December 2, 2003, 12:00 AM

Computers / Electronics / CDs / Videos:Building on a market made for the web

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Seeing the big picture

Netflix Inc. is a darling of Wall Street, with a stock price that has surged 500% in the past year to the mid-50s on top of an expanding base of customers for its online DVD rental service. But CEO and founder Reed Hastings compares it to the early Windows computer operating software-better than its DOS predecessor, but still far from its potential. “A lot of Internet retailers, even the great ones, are still learning how to use the medium, how to merchandise through a small computer window,” he says. “But it will take us another 10 years to get as good as we want in Internet merchandising.”

Nonetheless, continues to make impressive strides in perfecting the market for online rentals of DVDs. Its patented method of distributing DVDs-under which customers pay $19.95 a month to receive an unlimited number of DVDs-is designed to maximize service while minimizing costs. After customers select a large group of movie titles they’d like to view, Netflix randomly picks each month’s selections from the DVDs that are available on the customer’s list.

In the face of competition from the likes of Wal-Mart and Blockbuster, Netflix is trying to do even better. It has improved site navigation by reworking HTML coding, providing for faster page downloads. “By speeding up our site, we increased the overall satisfaction of customers,” Hastings says. The result: In the third quarter, Netfllix reduced customer churn to 5.2% from 7.2% a year earlier, as its customer base grew 74% from a year ago to 1.3 million. Q3 revenue hit $72 million, up 77% year-over-year, and net income reached $3.3 million, the third straight quarterly profit. Part of Netflix’s success comes from real-world logistics, though, and not just from a great web experience. An expansion to 20 distribution centers this year has put more customers within easy overnight deliveries.

Kathryn Cullen, principal of retail consultants Kurt Salmon Associates, says Netflix excels in offering a simple way of getting movies that appeals to a growing number of consumers. “Families with young children love it because parents can’t always get to the video store and they never know when they’ll have time to watch a movie,” she says.

But Hastings plans to provide even better service. He looks forward to the development of broadband enabling Netflix to distribute movies through the web, saving on operating costs while raising customer service. “We named the company Netflix and not DVD by Mail because we’ll offer the option of downloading or mailing movies,” he says. “We eagerly await the day the web delivers movies.”
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