Netflix launches 1,000-title online movie feature

Although Netflix has been working on virtual delivery for years, its debut comes about two months after rival Blockbuster Inc. beefed up its own online DVD rental program by allowing subscribers to swap movies in its stores, which carry an average of 5,000 titles.

The Blockbuster plan, called Total Access, has been seen by rental industry analysts as a threat to Netflix’s dominance of the fast-growing, $1-billion (510 million pounds)-plus online movie rental market.

Rental and retail sales revenues of DVDs and home videos reached $24.5 billion in 2006. About 100 million U.S. households have DVD players, and an estimated 41 million U.S. households had access in 2006 to broadband Internet services needed to download or stream video content.

Netflix’s goal is to sign up 20 million of them as subscribers by 2012.

The instant viewing feature also puts Netflix squarely in competition with several players already offering movies for rent online, including Starz Entertainment’s Vongo and the studio-owned MovieBeam, MovieLink and CinemaNow services.

Netflix’s limited slate of electronically available titles mirrors its new rivals’ but its subscriber base of about 6 million dwarfs those of the other online rental services.

Its instant viewing feature, available only on computers that run the Windows XP and Vista operating systems, plays back DVD-quality digital files almost instantly after subscribers install special software from the Netflix site, a process that takes about 20 seconds.

It does not download large movie files to consumers’ computer hard drives, but "streams" them directly from the Internet, meaning that users must stay connected to the Web, either through a cable or wireless connection, while viewing a movie.

The feature, which cost Netflix about $40 million to develop, is designed to adjust the picture’s resolution based on a user’s cable bandwidth so that the movie doesn’t freeze during play.

Online movie viewing time is awarded to Netflix subscribers based on their rental plans, with entry-level subscribers getting six hours per month and those with the most popular plans--three DVDS at a time-- getting 18 hours per month.

Hastings said that although the free viewing time will not affect how frequently subscribers receive DVDs, he expects growing online usage to cut demand for DVDs by mail, and the company’s costs associated with buying and mailing them.

"Online is, of course, more cost effective so what we’re learning is, how close to our current gross margin model can we operate as consumers watch more movies online?" Hastings said.

Netflix plans to roll out the offering across the United States over the next six months to ensure that its servers can handle demand.

Netflix has inked deals to stream online content from NBC Universal, Sony Pictures, Metro-Goldwyn-Mayer Inc, 20th Century Fox, Paramount Pictures, Warner Bros., Lionsgate, New Line Cinema and a number of television studios on the new service.

Paramount is owned by Viacom Inc.. NBC Universal is a unit of General Electric Co.. News Corp. owns 20th Century Fox.

Warner Bros. and New Line are owned by Time Warner Inc.. MGM is owned by a consortium of private investors, including Sony Corp., which owns Sony Pictures.