Netflix adds its own pix to the mix
Studios remain skeptical over company's plans
While Netflix's business rests on a traditional video rental model that happens to exist online, the company sees itself as a pioneering force in the media biz, one that can use its reach and vast trove of consumer data to redefine the act of discovering movies.
At a recent conference, Netflix CEO Reed Hastings described how he felt about the holiday season. "Thinking about the tens of millions of DVD players that will sell," he said, "it warms my heart."
The exec has a lot to feel warm about these days, especially since his company's dramatic turnaround last year, when its stock price more than tripled in the space of eight months. With the recent revelation that it could soon experiment with a new lower price model of $5.99 per month, the company seems better positioned than ever to sweep away the competition.
Of course in some ways, the company is still a relatively small player. With $688 million in revenue in fiscal 2005, its business constitutes not much more than 10% of Blockbuster's annual revenue.
Yet slowly but surely, the Netflix approach is catching on. The site has helped increase the popularity of niche categories like documentaries and foreign films, especially in smaller cities. The company takes credit for 70% of DVD revenue from hit "Capturing the Friedmans" and says that 16% of its rentals come from suppliers smaller than Lionsgate.
The company's rental ratio of library titles to new releases is thought to be an astonishing 70-30 (at most large rental outlets, new releases can easily account for 60%-70% of total rentals), as customers in search of brand-new titles are more likely to buy the DVD or rent locally.
Execs at the company, who tend to toss about lofty phrases like "democratizing film," believe they can quantify what has previously been determined by instinct. Netflix staffers feverishly work to refine "perfect-inventory" and "perfect-buy" models -- that is, stocking the exact number of copies of a given movie, whether it's one or 1,000, so that the company never runs at a surplus but is never shorthanded either. By doing that, Netflix believes it can offer a much broader selection of movies than, say, Blockbuster, which is forced to make the safer bet and carry a lot more tentpoles.
In other words, the Netflix system is customized to the tastes of individual customers -- the anti-tentpole model.
All of which brings a huge smile to the faces of indie distributors, some of whom say Netflix accounts for as much as one-third of their biz. Warner Independent's Mark Gill credits Netflix with a renaissance in indie film, citing the stat that the number of Americans who consider themselves indie film fans has doubled in the last three years. "I have to think a lot of that has to do with Netflix," he says.
Yet the company's clout has been a mixed blessing for studios, and even, to an extent, specialty distribs. Netflix has shrewdly fended off Wal-Mart (which last year gave up rentals and teamed up with Netflix) as well as Blockbuster (which demonstrated how threatened it feels when it aired a Super Bowl ad that took a dig at Netflix).
But Netflix also has used its leverage to pressure distributors. Haggling over terms has become common; several suppliers say that in fits of pique they have halted sales to the vid rental company in the hope that Netflix blinks first. (It usually doesn't.)
Meanwhile, studio execs worry privately that a gargantuan rental player could give rise to a number of problems. The real DVD margins lie in sales, and Netflix, they believe, cuts into those sales by making rentals so easy.
To the chagrin of exhibs, Netflix could also become a cudgel in the battle to collapse the distribution window. "We want to continue getting the message out that a long window isn't just bad for Netflix, it's bad for the studios," says Netflix chief content officer Ted Sarandos.
Hastings goes further -- he calls shrunken windows "unstoppable."
Given Netflix's database, distribution and financing is also a logical next step: If you already know rental habits, why not try theatrical and homevid releases?
So Netflix has begun to dabble in that game. Last year the company distributed or financed more than 20 indie pics, including the Hal Hartley movie "The Girl From Monday," the Tim Robbins war pic "Embedded Live" and the comic semi-docu "Assisted Living."
And it has a number of pacts for films releasing this year: a co-financing arrangement with IFC for Kirby Dick's MPAA doc "This Film is Not Yet Rated" (which is also seeking theatrical distribution) and nine other movies with the company over the next two years; a deal with Emerging Pictures for that company to distrib Netflix's "Cowboy Del Amor"; and a co-distrib deal with Roadside Attractions for 2005 Sundance buzz pic "The Puffy Chair," for which Netflix will share marketing costs and profits.
Netflix believes its database will help it succeed at the development game where precursors like Blockbuster's DEJ Prods., which made a number of B-level pics before being sold to First Look last year, have failed or languished.
But some experts are skeptical. "Being a good homevideo distributor doesn't always make you a good movie picker," says consultant Dennis McAlpine, a longtime observer of Netflix.
After all, Netflix still controls only about 8% of the overall U.S. rental market -- which means it needs rival outlets to carry its films. But those outlets might balk at carrying titles that would pad a competitor's pockets.
In the meantime, the Netco has other reasons to worry. The company has been looking over its shoulder at Amazon, which has long been rumored to be preparing an online rental service similar to the one it has in the U.K.
Netflix also risks becoming a victim of its own success. To keep revenue growing, the company must continually increase its pool of subscribers, but to keep costs low, it needs to ship as few DVDs as possible to those subscribers.
The paradoxical result -- as evidenced by a California class-action lawsuit the company recently settled -- is a need to limit the amount of DVDs it sends to frequent renters, a controversial policy known by critics as "throttling."
And the firm still can't decide whether to fight the oncoming VOD train or reserve a seat on it; it aborted plans to launch a digital delivery service last year.
But if studios and some observers are skeptical, most on the indie side of the biz are just keeping their fingers crossed that Netflix continues to thrive, no matter the concerns. Says ThinkFilm's Mark Urman: "Right now anything I can do to help Netflix do better means I'll do better."
