Online vidtailer to adapt new technology

Internet DVD rentailer Netflix plans to begin offering video-on-demand next year.

CEO Reed Hastings said VOD posed a direct threat to Netflix’s future, while the multibillion-dollar vidgame market is a tangential space the company may or may not enter in the future.

Hastings discussed the future of his company, which recently announced it reached nearly 2 million subscribers in the first quarter, as part of a wide-ranging interview with Daily Variety on Friday.

“We’re playing it a little defensively, because if we lose the digital download market, you’ll soon be hearing about the rise and fall of Netflix,” he explained.

Hastings granted that the Internet VOD market is still relatively small, with the studio-backed MovieLink struggling to find a market, but said the growth of wireless home networking and the expansion of digital video recorders and game consoles as entertainment hubs would soon allow consumers to easily transfer content from a computer to a TV.

Netflix’s VOD service will launch next year and allow consumers to rent three movies at a time via either physical DVD or digital download. Beyond the technological impediments, though, VOD will likely remain a less popular choice than DVDs for the foreseeable future due to the later times after theatrical release in which films enter that window.

Outlining Netflix’s appeal to the Hollywood community, Hastings also touted his company’s ability to push genre and independent films. He noted, for instance, that “Whale Rider” has been as popular a rental on Netflix as “The Hulk,” which was released on the same day. “Part of our business is helping films find an audience,” he said.

While admitting that increased rental volume squeezes Netflix’s margins, as it pays studios a fee for each rental it provides while consumers are charged a flat fee, he said increasing the average number of rentals per month beyond the current six is a key goal, because it would give the company leverage to raise its prices.

Considering competition, Hastings noted that Wal-Mart’s entry into the Internet DVD rental market has fallen entirely flat and said Blockbuster’s upcoming launch of an online service, along with an in-store flat fee offering, would likely pose the first serious threat to Netflix’s business.

He said overnight delivery would be one of the keys to his company’s short-term growth, though. Noting the rise to 7% market penetration in the San Francisco Bay Area since overnight service began a little more than two years ago, he said cities in which Netflix subsequently launched overnight delivery are on track to reach the same benchmark, while its San Francisco base will likely continue to grow.

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