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Netflix's Reed Hastings Expects DVD Rental Decline in Four Years

23 Jun, 2009 By: Erik Gruenwedel



Reed Hastings, CEO of Netflix, told the Wall Street Journal he believes the online DVD rental pioneer could see significant declines in packaged media rentals in the next “four to nine years.”

Concern about DVD rental declines led Hastings to aggressively entice new subscribers and mollify current members with the streaming service, Watch Instantly — a strategy that nearly saw the company enter the consumer electronics business with a proprietary set-top box.

About 20% of Netflix’s 10.3 million monthly subscribers use the streaming service.

As the date approached to unveil a prototype of the device in late 2007, executives at the Los Gatos, Calif.-based company cooled to the idea (which CFO Barry McCarthy attributed to Hastings’ “Apple lust”) and instead invested a $6 million minority stake (in addition to 20 employees) in upstart manufacturer Roku Inc., founded by former Netflix executive Anthony Wood.

Hastings said the decision to abort production of a set-top box was a “sudden left turn” to some employees but ultimately a wise one since it allowed him to license the Netflix brand and streaming technology to third party CE manufacturers and technology companies, including LG Electronics, Samsung, TiVO, Vizio and Microsoft.

McCarthy told the WSJ that sticking to production of a set-top box would have exposed the company to how much “we don’t even know what we don’t know about this [CE] business.”

Roku, which experienced initial product shortfalls of the $99 device due to high demand, has sold several “hundreds of thousands” and recently inked a streaming distribution deal with Amazon.

Pali Capital analyst Brandon Ross said the WSJ story underscored the fiscal impact streaming has on Netflix’s near-term profits, which he said could leave investors “somewhat unsatisfied.”

He said Netflix would have to substantially upgrade the quality of titles available for streaming (about 16,000 currently) to match the service’s 100,000 DVD titles — a move that not only requires fiscal resources but also the support of studios determined to extend the life of the DVD cash cow indefinitely.

“How good will these [streaming] titles ever get?” Ross asked in a note.
 


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