees, or per-title rental fees.
Netflix developed and maintains an extensive personalized video-recommendation system based on ratings and reviews by its customers, similar to the system used by Amazon.com. The company believes this gives it an edge in competing with newcomers such as Blockbuster Video and Apple Inc. On October 1, 2006, Netflix offered a $1,000,000 prize to the first developer of a video-recommendation algorithm that could beat its existing algorithm, Cinematch, at predicting customer ratings by more than 10%.
Unlike most online on-demand entertainment services, such as Movielink, Netflix's offerings cover the vast range of DVD movies (and increasingly, television series) with more than 80,000 titles, including titles by major and minor studios (excluding most pornographic movies). Particularly, Netflix has been noted for its extensive collection of documentary films, Japanese anime, and independent films — titles that are often difficult to find in traditional neighborhood video rental stores. Indeed, "some 35,000 different film titles are contained in the 1 million DVDs it sends out every day."
Netflix has played a prominent role in independent film distribution. Through a division called Red Envelope Entertainment, Netflix licenses and distributes independent films such as Born into Brothels and Sherrybaby. As of late 2006, Red Envelope Entertainment has also expanded into producing original content with filmmakers such as John Waters. Netflix announced plans to close Red Envelope Entertainment in 2008, in part to avoid competition with its studio partners.
Netflix initiated an initial public offering (IPO) on May 29, 2002, selling 5,500,000 shares of common stock at the price of US $15.00 per share. On June 14, 2002, the company sold an additional 825,000 shares of common stock at the same price. After incurring substantial losses during its first few years, Netflix posted its first profit during fiscal year 2003, earning US $6.5 million profit on revenues of US $272 million. The company is well-known for its worker-oriented culture, including unlimited vacation time for salaried workers and allowing those employees to take any amount of their paychecks in stock options.
Netflix has been one of the most successful dot-com ventures. A New York Times article from September, 2002, said that, at the time, Netflix mailed about 190,000 discs per day to its 670,000 monthly subscribers. The company's published subscriber count increased from one million in the fourth quarter of 2002 to around 5.6 million at the end of the third quarter of 2006, to 10 million in February of 2009. Netflix's growth has been fueled by the fast spread of DVD players in households; as of 2004, nearly two-thirds of U.S. homes had a DVD player. The DVD is the most successful product in the history of the U.S. in amount of growth measured by the number of units owned in individual U.S. homes. Impressively the DVD only took 5 years to reach 50% entrance into U.S. homes. Netflix capitalized on the success of the DVD and its rapid expansion into U.S. homes, integrating the potential of the Internet and e-commerce to provide services and catalogs that brick and mortar retailers could not compete with. Netflix also operates an online affiliate program which has helped it to build online sales for DVD rentals.
Competitive environment
Netflix's success has inspired a number of other DVD rental companies both in the United States and abroad, but none of the purely online companies appear to approach Netflix in terms of market share or revenues. Wal-Mart began an online rental service in October 2002, but left the market in May 2005 and now has a cross-promotional arrangement with Netflix. Netflix has also cited Amazon.com as a potential competitor, which offers online video rentals in the UK and Germany, but has remained coy about any similar intentions for the North American market.
Netflix had preliminary plans to expand to Canada and the UK in 2005, but the expansion appears to have been postponed or canceled as Netflix concentrates its services on the U.S. market. Zip.ca currently serves as a Canadian equivalent to Netflix. Posren and Tsutaya discas would be Japanese equivalents.
Blockbuster Video, the world's largest in-store video rental chain, entered the U.S. online market in August 2004 with a US$19.95 monthly subscription service. This sparked a price war; Netflix had raised its popular three-disc plan from US$19.95 to US$21.99 just prior to Blockbuster's launch, but by October Netflix reduced this fee to US$17.99. Blockbuster responded with rates as low as US$14.99 for a time, but by August 2005, both companies settled at the (identical) current rates. On July 22, 2007, Netflix announced that it would drop the prices of its two most popular plans by US$1.00 in an effort to better compete with Blockbuster's online-only offerings. Blockbuster's subscriber base after one year was roughly a third of Netflix's size and growing, including promotions such as the option to swap DVDs rented online at neighborhood stores and the simultaneous elimination of late fees altogether. Netflix founder Reed Hastings commented in a January 2005 interview that rival Blockbuster threw "everything but the kitchen sink at us."
Many in-store video rental chains now have unlimited rental plans similar to those of Netflix. Hollywood Video started its Movie Value Pass (MVP) service in late 2004, which enables customers to rent up to three movies at a time (due in five days) for US$15 a month. New releases, however, are typically excluded from the service for two to six weeks in the MVP "Basic" plan. Blockbuster started Movie Pass in 2004, which lets customers keep two to three DVDs at a time for US$25–30 a month, all without restrictions or due dates. Hollywood's MVP "Premium" plan offers the same benefits for a comparable price. Both services still require the customer to travel to the store to rent and return the movies, and their respective selections are not as diverse as that offered by Netflix.
The domain netflix.com attracted at least 194 million visitors annually by 2008, according to a Compete.com survey. This is about five times the number of visitors to blockbuster.com.
Netflix vs. Blockbuster
On April 4, 2006, Netflix filed a patent infringement lawsuit in which it demanded a jury trial in the United States District Court for the Northern District of California, alleging that Blockbuster's online DVD rental subscription program violated two patents held by Netflix. The first cause of action alleged Blockbuster's infringement of U.S. Patent No. 7,024,381 (issued April 4, 2006; only hours before the lawsuit was filed) by copying the "dynamic queue" of DVDs available for each customer, Netflix's method of using the ranked preferences in the queue to send DVDs to subscribers, and Netflix's method permitting the queue to be updated and reordered. The second cause of action alleged infringement of Patent No. 6,584,450 (issued June 24, 2003), which covers in less detail the subscription rental service as well as Netflix's methods of communication and delivery. The dispute was ended a year later, on June 25, 2007, with both companies declining to disclose the terms of their legal settlement, except for a statement by Blockbuster that it wouldn't have a major impact on its future financial performance. Blockbuster also said that the company planned to close 282 stores that year to shift focus to its online service. The company already had closed 290 stores in 2006.
In Fall 2006, Blockbuster signed a deal with The Weinstein Company, that gave it the exclusive rental rights to the studio's films beginning January 1, 2007. This agreement forced Netflix to obtain copies from mass merchants or retailers, instead of directly from the studio. Netflix has speculated that the effect of the Blockbuster-Weinstein agreement could result in higher rental costs and/or fewer copies of the studio's movies, which would limit the number of each movie's DVDs that would be available to subscribers at any one time. As of June 2007, Netflix continues to make available Weinstein movies, including Unknown, School For Scoundrels and Harsh Times, among others. The First Sale Doctrine allows Netflix and other video rental businesses to offer movies released by the Weinstein Company, but the long-term effects of the Blockbuster-Weinstein deal remain uncertain.
"Throttling"
Netflix's allocation policy — referred to by many as "throttling" — gives priority shipping and selection to customers who rent fewer discs per month. Higher volume renters may see some of their selections delayed, routed elsewhere or sent out of order.
Netflix currently claims that "the large majority of our subscribers are able to receive their movies in about one business day following our shipment of the requested movie from their local distribution center." However, not all shipments come from the subscriber's local distribution center, and shipments from distant centers are often delayed, as well.
Chavez v. Netflix Inc.
In September 2004, a consumer class action lawsuit, Frank Chavez v. Netflix, Inc., was brought against Netflix in San Francisco Superior Court. The suit alleged false advertising in relation to claims of "unlimited rentals" with "one-day delivery." In January 2005, Netflix changed its "Terms of Use" to acknowledge what has commonly become known as "throttling." (Mike Kaltschnee, owner of the Hacking Netflix blog, says Netflix calls this practice "smoothing" internally.)
In October 2005, Netflix proposed a settlement for those who had enrolled as a paid Netflix member prior to January 15, 2005. These earlier members would be able to renew their subscriptions with a one-month free membership, and those early members with current subscriptions would receive a one-month free upgrade to the next-highest membership level. Netflix's settlement denied allegations of any wrongdoing, and the case did not reach a legal judgment. Netflix estimated the settlement cost at approximately US$4 million, which included up to US$2.53 million to cover plaintiff lawyer fees. A controversial aspect of the settlement offer was that the customer's account would continue at the renewed or upgraded membership level after the free month provided by the settlement, with customers being charged accordingly unless they opted out after the month-long free period ended. After Trial Lawyers for Public Justice filed a challenge to the proposed settlement and the Federal Trade Commission filed an amicus brief urging the rejection or modification of the settlement, Netflix offered to alter the settlement terms requiring customers to actively approve any continuation after the free month. The final settlement hearing took place on March 22, 2006. but, implementation of the settlement was delayed pending appeal the California Appellate Courts.
The settlement was affirmed on 2008-04-21, with the court saying, "the trial court did not abuse its discretion in approving the amended class action settlement agreement, approving the notice given to class members, or determining the amount of fees." Interestingly, the court approved email notice and an online claims submission process. The court said:
The summary notice and long-form notice together provided all of the detail required by statute or court rule, in a highly accessible form. The fact that not all of the information was contained in a single e-mail or mailing is immaterial… Using a summary notice that directed the class member wanting more information to a Web site containing a more detailed notice, and provided hyperlinks to that Web site, was a perfectly acceptable manner of giving notice in this case… The class members conducted business with defendant over the Internet, and can be assumed to know how to navigate between the summary notice and the Web site. Using the capability of the Internet in that fashion was a sensible and efficient way of providing notice, especially compared to the alternative Vogel apparently preferred—mailing out a lengthy legalistic document that few class members would have been able to plow through.
The settlement was criticized because it paid out $2.5 million to attorneys for fees and costs, while offering only coupons to the class members.
"Releasing This Week"
The Netflix website at one time featured a list of titles "Releasing This Week" (RTW) that enabled customers to easily view new DVDs the company planned for rental release each week. On December 21, 2007, the company removed the link to the page without notice and replaced it with a slider system showing only four previously released movies at a time. The new page, called "Popular New Releases", does not list newly released DVDs for rental. The listing of new releases is still active, though no menu option links to the page.
On January 1, 2008, a Netflix employee unofficially stated on the Netflix Community Blog that customers used the RTW page to add newly released movies to the top of their queues, then complained about delays in receiving them after demand outstripped the supply of DVDs on hand. By removing the page, Netflix sought to quell complaints that these movies were not readily available. Critics, however, have suggested this was just another Netflix attempt at "throttling."
Outages and service interruptions
On August 12, 2008, the Netflix shipping centers experienced what Andy Rendich, Head of Operations for Netflix, was calling "a technology issue" that caused an interruption of DVD shipments to their customers. This outage continued, though there was indication from Netflix that some of the shipping centers had been successfully brought online, through the morning of August 15, 2008, when an announcement was posted to the Netflix Customer Blog indicating that they had successfully resumed shipping customer DVDs.
On August 22, 2008, Mike Osier, Head of IT Operations at Netflix, indicated that database corruption caused by "a key faulty hardware component" was responsible for the outage. This was the longest outage Netflix had experienced since its inception.
Another problem was that the Queues on the Netflix website were not updated properly. It showed shipped movies as not shipped yet, and vice-versa. This confused people and contributed to a very large call volume. A recorded message on the toll-free number assured people that "We didn't ship the same movie twice".
Though not required to by Netflix's Terms of Service, they provided 15% credits to the accounts of those customers affected by the outage.
Joint Competition Promotion
Netflix and Film Independent have announced jointly they want to discover the next great independent filmmaker. The Netflix FIND Your Voice Film Competition will award one aspiring filmmaker the "means, guidance and resources" to make a full-length, narrative film, plus a $150,000 cash production grant funded by Netflix. Film Independent will provide "advisement and mentorship" to the winning filmmaker throughout the production of the film and will also screen the winner’s movie at the Los Angeles Film Festival. The winner will own all rights to his or her film, which will be given distribution online at Netflix. As part of the grand prize, the winner will also receive a four-week camera package donated by Panavision, 25,000 feet of Kodak Color Negative Film or 10,000 feet of Kodak Color Intermediate Film donated by Eastman Kodak Company, up to $75,000 in dailies and prints donated by Deluxe Entertainment Services Group, and a digital intermediate package with a maximum value of $150,000 provided by EFILM Hollywood. First-time filmmakers who have not yet created and publicly screened a full-length narrative feature film of 70 minutes or more are eligible. There is no fee to apply to the competition, but a maximum of only 2,000 submissions will be accepted. The winner of “Netflix FIND Your Voice Competition” will be selected from among the five finalists by a panel of judges consisting of independent film professionals, chaired by Josh Brolin.
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