Red Envelope Madness!

Tuesday, May 25, 2004

Inside Netflix

Thanks to Matt who posted this article on alt.video.dvd, which goes into detail regarding the Netflix disc-handling process. There's some answers to FAQ in here.

Computer Power User
Artificial Intelligence
January 2002 Vol.2 Issue 1
Page(s) 82-83 in print issue

Pull back the curtain on this ingenious rent-by-Web model and Netflix
looks even more intriguing. How can a rental company afford to let
members keep a DVD as long as they want?

Only about 10% of DVDs returned to Netflix make it back to a storage
shelf. Almost all returned discs are turned around immediately to
other customers.
"We get the movies virtually for free," says Sneed, "so it doesn't
matter how long you keep it." Netflix only pays to duplicate the disc.
It then gives a share of the revenues back to the appropriate
Hollywood studio when a member rents the movie.
"Since we don't own the disc, we don't have to make as much cost back
on it," says Sneed. In fact, it's better for Netflix financially if
users keep DVDs longer because the postage fees constitute the highest
cost in the process. When members keep movies longer, they can rent
fewer titles, requiring fewer mailings. "What is perceived as a big
benefit for the user-no late fees-is a big benefit for the company,
too," says Sneed.

The Netflix fulfillment process is as novel as the business model. It
starts at 5 a.m. when company trucks visit the San Jose, Calif., post
office to pick up the 85,000 to 120,000 DVDs returned daily. At the
55,000-square-foot Netflix operations center, 50 to 60 workers open
the mailers to check the DVDs for damage, rerouting problem discs to a
quality control group. As the returns are logged into the company
computers, several things happen. Members receive an e-mail
acknowledging the return and are asked to rate the movie for the
Netflix database. Like Amazon.com, Netflix's Web site is a
sophisticated affinity engine, using a member's previous ratings and
rental habits to recommend DVDs that follow previously declared
tastes.

Inside the Netflix DVD machine, employees move thousands of DVD
mailers out of the door every afternoon and process 80,000 to 120,000
returns a day.
Meanwhile, back at Netflix operations, it's likely that a returned DVD
won't touch a warehouse shelf. "Over 90% of the movies that come in,
someone else wants, and so it goes right back out," says Sneed. Users
are encouraged to maintain large rental queues, so that at any time a
given DVD is on a member's want list. Because the company started its
revenue-sharing program with all the major movie studios, Netflix can
stock 25,000 to 40,000 copies of new, popular titles. A staggering 2.5
million discs are in the Netflix system, and 90% of users now get the
first rental choice, Sneed claims.


by Steve Smith


CPU: With DVD burners and broadband connections widely available, are
downloadable DVD rentals on your radar screen?

Hastings: Yes. It's the reason we named the company Netflix and not
DVD-Rentals-Something. We want to get to 3 or 4 million subscribers
and then start rolling out the broadband delivery to various kinds of
devices. We think we can afford to not be the first one to do that.
It's very expensive work to seed the market, to get the first 50,000
people used to downloading movies for their entertainment and paying
for them.

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