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Others, too, have entered the fray in the marketplace. Amazon, for example, which already had been renting DVDs online in the United Kingdom, last year acquired CustomFlix Labs Inc., a company that digitizes limited-run and classic movies and puts them on discs, on demand, for customers.
One way Netflix seeks to differentiate itself from the others is the use of a powerful, internally developed recommendation engine that guides individual customers toward films in its 70,000-title bank that they might like to rent. Recommendations are based on collaborative filtering of community behavior. Hastings uses the engine himself, recently finding-and liking-“Koyla,” a Czech film that wraps a parable about political change around the characters’ personal story. Outside his usual favorite genre of historical drama, Hastings says he might have written the film off as “an Eastern European chick film,” were it not for the Netflix recommendation.
But Amazon knows a thing or two about collaborative filtering and personalization, too. Increasingly, that could center the competition between any format of movie offering from Netflix or Amazon on who’s got the better engine-and Netflix is getting ready. In October the company announced the $1 million Netflix Prize, which will go to the first person or team that can develop a new personalization engine that will improve the accuracy of its movie recommendations by at least 10%.
In December Hastings said that of the entries received from more than 10,000 teams and individuals, “already more than 20 are better than Netflix, and they keep getting better. The great news is that we will incorporate all of their improvements into our service so everyone will get the benefit of their hard work.” If no one wins the grand prize in 2006, Netflix will award a $50,000 progress prize for the most significant advancement each year until someone grabs the big prize.
Video on demand
One question Hastings probably is asked more than any other these days is about the future of video downloads or video on demand; and specifically, about Netflix’s strategy. Hastings has said he expects Netflix to position itself at the forefront of that trend, and that the company invested as much as $10 million in a download initiative last year and will invest another $40 million-plus this year.
In discussing when-not if-consumers will embrace movie downloads, Hastings cites the barriers to be overcome before downloads overtake DVDs in the rental marketplace. For instance, there’s the problem of getting downloads from the computer onto the TV screen. Soaring sales of ever-larger flat screen televisions suggest consumers aren’t going to cluster around the PC to watch a movie-they want to see it in their den or home theater.
In January Netflix took a step toward electronic delivery of films by debuting a new instant-viewing feature that delivers a selection of movies to subscribers’ PC screens via live Internet feeds. They’re not downloads, and they aren’t delivered to a TV screen, but they do bring Netflix closer to what it says is its eventual goal of getting movies to every Internet-enabled screen-including television screens.
Others are launching other forms of electronic delivery. Netflix’s announcement trailed by one week the launch of Apple TV, a device that connects to most widescreen TVs, enabling viewers to wirelessly pull content such as downloaded films from their PC into their home entertainment systems and onto their TV screens from up to 30 feet away.
But an even bigger impediment than getting the movie from the PC to the TV screen still hinders the widespread use of downloads among consumers, and that’s movie studio economics. The studios make more money licensing movie rights for other uses than for direct downloading to consumers. That’s one of the reasons that those who are offering movie downloads don’t yet have significant content to offer. Movielink, for example, an online film downloading service owned by the studios, offers titles representing only about 3% of Netflix’s total DVD catalog.
So while it doesn’t pay to rush movie downloads to a mainstream market not yet prepared for them, it wouldn’t pay to be late to the party, either, an equation Hastings must balance carefully while Netflix is deeply invested in DVD distribution. “Studios want to find a way to make more money, not less,” he says. “Consumers want to find a way to pay less money, not more. To succeed, both the consumers and the studios have to be happy, and that’s a hard one to figure out.”
While no one has that answer yet, Hastings already has demonstrated in his career that sinking his teeth into a knotty problem, shaking it around and eventually worrying a solution out of it is his specialty-a trait that could one day help place Netflix at the forefront of the almost inevitable technology changeover.
“One characteristic Reed has is that he’s able to take on bits of information, store them away like a computer, and call on them with almost total recall weeks, months, years later, and assimilate them into a pattern,” says Pisano of the Motion Picture Association of America. “Many executives decide on a business model and then never change it because they are not able to understand that things change. Or that you were wrong in the first place, and therefore you have to readjust. Reed is constantly readjusting.”