Technology

Reed Hastings: Movies by Mail


Position: CEO, Netflix

Contribution: Created a supersimple mail-order DVD subscription service that has taken the movie-rental market by storm

Challenge: Keeping at bay powerful competitors, including Blockbuster and Wal-Mart

It was a seminal moment for Reed Hastings. Sitting in a Stanford University computer-science lecture 15 years ago, he listened as his professor described how a station wagon full of old-fashioned data-storage disks held more information than the entire fledgling Internet. The message was clear: Sometimes low-tech solutions work best.

While the Net has grown wildly since then, that lesson has stuck with Hastings, now the CEO of Netflix (NFLX), a mail-order DVD subscription service that has captured the hearts and minds of its 670,000 subscribers. Its appeal, like the concept, is simple. For $20 a month, subscribers can rent as many DVDs as they want, checking out three at a time.

Even better, Netflix charges no late fees, ever. Subscribers can keep a movie out as long as they like. The only catch is that they won't receive a new title until at least one is returned.

PROFITABLE NOTION. "That image of a station wagon always captivated me," Hastings says. "While the whole world was talking about downloading movies and wireless distribution, I knew that the most cost-effective way to distribute movies was by mail." In fact, it costs just 37 cents to send a DVD by mail -- perhaps one-tenth what Hastings estimates it would cost to transmit movies over the Internet.

The good news is that the idea is profitable. Netflix's second-quarter revenues doubled -- to $36.4 million, from $18.4 million a year ago. Its earnings before interest, taxes, depreciation, and amortization (EBITDA) of $6.5 million in the second quarter, compared to a loss of $100,000 a year ago. "Over the next four years, we're going to grow the subscriber base to 5 million," Hastings vows. "That's about a billion in revenue. That will make us a 'real' media company. At $150 million in [annual] revenues, we're still just a promising niche."

Its rapid growth -- and Hastings' candid management -- has made Netflix one of the few successful e-commerce IPOs of 2002. However, at around $10, the stock is well off its 52-week high of $18.19 and is just above its 52-week low of $9.89.

BLOCKBUSTER BUSTER? Hastings readily admits that he can't take all the credit. In fact, the Los Gatos (Calif.) company has benefited from impeccable timing. Americans now own 35 million DVD players, up from zero in 1997. With low-end players selling for as little as $80, that number is expected to continue growing dramatically. And Hollywood studios have been eager to sign deals with Netflix to counter the growing power of Blockbuster (BBI).

So far so good. But Netflix' success has piqued the curiosity of Blockbuster and that other behemoth, Wal-Mart (WMT), the largest U.S. retailer of DVDs. In July, Blockbuster launched an unlimited monthly subscription service in four metropolitan markets. Wal-Mart is expected to roll out a competitive service by yearend. Both announcements have knocked down Netflix' stock.

Hastings says he isn't frightened. "We've been doing this for four years, and we know how hard it is to do well," he says. His plan for staying ahead is to excel at what made the company a hit: Delivering an amazing assortment of movies quickly by mail. In June, Netflix said it plans to open 10 new distribution centers to ensure that most subscribers receive their DVDs within 24 hours.

100 MILLION RATINGS. It's also constantly improving its already-popular rating system, which allows subscribers to grade the films they watch and should lead next to sophisticated recommendation software to help viewers find new films they might enjoy. The average Netflix subscriber rates 150 movies, and Netflix has collected more than 100 million movie ratings to date.

Can Netflix make the transition from scrappy startup to media colossus? Many analysts and investors are betting on it. Either way, though, Hastings has already made his mark: For millions of consumers, renting a movie will never be the same. By Jane Black in New York


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