Netflix offers movies on the Web

By MSN Money staff with wire reports

After a year of attacks by bigger rivals, Netflix (NFLX, news, msgs) is firing back.

The DVD subscription service -- now facing competition from movie-download options from Apple (AAPL, news, msgs) and Amazon.com (AMZN, news, msgs), as well as aggressive attacks from traditional rivals such as Blockbuster (BBI, news, msgs) -- will start showing movies and TV episodes over the Internet this week.

As part of a new "Watch Now" streaming-video feature, Netflix will provide its subscribers with instant gratification as the DVD-by-mail service prepares for a looming technology shift that threatens its survival.

Shares jumped 6.6% to $24.22 in early trading this morning after news that the Los Gatos, Calif., company would unveil the "Watch Now" feature today.

Although only a small number of its more than 6 million subscribers will get immediate access to the service, which is being offered at no additional charge, Netflix plans to roll out the instant viewing system to about 250,000 more subscribers each week through June.

How it works

After accepting a computer applet that takes less than a minute to install, subscribers will be able to watch anywhere from six to 48 hours of material a month on an Internet streaming service that is supposed to prevent piracy.

The allotted viewing time will be tied to how much customers already pay for their DVD rentals. Under Netflix's most popular $17.99 monthly package, subscribers will receive 18 hours of Internet viewing time.

The company has budgeted about $40 million this year to expand its data centers and cover the licensing fees for the roughly 1,000 movies and TV shows that will be initially available for online delivery.

Netflix's DVD library, by comparison, spans more than 70,000 titles, one of the main reasons why the mail is expected to remain the preferred delivery option for most subscribers.

Another major drawback: The instant viewing system works only on personal computers and laptops equipped with a high-speed Internet connection and Microsoft's (MSFT, news, msgs) Windows operating system. That means the movies can't be watched on cell phones, TVs or video iPods, or on computers that run on Apple's operating system. (Microsoft is a publisher of MSN Money.)

Greater competition

Despite its limitations, the online delivery system represents a significant step for Netflix, which has been facing increased competition both online and off.

Both Amazon and Apple have introduced movie download services that allow potential viewers to get their movies faster. Several TV networks have introduced online sites that allow viewers to watch streamed versions of hit TV shows such as ABC's "Lost."

And in December, rival Blockbuster lashed out with an offer that gave Netflix customers free movie rentals at Blockbuster stores in exchange for the Netflix mailing labels they normally would throw away.

"This is a big moment for us," said Netflix Chief Executive Reed Hastings as he clicked a computer mouse to quickly call up "The World's Fastest Indian" on the instant-viewing service. "I have always envisioned us heading in this direction. In fact, I imagined we already would be there by now."

A revolutionary service -- once

Since its 1999 debut, Netflix has revolutionized movie-watching habits by melding the convenience of the Web and mail delivery with a flat-fee system that appealed to consumers weary of paying the penalties imposed by Blockbuster for late returns to its stores.

After first brushing off Netflix as a nettlesome novelty, Blockbuster has spent the past few years expanding a similar online rental service that provoked a legal spat over alleged patent infringement.

Netflix has been able to maintain its leadership so far, building so much momentum that the world's largest retailer, Wal-Mart Stores (WMT, news, msgs), abandoned its efforts to build an online DVD rental service in 2005.

In the past three years, Netflix has signed up nearly 5 million more subscribers to become increasingly profitable. Although Netflix won't report its 2006 earnings until later this month, analysts believe the company made about $44 million last year, up from $6.5 million in 2003.

Long-term worries

Despite the company's growth, Netflix's stock price has dropped by more than 40% over the past three years, shriveling to $22.71 at the end of last week.

The erosion largely reflects investor misgivings about Netflix's long-term prospects.

Once it becomes more practical to buy and rent movies within a few minutes on high-speed Internet connections, few consumers presumably will want to wait a day or two to receive a DVD in the mail. If that happens, Netflix could go the way of the horse and buggy.

Online movie delivery already is available through services such as CinemaNow, MovieFlix, Movielink and Vongo, as well as Amazon's recently launched Unbox and Apple's iTunes service. Apple last week launched a new device that promises to transport media from a computer to a TV screen.

But none of those online services have caught on like Netflix's mail-delivery system, partly because movie and TV studios generally release their best material on DVDs first. The studios have had little incentive to change their ways because DVDs still generate about $16 billion of highly profitable sales.

'Kickboxer's Tears' and 'Amadeus'

Like already existing online delivery services, Netflix's "Watch Now" option offers a lot of "B" movies such as "Kickboxer's Tears." But the mix also includes critically acclaimed selections like "Network," "Amadeus," "Chinatown" and "The Bridge on the River Kwai."

The studios contributing to Netflix's new service include NBC Universal, Sony Pictures, MGM, 20th Century Fox, Paramount Pictures, Warner Bros., Lion's Gate and New Line Cinema.

"We are going into this with the knowledge that consumers want to watch (media) in various ways, and we want to be there for them," said Frances Manfred, a senior vice president for NBC Universal. "For now, though, we know television is the vastly preferred option."

With its 8-year-old service on the verge of mailing out its billionth DVD, Netflix has been in no rush to change the status quo, either.

But Hastings realizes Internet delivery eventually will supplant DVD rentals shipped through the mail, although he thinks it will take three to five more years before technological advances and changing studio sentiment finally tip the scales.

By then, he hopes to have 20 million Netflix subscribers ready to evolve with the service.