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Netflix preparing for future with delayed rentals, more Internet streaming

October 23, 2009 |  8:15 am

NetflixStream After another quarter of stunning growth, Netflix is preparing for a future in which its business may look very different.

On the way out: rentals of new DVDs. On the way in: more Internet streaming across a variety of devices.

In a conference call with analysts after earnings were released yesterday, Netflix Chief Executive Reed Hastings opened up about a subject that has been privately discussed by many in Hollywood recently: the looming possibility of a delayed DVD rental window. Under such a plan--which people close to the home entertainment operations of three major studios confirmed is under discussion--no rental outlet would be able to offer a movie to its customers until several weeks after the movie goes on sale.

The studios hope that would drive some consumers toward DVD purchases, which are significantly more profitable than rentals, and help stem the ongoing decline in home entertainment revenue.

For more on the possibility of a sales-only DVD window and what it would mean for Netflix, Redbox, Blockbuster Inc. and consumers, read the story in today's Times.

While such a system might somewhat depress the revenue of Netflix and its competitors, it would probably result in reduced costs as well, as studios would have to lower the wholesale cost of DVDs for rental companies to get them on board.

Hastings said he would be fine with that scenario and already has plans for the money his company would save on DVD purchases.

"A short DVD sales window would benefit sales and therefore the health of the entire ecosystem," he said. "Plus it would allow us to spend less on discs and more on streaming content."

Netflix considers Internet streaming, which it offers via computers and a growing number of living room devices such as the Xbox 360, crucial to its future rentention and acquisition of subscribers. Last quarter, 43% of Netflix subscribers streamed at least one movie or television show online, up from 22% in the same period a year ago.

The biggest challenge for Netflix is acquiring content for its streaming service, which requires an entirely different set of business considerations than DVDs.

Hastings also told analysts that Netflix will soon announce a new partnership to stream movies through a consumer electronic device "that has a material installation base" by the end of the year. Likely candidates include the two major video game consoles that don't currently offer it: Sony's Playstation 3 and Nintendo's Wii.

It will still be a long time until Netflix goes entirely digital, however. "We expect to be renting DVDs until 2030," Hastings said.

--Ben Fritz

Correction (Oct. 25, 5:10 PM): An earlier version of this post incorrectly quoted Hastings as saying that Netflix expected be renting DVDs until 2020.

Photo: Netflix streaming "The Wizard of Oz." Credit: Netflix

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