How Netflix is fixing Hollywood
David
How Netflix Is Fixing Hollywood
By finding a market for niche titles -- and keeping discs in constant
circulation -- the online DVD rental pioneer is shaking up the movie
biz.
By Christopher Null, July 2003 Issue
Stu Pollard is your typical indie filmmaker: mid-30s, wide-eyed,
earnest, and willing do just about anything to get people to see his
movie. Four years ago, Pollard showed his $800,000 film around the
festival circuit, to decent reviews. But he couldn't talk any
distributors into releasing the romantic comedy, Nice Guys Sleep
Alone, to theaters.
Then he got a call from Ted Sarandos, vice president for acquisitions
at Netflix (NFLX), who'd seen it at a festival and liked it so much he
bought 500 copies on the spot.
Granted, it was no windfall -- Sarandos paid just $1 per copy, about
the same as the cost of producing one. But he offered Pollard a cut of
each rental for the first year. The 10,000 rentals in 2000 generated
sufficient buzz to get Nice Guys a 2001 airing on HBO. And Pollard has
already reinvested the $12,000 he's earned through Netflix rentals in
his next movie.
Sarandos, for his part, spends most of his days indulging Netflix's
voracious buying habit, whether it's 60,000 copies of My Big Fat Greek
Wedding or just a few hundred from a director out of film school. But
as Hollywood (and Pollard) knows well, the real trick is getting the
movies in front of paying viewers. Major film studios have for years
dumped staggering quantities of videotapes and DVDs of the most
popular films into the biggest rental outlets, hoping that something
will stick. Older movies and smaller titles with niche audiences,
meanwhile, get relegated to the stacks and the bargain bin.
Netflix is turning that idea upside down by offering a serious market
-- 1 million subscribers and counting -- for every movie, not just the
blockbusters. How? Part of its success is due to its proprietary
software, called the Netflix Recommendation System, which constantly
suggests movies you might like, based on how you rate any of the
15,000 titles in the company's catalog. But beyond that, Netflix has
figured out how to get DVDs from one address to the next with ruthless
efficiency -- and without the overhead of the offline world. That's
turning the company into Hollywood's most promising new business
partner.
In the longer term, success for the $153 million company is hardly
assured. Walmart.com recently launched its own version of the Netflix
model, has already built six distribution centers for it, and is
charging $1.19 less per month for the service. Blockbuster (BBI)
bought another copycat, now called FilmCaddy, and is still debating
how to promote it nationally. And, as video on demand from satellite
and cable companies takes hold, who wants to hassle with sending discs
in the mail?
But for now, Netflix accounts for 3 to 5 percent of all U.S. home
video rentals -- an astounding figure when you consider that Kozmo.com
and other online companies that experimented with video rentals barely
got out of the starting gate. And for last year's indie hit Amélie,
Netflix says, it generated better than 20 percent of U.S. rentals.
Boutique movie studios like IFC Films, which released last year's
critical hit Y Tu Mamá También, love Netflix because it provides a
huge market for movies that can't muster a widespread theatrical
release, as well as for those that last only a few weeks on the big
screen.
That helps explain why Columbia TriStar Home Entertainment, Dreamworks
International Distribution, Warner Home Video, Twentieth Century Fox
Home Entertainment, and Universal Studios Home Video collectively own
about 3 percent of Netflix stock, and have deals in place that give
the studios a small cut of Netflix's rental revenue on their films for
the first year after release. Mike Dunn, president of Fox Home
Entertainment (FOX), says Fox's business with the outfit grew about 30
percent in 2002 and will exceed that this year. The studio's
top-performing titles, Dunn says, tend to be those from Searchlight,
Fox's boutique film division, which distributes films such as One Hour
Photo and Donnie Darko. "Those films found their audience on Netflix,"
Dunn says. Just three months after its video release, for instance,
One Hour Photo was already No. 36 on Netflix's list of all-time top
renters.
All of this bodes well, especially given that just four years ago,
Netflix was on the ropes, having spent 18 months renting DVDs by mail
-- to dismal public response -- as it tried to emulate the video-store
model. Including shipping, a single rental cost more than $4, and you
paid late fees if you didn't get the disc back within a week. Netflix
tried lowering prices and extending the rental period to two weeks,
but in its first year of operations, only 250,000 discs were rented
and few customers returned for a second helping.
"It wasn't working. People weren't coming back," Netflix CEO Reed
Hastings recalls. In a late-night brainstorming session in 1999,
Hastings and his lieutenants hit on the idea of a subscription model,
and they launched it that September. Customers could rent as many
movies as they could watch for $20 a month, as long as they had no
more than three DVDs out at a time.
Since then, the company's growth has been staggering: By December 2000
it was shipping 300,000 discs a week and had 292,000 subscribers.
Netflix, which went public in May 2002 (NFLX), has been doubling the
size of its subscriber base about every year, hitting the magic 1
million mark in February.
But the spectacular growth is creating unforeseen problems. The
company's recommendation software promotes older and independent
titles so well that it's threatening to cost the company: Customers
are renting an average of 5.5 movies per month, compared with 4.5 two
years ago. By encouraging people to rent more films, Netflix is only
encouraging more shipping costs, and training its happy users to pig
out on the all-you-can-eat DVD buffet.
For Netflix, that means that as many as 3 million discs are in the
hands of customers at any given time, with an average of 300,000 DVDs
shipped out of the company's 20 leased distribution centers each day.
It's the kind of logistics task that makes handling user ratings for
15,000 titles seem like a kid's programming project.
Until recently, managing the ebb and flow of all this was pure chaos:
Netflix production workers would spend their mornings checking in
discs and returning them to shelves, and their afternoons pulling
discs and stuffing them in envelopes to be sent to customers. When
inventory costs reached red-alert levels, Hastings asked his engineers
to create software that could balance inflow and outgo more
effectively.
What they came up with was a system, introduced in January, that
dramatically reduces shelf time. Now when discs arrive in the morning
mail, operators scan a bar code on each label. The software retrieves
the name and address of the next person on the waiting list for that
DVD, prints out a label, and ensures that the disc is mailed out that
afternoon. (How Netflix chooses this next person has become a thorny
subject with customers, after one user's online exposé revealed that
Netflix bumps the most frequent renters to the bottom of the waiting
list for popular titles -- another problem triggered by the site's
success.) The payoff? Netflix has slowed hiring and reduced labor
costs by about 15 percent, and the vast majority of discs never touch
the shelf before they go out again.
Netflix's library of discs, now 5.5 million, continues to grow. But
the company can't buy nearly enough of some DVDs (such as the wildly
popular 8 Mile) to keep everything in stock. It almost never sells
used copies, and it doesn't promote new releases either. So it
merchandises films from its stock of what's immediately available to
ship. That's why Hollywood loves the model: It keeps older titles in
motion and gives life to smaller releases. On any given day, in fact,
98 percent of the 15,000 titles in Netflix's inventory are in
circulation with customers.
It's a niche Hastings seems determined to further exploit. Netflix has
recently announced deals with small distributors like New Video and
Seventh Art Releasing, which have made Netflix the premier outlet for
numerous hard-to-find DVDs. Among them is a well-received documentary
called e-Dreams. Never heard of it? Hastings certainly has. It's about
the brief life of Kozmo.com.
Randy
I wasn't thrilled with them when they only had a west coast distribution
center but now that they added on in Flushing, NY, I can watch 3 flix
over the weekend, return them and have 3 more shipped to me by Thursday.
They are efficient and since I return fast, I get new releases
immediately.
Grey Wolf
>from business2.com
>
>How Netflix Is Fixing Hollywood
>By finding a market for niche titles -- and keeping discs in constant
>circulation -- the online DVD rental pioneer is shaking up the movie
>biz.
>By Christopher Null, July 2003 Issue
>
>
>In the longer term, success for the $153 million company is hardly
>assured. Walmart.com recently launched its own version of the Netflix
>model, has already built six distribution centers for it, and is
>charging $1.19 less per month for the service. Blockbuster (BBI)
>bought another copycat, now called FilmCaddy, and is still debating
>how to promote it nationally. And, as video on demand from satellite
>and cable companies takes hold, who wants to hassle with sending discs
>in the mail?
I haven't used Netflix yet, but surely Walmart is not going to buy
copies of little-known movies to distribute. Plus I think they would
avoid ediger titles; aren't they known for banning certain items that
might have negative connotations? So, as someone who enjoys good
films that are overlooked by mainstream, would Walmart really be able
to provide as well-roudned a service as Netflix?
butterman
great. We now have a distribution center here in PHX, AZ. So the
turnaround time is fast, really fast.
Highly recommend it!!
"Grey Wolf" <phony...@phonyemail.com> wrote in message
news:2shkfvsfa01koct4p...@4ax.com...
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HumanHighlight
> I haven't used Netflix yet, but surely Walmart is not going to buy
> copies of little-known movies to distribute. Plus I think they would
> avoid ediger titles; aren't they known for banning certain items that
> might have negative connotations? So, as someone who enjoys good
> films that are overlooked by mainstream, would Walmart really be able
> to provide as well-roudned a service as Netflix?
That's an excellent question. Personally, I can't figure out why Netflix
doesn't include porn titles in their inventory. They've got the shipping
and distribution systems in place. Why limit your inventory/potential
customer base like that?
My guess is that if you hear that Wal-Mart's new service carries the
wal-mart name, you can expect only mainstream fare. But if they give it an
unrelated name, like Disney does with their studios they use to market
grown-up films, then maybe there's a chance.
DrPimpDadi
>doesn't include porn titles in their inventory. They've got the shipping
>and distribution systems in place. Why limit your inventory/potential
>customer base like that?
They used to carry mature videos like Playboy and Penthouse, but stopped. I'm
guessing someone complained about their kids opening the mail or something. Or
maybe the customers never returned em.
-=-
I smell....
..... therefore, you stink.
-=-
Hey, Jude!
"DrPimpDadi" <drpim...@cs.com4SARS> wrote in message
news:20030626153745...@mb-m27.news.cs.com...
> >Personally, I can't figure out why Netflix
> >doesn't include porn titles in their inventory. They've got the shipping
> >and distribution systems in place. Why limit your inventory/potential
> >customer base like that?
>
> They used to carry mature videos like Playboy and Penthouse, but stopped.
I'm
> guessing someone complained about their kids opening the mail or
something. Or
> maybe the customers never returned em.
>
>
for online rentals.......I think it was mostwantedDVD.com or something like
that.
DrPimpDadi
>for online rentals.......I think it was mostwantedDVD.com or something like
>that.
>
They still have those.
Grey Wolf
<bug...@hotmail.com> wrote:
>
>My guess is that if you hear that Wal-Mart's new service carries the
>wal-mart name, you can expect only mainstream fare. But if they give it an
>unrelated name, like Disney does with their studios they use to market
>grown-up films, then maybe there's a chance.
>
I'm thinking for the mainstream titles, I can go to my local video
store and rent 'em. But for foreign films or lesser known gems,
something like Netflix, which apparantly makes the effort to have a
great selection, would be awesome. Wal-Mart, on the other hand, would
provide no benefit to me that my video store would... other than maybe
purchasing mainstream movies fairly cheap! :-)
David