Netflix is a company with a different business model than prevails in the area of providing video to the consumer. The prevailing model is seen in companies like Hollywood Video and Blockbuster, both with stores across the country to which consumers go to select the video they want to watch. The consumer has a membership in these stores and checks out a video for a rental fee, usually for a fixed period of time (though more recently, Blockbuster has instituted a more open-ended policy). The Netflix model presents a company that provides rental video through the mail, emphasizing convenience for the consumer and a longer time period for the rental. The consumer pays a monthly fee for this service and can rent as many as possible during each monthly period, with the number determined by how quickly the consumer watches and returns each set of videos (the premium plan being for three videos at a time). Industry Conditions

The video rental industry has been in a state of flux for some time. The videotape rental business had reached a saturation point, and people were renting fewer and fewer videos at the time when the DVD began to replace videotape. Companies with brick-and-mortar rental businesses have a large inventory to maintain, usually with a large collection of videotapes still on the shelves as the stores switch over to DVD for all new releases. Many consumers developed the habit of renting a video on the weekend or at other times and made the industry a success, so much so that many of these companies were viewed as cash cows for a long time. The shift to DVD offered a new attraction to the consumer, meaning even better quality videos in terms of the picture, appealing to even more consumers who want to see films more like what they can see in a theater, and who also want to view the added material most DVDs have. As with the music industry, this shift to a new technology created a number of new selling points and increased sales and rentals as a result.

However,...

Analysts see a new vision of what the consumer will want and be able to do in the near future, so that going out to rent a film may be a specialty market only, appealing to the aficionado who wants to see harder-to-find films that might not be mass consumer items. Even for these customers, the new means of delivery may be preferable, meaning purchasing DVDs (which are becoming cheaper), video-on-demand from cable and satellite servers, downloading films over the Internet, and so on.
Given the belief that this is the future of the industry, Netflix is in a good position to gain a large market share as this industry model becomes more a reality. Netflix operates both as a mail-order businesses and an online business. The consumer maintains a list of films wanted with the company, and as they become available, they are mailed to the renter. Once viewed and returned, another set from the list is sent. The list can be added to or modified online or by mail. Convenience is the watchword, and this is increased by the fact that there is no charge for mailing either way and no need to put postage on the package before it is returned, since it is prepaid. There are also drawbacks, of course. The consumer cannot necessarily get the latest film that he or she may want to see as would be possible at Blockbuster, which often has a guarantee and which also enables the consumer to make second choices in the store. The customer of Netflix cannot make a direct substitution and also cannot "shop" for a video as would be true in a store where he or she can see all the titles available.

The primary competitive forces for the industry have not changed greatly over the years and center on choice, convenience, cost, and policies regarding late fees and the like. As part of the element of convenience, placement of stores…