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As telecom industry evolves, success of Netflix is its biggest threat

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Washington Post Staff Writer
Sunday, March 6, 2011

By any measure, Netflix is having a marquee year.

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It has 20 million subscribers, way up from 12 million just a year ago. Its stock has tripled in that time. During periods of peak Internet use, a full fifth of all American bandwidth consumption is people watching movies on Netflix.com.

But the more that consumers embrace the movies-at-home ethos of Netflix, the more uncomfortable major players in the entertainment industry have become. Now Netflix, a secretive company known more for the laid-back attitude of its founder than for sharp elbows, has emerged at the center of a titanic clash over the future of television.

Because if Netflix can bring movies straight into your living room through the Internet, it can bring a full slate of TV shows, too. Pretty soon, who needs cable?

On the other hand, if cable companies can bring you movies and TV directly over high-speed Internet lines, who needs Netflix?

Multibillion-dollar corporations are fretting over those questions and fighting to influence the outcome.

"No one can deny that Netflix has become a huge player in the industry," said Deana Myers, a research analyst at the investment firm SNL Kagan. "But there are big questions surrounding the company, and they have big obstacles ahead."

Netflix has been disruptive since its inception in 1997. That year, Reed Hastings, a former Peace Corps volunteer and MIT engineering graduate, received a $40 video late fee and thought, "There has to be a better way."

So he built a Web site with partner Marc Randolph for Internet users to sign up for seven-day DVD rentals. Two years later, the mail-order service copied the health-club business model and offered unlimited DVD rentals for monthly memberships.

People liked it. No more late fees. No lines. You didn't have to go any farther than the mailbox to get your movies.

For Blockbuster, not so good. Netflix almost single-handedly wiped out the retail video rental business. Blockbuster went bankrupt last fall.

But even faster than the business model could go from storefront rentals to mail-order rentals, it changed again. The spread of broadband Internet service led to the rise of online movie-watching. And this is where it gets messy.


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