- The Washington Times - Wednesday, March 10, 2004

LOS GATOS, Calif. - It would be easy to cast Netflix Inc. founder Reed Hastings as simply a dot-com rebel whose online DVD subscription service empowers consumers by letting them keep video rentals indefinitely without facing late fees.

But Mr. Hastings, a former Peace Corps volunteer who once taught math in Swaziland, says he is pursuing a far nobler cause.

Mr. Hastings sees himself as a DVD evangelist, with Netflix as a bully pulpit for his mission to deepen the world’s passion for movies and find an audience for every film.

“I would like Netflix to transform the movie business,” Mr. Hastings says without the slightest trace of bombast. “We want to become a Top 10 media company.”

It sounds like a far-fetched ambition for an industry upstart that started this year with a 3 percent share of the $9.9 billion video-rental market, with stiffer competition from retail giants Blockbuster Entertainment and Wal-Mart Stores Inc. looming ahead.

Mr. Hastings, 43, isn’t backing down, perhaps because he already has defied conventional thinking.

“He’s the kind of guy you would back in a heartbeat because he is such a brilliant strategic thinker,” said Jay Hoag, whose venture-capital firm, Technology Crossover Ventures, was among Netflix’s early backers.

Skepticism has been shadowing Mr. Hastings since his 1999 start of Netflix, which charges an all-you-can-watch monthly fee of $19.95 to receive up to three DVDs at a time through the mail.

Critics quickly panned Mr. Hastings’ smorgasbord approach as another dot-com blunder. The service instead struck a nerve with tech-savvy movie lovers fed up with video late fees — a cash cow that industry leader Blockbuster Entertainment milked for about 15 percent of its revenue before Netflix came along.

Now Los Gatos, Calif.-based Netflix is thriving, with its audience rapidly approaching 2 million subscribers as the service attracts about 125,000 new customers each month, helped by software that personalizes movie recommendations based on customers’ viewing histories and their feedback on films they have seen.

The company’s accelerating growth has helped its stock more than quadruple in less than two years despite persistent doubts about Netflix’s ability to survive amid tougher competition and a long-anticipated shift to video-on-demand.

Meanwhile, consumers are renting fewer movies from Blockbuster, a trend that recently prompted majority owner Viacom Inc. to seek a buyer for its 81 percent stake in the 8,900-store video-rental chain.

Even before Netflix, Mr. Hastings had established himself as a shrewd entrepreneur.

In the early 1990s, he started a business-software maker, Pure Atria, that he wound up selling to Rational Software for $752 million in stock. Mr. Hastings then came up with the idea for Netflix when he returned a rented copy of the movie “Apollo 13” more than a week late and got slapped with a $39 penalty.

It might turn out to be the best money Mr. Hastings ever spent, considering his personal stake in Netflix is worth nearly $150 million.

Mr. Hastings isn’t driven entirely by money. In 2000, former California Gov. Gray Davis appointed Mr. Hastings as president of the state’s Board of Education — a nonpaid position that he is lobbying to keep under California’s new governor.

“We have all of Arnold Schwarzenegger’s movies at Netflix,” Mr. Hastings says, with a laugh.

Netflix’s library of 18,000 DVD titles includes many little-noticed movies — the kinds of films for which Mr. Hastings hopes to build larger audience. He aims to assemble the world’s most diverse selection of DVDs and then draw upon Netflix’s ability to analyze each customer’s film tastes to “find the right movie for the right person.”

It’s a cause that Mr. Hastings hopes will help differentiate Netflix from mounting competition.

Wal-Mart, the world’s largest retailer, began a similar online rental service last year that undercuts Netflix by about a buck a month.

Blockbuster already owns a Netflix copycat, FilmCad-dy.com, and plans to introduce an online service that will deliver DVDs under its brand name later this year.

“We should not only be able to compete in the online business, but have a substantial edge over the existing competition,” Blockbuster CEO John Antioco recently assured analysts.

But Netflix already is gaining a reputation as the place to go for independent films, foreign movies and documentaries that are tough to find in Blockbuster and other traditional rental stores.

Still, Netflix doesn’t impress all its customers. About 5 percent drop the service each month.

The defections, known as customer “churn,” have been declining as Netflix has set up 23 distribution centers across the country to get DVDs to customers more quickly.

Controlling churn is vital to Netflix’s success because the company loses money on new customers during their first four months. Based on its current churn rate, Netflix estimates that the average subscriber keeps the rental service for 21 months, up from 16 months at the end of 2002.

The formula has paid off so far.

Netflix’s revenue nearly doubled last year, producing a $6.5 million profit on subscriptions totaling $270 million, enough to encourage Mr. Hastings to expand the service into Canada and Britain.

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