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Waiting for Netflix's Plot to Advance

By Mike Musgrove
Sunday, October 28, 2007

"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.

Last year, for example, Netflix had a six-month exclusive on "This Filthy World," a film about a one-man show by Baltimore director John Waters.

Waters, who might be most famous at the moment for his flick "Hairspray," gave his parents a subscription to Netflix for Christmas last year and said he counted himself as a fan of the service even before the deal.

"When I was born, you had to go to L.A. or New York to see good movies," he said. "Now you don't have to leave where you were born to be cool."

The director, who is currently working on a children's film, said the selections at some theaters are low. Netflix is "making available films that you cannot see in your local theater, and that's incredibly important," he said.

Netflix's Washington area hub is tucked into generic-looking office space; it's possible to walk around the outside of the building without realizing you've arrived at the Netflix processing center, one of 46 such hubs across the country.

The company keeps the location low-profile because it doesn't want people wandering in to try to return the movie they just watched, which is exactly what I tried to do at the start of a recent visit.

On a typical day, the Rockville hub processes about 85,000 DVDs; Tuesdays and Wednesdays are the busiest because people tend to watch movies on the weekends. If a movie goes too long without a rental, it gets sent back to a central warehouse. But if a Washington area subscriber has a movie in his or her queue, it stays. The system relies on bar codes, machines and 60 or so fast-moving workers.

For Netflix to be able to offer films such as Waters's one-man show, it has to get the word out to members who might be interested in the film. Its ratings system collates 2 billion user-submitted reviews to predict which movies its subscribers will like.

It isn't always perfect. To show off some of Netflix's features, Swasey opens a laptop and connects to his own account. Based on his enthusiastic rating of "Champion," a moving documentary about character actor Danny Trejo, Netflix has recommended that Swasey check out a disc called "Ultimate Fighting Championship: Liddell vs. Ortiz 2."

"Interesting," he says. "I don't think I'm going to like this movie at all."

Which reminds me, for some reason, of behavior I've noted among some of my Netflix-using friends; sometimes you check out the movie you think you should see, even if it doesn't turn out to be the light entertainment you actually feel like watching when Friday night rolls around.

"Hotel Rwanda," for example. I had it on my coffee table for a few weeks before I ever got around to watching it.

"I've had it for eight months," Swasey confessed. "I just can't bring myself to watch it because I know it's going to be depressing."

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