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Netflix Opens 10 Distribution Centers

20 Jun, 2002 By: Holly J. Wagner



About half of Netflix subscribers will start getting their rentals by mail a day or two sooner as a result of 10 new shipping and distibution centers the online rentailer launched today.

While the regional centers will increase Netflix overhead, they will help reduce shipping charges for the company and improve customer service, said CEO Reed Hastings.

Using money from the only dot-com IPO to generate excitement in well over a year, the company has hired 10 to 30 new employees per warehouse to check in, inspect and ship DVDs to the company's 600,000 subscribers. About half of those subscribers are within a 50-mile radius of one of the centers and should see improved shipping times soon.

That's good news for Netflix, which relies on customer service and convenience to differentiate itself from brick-and-mortar video rental outlets and grow its subscriber base. Hastings attributes a 6 percent reduction in churn rate (from 14 percent to 8 percent) over two years to customer service.

Girding for Blockbuster's DVD-by-mail trial this summer, Hastings is confident Netflix can do what it does better than anyone else.

“It'll be god for us to have Blockbuster enter [rental-by-mail] because until they do, it'll be hanging over us,” he said.

“What we've found is the markets are as different as Denny's and Starbucks,” he said. “The question isn't ‘how do we compete with Blockbuster.' It's ‘how does Blockbuster compete with us? We have four years' experience making our system work.”With a background as a software designer, Hastings also realized the impotance of a proprietary software program to process the goods – a part o f the system brick-and-mortars typically don't have.

The company also has a few other things its brick-and mortar rivals don't: 12,000 titles in stock, no store lease overhead and an online presence that lets it build a community with things like consumer reviews and title suggestions.

“Online, people look not just at the box art but at what other people say about the movie. That enables us to create demand for a good, small movie.

The British film Croupier, for example, has rented 40,000 times even though it did just $2 million at the U.S. box office, he said, offering an example of how Netflix nurtures the niche markets on which part of its success depends.

For Indian expatriates in Hutchinson, Kansas or Durango, Colo., Netflix may be the only place to get Bollywood titles. It's that strategy Hastings is using to reach both the heartland and the fringe of America.

“Netflix is creating a vast new market for catalog titles,” he said. “For every new release we rent, we rent three catalog titles.”

The company still has an uphill battle. Though it eked out a profit in EBITDA, it analysts say Netflix will have to reach a million subscribers to show a net profit. That may depend on reducing the churn rate or increasing customer acquisition.

Netflix stock was trading at $13.40 per share when the market closed today and has been hovering below the $15 IPO price since the distribution center announcement went out last week.

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