Netflix founder Reed Hastings (RPCV Swaziland) unfazed by challengers
Netflix founder unfazed by challengers
By Dawn C. Chmielewski
Knight-Ridder Newspapers
San Jose, Calif. - Netflix chief executive Reed Hastings has made a career of defying his skeptics.
Hastings launched his online DVD movie rental business in 1998, back when DVD players were $400 playthings for gadget freaks with cash.
Amid the wreckage of the dot-com crash, the Los Gatos, Calif., startup raised $82.5 million in one of the most successful initial stock offerings of 2002. DVDs soared in popularity, and Netflix quickly came to dominate the online rental market. The company's success at marketing classic movies and independent films has made it the darling of both Hollywood and the art-house crowd.
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But Hastings now risks being run over by his own revolution. Video rental giant Blockbuster launched a competing service last summer that grabbed 15 percent of the online rental market in just four months, according to Adams Media Research. And rumors that Internet retail behemoth Amazon.com will begin offering DVD rentals has sent Netflix's stock tumbling.
Faced with such threats, Hastings remains preternaturally calm.
He's confident that Netflix will not only survive the battle with Blockbuster but will emerge as a powerful mass- market force that changes how people find and watch movies.
Go ahead, call it whistling past the graveyard. Hastings calls it validation of his instinct that Netflix knows far more about the online rental business than folks who spent two decades peddling videotape in crowded, fluorescent-lit stores.
"We've been doing online rental for five years. We do it better than anyone on the planet," Hastings says.
By all accounts, Hastings, 44, is a classic innovator in the mold of Apple Computer co-founders Steve Wozniak and Steve Jobs.
"He's the real deal," says Silicon Valley angel investor Audrey MacLean, who gave Hastings $20,000 for his first startup, Pure Software in 1991.
Hastings, then a 30-year-old programmer, came up with an idea for a tool to help software designers debug programs in hours rather than weeks.
Pure went public in 1995, and Hastings reaped $2.3 million in cash and stock worth $75.4 million. By 1997, his fortune grew with the sale of the software company to its chief rival, Rational Software, for $752 million in stock. On the day of the merger, his shares were worth $35.3 million. That same year, Hastings returned a copy of "Apollo 13" to a video store and was socked with a $40 late charge. The experience sparked another business epiphany: Netflix.
It was anything but an obvious bet. Few people predicted how quickly the price of the DVD players would drop, from about $400 in 1998 to as little as $29 today. Or how rapidly consumers would embrace the new movie format and a no-late-fees rental service that lets people order DVDs online, receive them in the mail and return the discs in prepaid envelopes.
By 2004, the soundness of Hastings' instincts were clear. Netflix ended the year with 2.6 million subscribers and revenue of $506.2 million.
But that success has attracted serious competition.
Wal-Mart launched a copycat movie-rental service on walmart.com in June 2003. That service, which currently offers unlimited rentals for a $12.97-a- month subscription fee, is not heavily promoted and has attracted only about 250,000 subscribers, according to Adams Media Research.
A bigger challenge has come from Blockbuster. The company launched a competing service in August, touting it to its 40 million customers though its 5,600 video stores.
Blockbuster has not disclosed subscriber numbers, but analysts estimate the service will easily meet the company's goal of attracting 500,000 customers in its first year - a milestone Netflix took more than two years to reach.
"The combination of having both online and in-store is a big advantage," says Shane Evangelist, general manager of Blockbuster Online.
There's little sense of a company under siege at Netflix headquarters in a squat, standard-issue Silicon Valley technology building. Hastings works to preserve the feel of the company's days as a 30-employee startup. His casual style is on display, even in publicity photos of him hoisting drinks with HBO stars Sarah Jessica Parker and Larry David. He's the one in the open-collar shirt and leather jacket.
The long-term threat to Netflix isn't necessarily Blockbuster but cable and satellite television companies offering movies on-demand.
When it comes to instant gratification, ordering a movie with the click of a remote control easily trumps mail delivery.
Hastings thinks that threat is at least a decade away. He says DVDs are such a huge part of Hollywood's revenue that studios will continue to release movies exclusively on disc before making them available for on-demand services.
He sees Netflix not only surviving but continuing to break new ground in film distribution by creating a nationwide market for documentaries and other small, independent films that might never make it to suburban multiplexes.
"If we can get to 5, 10 or 20 million subscribers, then we can be as significant to film production as HBO," Hastings says. "You know - a really amazing channel for interesting film."
