Netflix proves that he who satisfies the public wins

Through word of mouth, I heard about a company called Netflix that allows you to rent DVDs (digital video disks) online for a subscription fee of $19.95 a month.

It seemed like a good idea. It would no longer mean hopping in the car and driving to the nearest Blockbuster video rental store to search for movies, many of which were already out of stock, then queuing to check-out, and often having to pay late fees if the video was returned a day or two late.

Sometimes, after going to all the trouble of renting a video we ended up not getting a chance to watch it.

I recently tried to buy a children's video at the local Barnes & Noble book store and was told it no longer stocked videos, only DVDs. For the first time ever, last month DVD rentals outstripped video rentals.

According to the Video Software Dealers Association, consumers rented 28.2 million DVDs compared with 27.3 million VHS cassettes during the week ended June 15th.

Then last week, our video recorder broke after seven years of use. The time had come, I thought, to invest in a combo VCR/DVD player.

Once I bought one, I realised we needed to get some DVDs. On average, it costs about $18 to buy a new DVD so renting can work out cheaper.

Ms Shivaun Korfanta, who lives in Boise, Idaho, joined Netflix a few months ago after a work colleague gave her a free two-week subscription. She has digital cable and often she and her husband ordered pay-per-view movies in addition to renting movies from a Blockbuster or Hollywood Video store.

"The first month we had Netflix our cable bill was $20 lower," she said. "It's super easy to use. I like that I don't have to drive to the video store but I can walk to the mailbox, drop in the DVD and it's gone."

The premise behind Netflix is to offer convenience to the customer. Mr Reed Hastings, the chief executive and founder, was so tired of paying video rental late fees that he set up the company in 1998. It now offers 15,000 titles, has 5.5 million discs and boasts more than one million subscribers.

Signing up is easy. The website just requires you to fill in your name, mailing address, email address and a credit card number. Then it asks you to list movies you would like to rent and places them in the rental queue.

As soon as a DVD in your rental queue is available, it is mailed to you. After you have watched the movie simply place the DVD in the supplied pre-paid return envelope and mail it back to Netflix. Once the company receives a DVD back, it will ship out the next available movie in your rental queue.

Each DVD comes in a barcoded sleeve so when it is sent out, the software scans in your name and address. When that disc is returned, the sleeve is scanned and the DVD is removed from your rental queue.

The software then determines the next person on the waiting list for that movie and it is popped into an envelope and mailed out to that customer.

You can rent as many DVDs you want in a month but can only have a maximum of three movies at any one time. Customers are renting an average of 5.75 movies a month.

Part of Netflix's appeal is its proprietary software called the Netflix Recommendation System, which constantly suggests movies you might like, based on how you rate the movies you watch. It suggests you keep at least six movies in your rental queue so if one of your choices is not available, it can ship out the next on the list.

Because the DVDs are shipped in an easily recognisable red Netflix envelope, someone, say, who lives in a college dorm room or apartment complex, may find their DVDs are being stolen. To deal with situations like this, Netflix has a strategy in place to resolve disputes about DVDs that are ordered but never arrive, DVDs that arrive damaged or unplayable, or any other issue that may arise during the rental process.

Mr Frank Cole, a long-time Netflix customer from Middletown, New Jersey, ordered a DVD but when it arrived it was broken in two. He checked a box on the DVD sleeve to say the disc arrived damaged, sent it back, and Netflix mailed him a new one a couple of days later.

Netflix publicly floated in May 2002 and has a market cap of $502.6 million but other companies are treading in its territory. Blockbuster, the video rental chain which has 8,500 franchised outlets nationwide and 22 million customers, last year acquired DVD Rental Central and renamed it FilmCaddy.com, which similarly rents DVDs online for $19.95 a month and limits you to four movies at any one time. Wal-Mart Stores, the largest private employer in the United States employing one million people and 300,000 internationally, has introduced the Wal-Mart DVD Rentals online program which offers 14,000 movies with unlimited rentals though with a maximum number of three at any one time and no late fees for $15.54 a month.

Both Wal-Mart and FilmCaddy use just one distribution centre in contrast to Netflix which has 20 distribution centres and is shipping 300,000 discs a day. Turnaround time for DVDs that are available is almost immediate. In fact, my husband ordered his first DVD from Netflix on a Thursday morning and it arrived in Friday's post.

"You could watch 100 movies a month if you want and it still costs $19.95 with no late fees to worry about," Ms Korfanta said. "The quicker you return a movie, the more new ones you get. I have a list of 20 that I want to watch. But the biggest challenge is to get my husband and I to agree to what movies are on our list."