Waiting for Netflix's Plot to Advance

Customers are now used to Netflix's by-mail business model. In the future, everything will be viewed online. (By Susan Biddle -- The Washington Post)

"It's like a three-act play, and we're in the opening minutes of the second act," says Steve Swasey, vice president of corporate communications at movie-rental Web site Netflix, as he gives a tour of the company's Rockville processing center.

Act 1, as far as the company is concerned, was getting people used to renting DVDs over the Internet. Act 3 is "no more DVDs and everything is online."

As the curtain rises on Act 2, the world is somewhere in the middle. Tech companies, including established retailers such as Amazon.com and start-ups with names like Vudu, have been tripping over themselves to figure out how to hook up the living-room TV to the home's high-speed Internet connection.

None of these products has been a hit, and some executives seem bent on keeping expectations low. Apple chief executive Steve Jobs called his company's entry in this product class, called Apple TV, a "hobby."

Online music sales took off because it became faster and easier to download a song than to go to the store, said Stephen Baker, an analyst at research firm NPD Group. The idea is to make movies go that way, too, though the technology isn't quite there yet.

"The technology industry knows what people want," he said. "They just haven't been able to deliver it in an easy-to-use, affordable format yet."

Netflix is experimenting, too. After all, the by-mail business model that made it a success could disappear as quickly as the old mom-and-pop video store, particularly if Apple or Amazon figures out a more appealing approach that doesn't rely on the U.S. Postal Service.

As a Netflix subscriber -- I've checked out more than 80 discs this year -- I'm sort of fascinated with the company, as are many subscribers I know. A recent test drive of Apple TV was interesting but wasn't enough to lure me away from Netflix. But I also doubt I'll be dropping those red Netflix envelopes in the mail forever.

To nudge the digital revolution a little further along, the company in January made about 5,000 of the 85,000 titles in its library available for instant online viewing. So far, subscribers have watched 10 million programs online. Compared with the company's core business, handling the mailing of about 1.6 million DVD rentals a day, that's still a relatively small number: about 40,000 online viewings per day, by my math. Act 3 is years away, Swasey said.

With 7 million subscribers, the service is popular enough that it has helped more than one movie find an audience that didn't turn up at the box office. About as many people have checked out "Hotel Rwanda" from Netflix as saw it in the theater.

The company has even become a producer of films, descending on film festivals and snapping up movies that the studios didn't pick up.

It offers 100 or so independent films that sometimes aren't available elsewhere, thanks to deals struck by its division called Red Envelope Entertainment. One indie movie PR executive jokes that he doesn't know if Netflix is a video store or a network these days.