Growth Matters: Netflix Moves to Streaming Video

Netflix DVD sleeve
Netflix DVD sleeve

Perhaps no company has revolutionized the video rental business as much as Netflix (NFLX). The company got its start in 1997 when most people were still heading to Blockbuster or some other video rental store to get their DVDs. Netflix had a simple, but brilliant idea: Charge people a reasonable fee and mail the DVDs to them as often as they want. Later, Netflix took its delivery process one step further. It started allowing people to view streaming videos online.

With over 90,000 titles and more than 11 million paying subscribers, Netflix is now the leading online DVD subscription service. Consumers can select from a variety of monthly pricing plans and have DVDs delivered within a business day or two. While Netflix carries blockbuster titles, many of the DVDs it sends to its subscribers are from its enormous back catalog of less popular titles.

The company has been growing at an impressive 26% annual rate and the company, which now has some 2,500 employees generated $1.67 billion in sales and earned $116 million in net income in the last year. Its earnings per share rose 25.4% in the last year while its stock spiked 77.8%.

Netflix Plans to Focus More Online

Netflix is making the transition from DVDs to streaming video and currently allows you to do both. But don't worry: DVDs are not going away anytime soon. But the pressure is on. The company says that over the next several years, it expects United States Postal Service charges for shipping DVDs to climb from $600 million a year to $700 million a year. The company plans to increasingly focus on online streaming and says it will make more titles available for download.

While the company has grown quickly, Netflix is concerned about the competition -- it competes with both consumers who choose to do without its service and with kiosks. As far as the consumers go, a company spokesman says that people increasingly view themselves as too busy to watch movies which could put a damper on sales. But at the same time, those busy people see downloading a movie through Netflix as more time efficient than making a trip to a movie theater. Another worry: In a recession, people may choose to cancel our service even though at $8.99 per month for unlimited rentals, it is very inexpensive entertainment.

No question, the competition is intense. Netflix is losing some market share to kiosks such as Coinstar's RedBox, which offers the latest titles but not the broadest selection. In addition, Netflix competes against Amazon (AMZN), Apple (AAPL), Hulu (also profiled in this Growth Matters series) and YouTube.

While the stakes are high, Netflix has show that it's able to turn on a dime and beat the competition by being nimble. Now, it just has to keep that up as more devices, from handhelds to Google TV, offer their customers video.