Netflix Inc. will start showing movies and TV episodes over the Internet this week, providing its subscribers with more instant gratification as the DVD-by-mail service prepares for a looming technology shift threatening its survival.
The Los Gatos, Calif.-based company plans to unveil the new “Watch Now” feature today, but only a small number of its more than 6 million subscribers will be given immediate access to the service, which is being offered at no additional charge.
Netflix expects to introduce the instant viewing system to about 250,000 more subscribers each week through June to ensure its computers can cope with the increased demand.
After accepting a computer applet that takes less than a minute to install, subscribers will be able to watch anywhere from six hours to 48 hours of material per month on an Internet streaming service that is supposed to prevent piracy. But the system works only on computers equipped with a high-speed Internet connection and Microsoft Corp.'s Windows operating system.
The allotted viewing time will be tied to how much customers already pay for their DVD rentals. Under Netflix’s most popular $17.99 monthly package, subscribers will receive 18 hours of Internet viewing time.
The company has budgeted about $40 million this year to expand its data centers and cover the licensing fees for the roughly 1,000 movies and TV shows that will be initially available for online delivery.
Netflix’s DVD library, by comparison, spans more than 70,000 titles, one of the main reasons why the U.S. mail is expected to remain the preferred delivery option for most subscribers.
Despite its limitations, the online delivery system represents a significant step for Netflix as it tries to avoid obsolescence after the Internet becomes the preferred method for piping movies into homes.
“This is a big moment for us,” said Netflix Chief Executive Reed Hastings as he clicked a computer mouse to quickly call up “The World’s Fastest Indian” on the instant viewing service. “I have always envisioned us heading in this direction. In fact, I imagined we already would be there by now.”
Since its 1999 debut, Netflix has revolutionized movie-watching habits by melding the convenience of the Web and mail delivery with a flat-fee system that appealed to consumers weary of paying the penalties imposed by movie rental stores for late returns.
In the last three years, Netflix has signed up nearly 5 million more subscribers to become increasingly profitable. Although Netflix won’t report its 2006 earnings until later this month, analysts believe the company made about $44 million last year, up from $6.5 million in 2003.
Despite the company’s growth, Netflix’s stock price has dropped by more than 40% over the last three years, shriveling to $22.71 at the end of last week.
The erosion largely reflects investor misgivings about Netflix’s long-term prospects.
Once it becomes more practical to rent movies online, few consumers presumably will want to wait a day or two to receive a DVD in the mail. If that happens, Netflix could go the way of the horse and buggy.
Hastings realizes Internet delivery eventually will supplant DVD rentals shipped through the mail, although he thinks it will take another three to five years before technological advances and changing studio sentiment finally tip the scales.
By then, he hopes to have 20 million Netflix subscribers ready to evolve with the service.