Will Netflix Survive the Death of DVDs?

By Mike Schuster Jun 24, 2009 11:50 am

Internet is rental company's next big competitor.

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When commercial music first appeared on cassettes, movies soon followed suit. Then came compact discs -- and film soon followed suit. And now that commercial music has all but abandoned a physical media format, DVDs' days are numbered.

Netflix (NFLX) CEO Reed Hastings is certainly preparing for the moment when DVDs are no longer viable.

The inevitable death of the DVD has long been on Hastings' radar -- ever since the company's inception. Though Netflix set the standard for snail-mailed movie rentals, it has always been poised to take advantage of instant-streaming technology -- as the company name makes clear.

But the shift to streaming media involves a completely new set of issues.

As the DVD industry emerged in the late '90s, Netflix was able to usurp Blockbuster's (BBI) throne by offering up warehouses of narrow, easily-stored discs rather than the bulky cassettes that clogged the limited space at store locations. Netflix had a seemingly unlimited selection of classic and genre films available -- and for a flat monthly fee. But the video-rental industry was changing faster than Blockbuster was able to move, and has left the chain far behind.

Netflix responded to a drop in DVD rentals by introducing subscriber streaming in January 2007 for around 1,000 titles -- a far cry from the over 100,000 available on disc. Since then, members have been able to watch selected films instantly on their home computers for no more than it used to cost to have discs mailed. Impatient users prefer instant streaming, and it's vastly cheaper for Netflix.

The main problem for Hastings has been -- and continues to be -- procuring licensing fees from the studios. Premium cable networks, such as HBO (TWX), Showtime (VIA), and Cinemax, are already in bed with most movie studios and have purchased exclusive rights to air their programming on cable or through on-demand services. For Netflix, obtaining Internet rights is just as complicated -- if not more so, since the revenue model for streaming video has yet to be determined.

Netflix has found itself in hot water more than once: Sony (SNE) claimed the rental company never had the right to stream its titles online and blocked streaming access to compatible TV units -- including Microsoft's (MSFT) Xbox consoles. PC users were unaffected.

Streaming video to television is a major concern for the top media companies. Netflix's wide selection of films and TV shows trumps anything that network or on-demand services have to offer.

Netflix is also facing a surfeit of competitors. While Blockbuster is no longer a threat, Google (GOOG), Apple (AAPL), Amazon (AMZN), Hulu.com, YouTube, and countless others are scrambling for more eyeballs, more click-throughs.

Speaking with the Wall Street Journal, Hastings said, "As a capitalist, I'd rather have Blockbuster as my primary competitor than all those Internet companies."

But if this competition means a wider selection of titles in a larger format and crisper resolution, those who like to curl up with Jiffy Pop at home are about to be very happy indeed.Twitter: @mcs212