Reed Hastings Netflix | U.S.
The idea for Netflix, like many great eureka moments in business, came from a very mundane experience. It was 1997, and Reed Hastings was six weeks late in returning a copy of Apollo 13 to his local Blockbuster in San José, California. The late fee was $40, and the former computer scientist thought to himself, Never again. He came up with a simple solution—so blindingly simple, in fact, that Silicon Valley entrepreneurs are still kicking themselves for not thinking of it first. Netflix customers keep a wish list of DVDs they want to see, in order of preference, on www.netflix.com. Netflix then mails out the selected films. The service costs $22 a month, for which customers get to keep out three movies at a time. When they're done with a DVD, they stick it back in the same prepaid envelope in which it arrived. As soon as the nearest Netflix hub receives it, staff send out the next one.
That's it: no late fees, no standing in line, no walking out of the store with a film you didn't really want to see. It's working for Netflix's 2 million U.S. subscribers, almost 1 million of whom signed up in the last year alone. In Northern California's Bay Area, Netflix's
I'm a funny kind of guy to be running a consumer company
— REED HASTINGS, founder and CEO, Netflix
largest market, the company accounts for an astonishing 10% of all movie rentals. Launched in 1999, the Los Gatos, California-based company posted its first profit last year ($6.5 million), while revenues grew by 78%. It's also inspired copycats abroad: Zip in Canada (www.zip.ca) and Lovefilm in Britain (www.lovefilm.com). Netflix skillfully exploits two defining consumer trends of the last decade: the ubiquity of the Internet and the rocket-fueled growth of DVD players. The first commercially available DVD players only hit the market in 1997; by the end of this year, two-thirds of U.S. homes will have one.
Hastings, 43, is modest about his firm. "I'm a funny kind of guy to be running a consumer company," he says, admitting he'd just as soon discuss artificial intelligence. He thinks he can win the battle with WalMart, which launched a copycat service in 2002, and Blockbuster, which plans to trial a similar rental program in the U.S. soon. Hastings has an advantage; like Amazon, Netflix relies on ratings by its members, who are asked to give everything they rent up to five stars. These ratings go into the system's algorithm and out come recommendations for movies you never knew you wanted to see—like Whale Rider, which was never a top 10 movie at the box office but topped Netflix's charts. Starting from scratch, Blockbuster et al are five years behind in their online recommendation systems.
Granted, Netflix for now is dependent on the DVD, which will presumably fade when paying to download films becomes widespread. That's Blockbuster's intended path, and Hastings himself is set to start a trial download service next year. But he doesn't expect imminent success. The technology and copyright management make it too daunting for most users, and who wants to watch movies on a PC anyway? "DVDs have got a good decade left in them," he says. For Netflix, chances are it will be a very good decade, indeed.—By Chris Taylor/Los Gatos
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