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Hastings: Netflix Ready for Battle

3 Aug, 2004 By: Holly J. Wagner


Two days or $2? That may be what the online rental battle boils down to when Blockbuster Video launches its online challenger to Netflix, expected by the end of the quarter. The next two years “will be the battle for who is the best online DVD service,” Netflix CEO Reed Hastings said. But it's business as usual at Netflix despite Wall Street's apparent anxiety over pending competition.

“We wish [Blockbuster] well as they try to grow the subscription business. My guess is that we will dominate the online subscription, and they will dominate in-store subscriptions,” he said.

The key differences in the online services, at least until Blockbuster is able to make good on its promise to integrate the online and in-store subscription programs, are price and that Netflix promises overnight delivery to most customers, while Blockbuster promises delivery to most customers in two or three days.

“[Blockbuster has] to enter the market at a much more attractive price point,” said Vamsi Sistla, an analyst at ABI Research. “One other key aspect is for consumers to use the online as well as in-store facilities without having to get caught in one system or another.”

Hastings said Netflix is unfazed. “Our focus is the same as it's always been: providing the best movie-rental service in the country,” he said.

Netflix has added distribution centers with growth to keep its delivery time to one day in 90 percent of the markets it serves. The site has 300 million customer ratings, which in turn feed its recommendations.

Analysts are jittery because Netflix admitted to suffering a longer period of cancellations than expected after it announced its price hike from $19.95 a month — the price quoted on Blockbuster's beta site — to $21.95 in June. But Hastings is quick to point out that Blockbuster is not the first challenger.

“We've been competing against Wal-Mart for two years,” he said. “They just haven't succeeded.”

Blockbuster's site “puts pressure on us to serve customers better,” Hastings acknowledged. “But it's welcome pressure.”

Still, the company, which has a 2.1 million subscriber head start, has no plans to branch into sellthrough or games, Hastings said, even though Blockbuster's site does offer game and movie sales.

Netflix's share price took a 38 percent dive in the week after the company's second-quarter financial call. Four law firms seeking class action status for shareholder lawsuits in U.S. District Court for the district of Northern California claim Netflix, Hastings and some other senior corporate officers misled investors in the way the company calculates churn. When the company disclosed the number of defecting subscribers in the call, the stock tumbled and lawsuits followed. The criticisms are “meritless,” Hastings said. “The key factor is, we disclose how we calculate churn.”

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