Swaziland RPCV Reed Hastings is software entrepreneur and CEO of Netflix
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Reed Hastings | Digital Entrepreneur
Outlook 2004: People to watch
By Paul Andrews
By now, Netflix CEO Reed Hastings was supposed to be a dead man. You don't go head to head in renting out DVDs against the likes of Wal-Mart and Blockbuster and live to tell about it.
Yet 2004 will find Hastings not just alive but thriving. Netflix shares have more than tripled in value the past year to around $45, third-quarter revenue jumped 77 percent to $72 million, and its subscriber base, now 1.3 million, is growing at about 125,000 a month. To top it all off, Netflix is the Silicon Valley darling of an anticipated billion-dollar market in digital movies if downloads over the Internet ever become feasible and popular.
Innovator. For the 43-year-old Hastings, a former Peace Corps volunteer in Swaziland and software entrepreneur who moonlights as the appointed president of California's Board of Education, Netflix's success proves that innovation triumphs over adversity every time.
Hastings has stared into the abyss before. In 1996, he was toying with the idea of renting out videocassettes through the mail when someone showed him a DVD. In a flash he describes as "one of those `aha' moments," Hastings realized the waferlike disks could be duplicated and mailed much more cheaply and in greater volume.
By 1999, Netflix had hit the wall. DVDs were convenient, but renting them out one at a time for $4 apiece wasn't working. "People weren't coming back," he says. Driving to his health club one night, Hastings hit on his next breakthrough. "I was getting unlimited workouts for a monthly fee," he recalls. "I thought, `Why not rent DVDs that way?' " Subscribers paying $20 a month would get three DVDs to start with and could rent as many movies as they liked, with Netflix sending a new title as soon as a disk was returned.
The subscription model, combined with the convenience and speed of Internet ordering, turned Netflix golden. Then the Big Boys got into the game. Last June, Wal-Mart inaugurated its own DVD subscription service, low-balling Netflix by a little more than $1 a month. In 2004, Blockbuster is expected to offer a subscription service with the added benefit of returning disks to its retail outlets.
Initial news of Wal-Mart's entry pounded Netflix stock. But the retailing giant has yet to build a community of loyal users like Netflix. With Netflix's market share at 95 percent, Wal-Mart "essentially has made no dent," Hastings says. GartnerG2 analyst Gale Daikoku says Netflix will do fine if it emphasizes new releases and limits the number of customers who cancel the service after trying it. That "churn rate" has been reduced from 7.2 to 5.2 percent over the past year largely by adding local distribution centers to cut the time it takes to return movies. As for Blockbuster, parent Viacom is shopping the rental chain, clouding its future.
Not for sale. And Hastings has a trump card: The company patented much of its business model early while no one was looking--or cared. Netflix conceivably could go after imitators, although Daikoku cautions it might drain the small company's resources. Netflix could be an attractive purchase, though Hastings says the company is not interested in a buyout and won't comment on whether suitors are knocking.
Hastings faces some challenges in the coming years. With high-speed Internet access gaining critical mass, demand for DVD downloads over the Internet may increase, opening the movie market to new competitors.
Netflix expects to offer downloads, but because they still take hours even with broadband, Hastings says mail rentals will hold sway for the foreseeable future. The good news, he says, is that Wal-Mart "doesn't enter less-than-billion-dollar markets. We've got lots of growth ahead."
