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Netflix Distribution Stricken

14 Aug, 2008 By: Erik Gruenwedel

Engineers for online DVD rental pioneer Netflix Aug. 14 frantically continued to try to determine the cause of a technical glitch that had disrupted daily disc shipments to more than 30% of its 8.4 million subscribers.

The problem — discovered internally — resulted in Los Gatos, Calif.-based Netflix not shipping DVDs from any of its 55 nationwide distribution centers Aug. 12, shipping only partial orders Aug. 13 and none Aug. 14.

The disruption did not affect DVD returns or Netflix's Web site, including the Instant Watch streaming service, according to spokesperson Steve Swasey. He didn't know if the problem had originated at corporate headquarters or at a distribution center.

“This is absolutely top priority for the company to get fixed,” Swasey said. “We don't want to go without shipping to our members. It is what we live for.”

He said the company received DVD returns Monday and Tuesday but couldn't process any outbound distribution. Subscribers who had returned discs were notified through a community forum and a message posted on the Netflix site as well as e-mail.

“We're doing everything we can to communicate with members,” Swasey said.

While not diminishing the impact of the breakdown, he said Netflix received just 17 responses to the initial forum post, with the majority generally positive toward the service for taking a proactive approach to the problem.

He said most members likely did not notice the interruption, but admitted there was one subscriber who lamented the disruption had precluded him from watching Batman Begins the night before he was to see The Dark Knight theatrically.

“He was disappointed, and we're disappointed, too,” Swasey said. “We don't want to disadvantage anybody or be late with a shipment, but sometimes technology issues are bigger than our immediate control.”

Netflix experienced a 24-hour shutdown of its Web site in March — the first technical malfunction in the company's 10-year history, which resulted in the service issuing 5% discounts to subscribers' monthly bills.

Edward Woo, analyst with Wedbush Morgan Securities in Los Angeles, downplayed the problems.

“I don't think it's significant, unless the outage is more than a couple of days, which I don't think it will be,” he said. “Netflix has had a couple of short outages this year and people quickly forgot and it had almost no impact on financial results. I expect the same this time.”

Rob Enderle, analyst with the Enderle Group, added: “If it is resolved soon, the firm should recover easily. Switching isn't particularly easy and there really isn't a good alternative yet, so they should hold reasonably well. If this goes on for a couple of weeks though, I would expect them to start bleeding subscribers.”

Meanwhile, Moody's Investors Service Aug. 14 downgraded competitor Blockbuster Inc. due to concerns over the DVD rental giant's future. The service cited “notable” improvements in Blockbuster's operating income but remained critical regarding the Dallas-based service's ability to refinance in “a challenging credit environment.”

Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, countered that investor confidence in Blockbuster would return when skepticism about the company's aborted proposal to acquire Circuit City Stores abated.

“We believe that [Blockbuster's] new initiatives in retail merchandising, video games and DVD vending kiosks will provide future growth opportunities,” Pachter wrote in a research note.

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