Netflix Boss Plots Life After the DVD - WSJ.com

Moreover, Mr. Hastings stumbled in an earlier effort to introduce a set-top box that would bring Internet video service into the living room. Netflix developed the hardware but then abandoned it after Mr. Hastings and other executives got cold feet.

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Mr. Hastings predicts the company will still be shipping discs to consumers 20 years from now.

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Now more than 20% of Netflix members regularly use the service

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The online model has another benefit for Netflix. The company currently pays about 80 cents to post a DVD to a customer's home and back. Its bandwidth costs for streaming a typical two-hour movie: roughly a nickel.

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Mr. Hastings's biggest challenge in reorienting Netflix is getting Hollywood to go along for the ride. Netflix's selection of more than 100,000 DVD rental titles is made possible by the "first-sale doctrine" of U.S. copyright law, which permits buyers of DVDs to lend them out without studios' consent.

In Netflix's early days, its buying team would sometimes purchase DVDs at local Wal-Marts or Best Buys if it couldn't get copies through studios, says Ted Sarandos, Netflix's chief content officer.

In contrast, to deliver movies and television shows over the Internet, Netflix has to license them from studios. So far, it has gotten only about 12,000 titles, a hodgepodge of older films such as "Diehard," episodes of popular TV shows including "30 Rock" and a smattering of new releases.

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In contrast, to deliver movies and television shows over the Internet, Netflix has to license them from studios. So far, it has gotten only about 12,000 titles, a hodgepodge of older films such as "Diehard," episodes of popular TV shows including "30 Rock" and a smattering of new releases.

The main reason: Netflix must compete with television subscription services like Time Warner's HBO, Viacom Inc.'s Showtime and others that gain exclusive rights to show studio movies on cable channels or through on-demand systems. These pay channels have bigger audiences than Netflix and a longer history of hashing out complicated licensing agreements to secure movie rights. Their lucrative deals can prevent Netflix from getting Internet rights for movies until years after they're released on DVD.

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Mr. Sarandos, Netflix's point man with the studios, says Hollywood is "clearly conflicted" about the online service's growth because it could help accelerate the decline of DVDs.

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Mr. Hastings concedes that he "fell in love with building boxes" and that part of the inspiration was watching Apple Inc. use its hardware to sell online content. Apple, too, is seeking to bring Internet video to TV sets through its iTunes Store and a box called Apple TV. "Every entrepreneur is a Steve Jobs wannabe," he says. "I was as guilty of that as anybody."

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The group's conclusion: Netflix would stay out of the hardware business, handing the project to Roku Inc., a privately owned start-up that Mr. Wood had founded. Netflix invested $6 million for a minority stake in Roku and sent about 20 Netflix employees to work there under Mr. Wood. The decision was disappointing for employees across Netflix who were preparing for the product launch.

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he company reached agreements over the next year to get Netflix into Blu-ray high-definition movie players by LG Electronics Inc. and Samsung Co., TiVo Inc. digital video recorders, Microsoft Xbox 360 and big-screen television sets by Vizio Inc.

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