Source: Reuters

Online DVD rental pioneer Netflix on Thursday worked feverishly to fix the most severe outage in its history, as disc shipments to a third of its 8.4 million customers came to a halt due to a shipping system problem.

Red mailers with the Netflix name have become ubiquitous for many Americans who pick films to watch on the Internet and then get DVDs in the mail, usually a day or two later. Advertisements litter the Web with trial offers.

However, Netflix shipped no DVDs on Tuesday. It shipped some on Wednesday but has shipped none so far on Thursday.

Netflix spokesman Steve Swasey said the Los Gatos, Calif.-based company would give credits to affected customers and was working "feverishly" to determine the cause of the outage and fix the problem.

Swasey said the disruption was not affecting its Watch Instantly Web streaming service, which it offers free to subscribers.

Netflix's stock was up 1.1 percent, or 34 cents, to $31.50 a share in afternoon trade. It had been up more than 3 percent earlier in the day but gave back most of the gain after news of the shipping problems surfaced.

Cary Miller, a media executive and avid Netflix user who receives four or more discs in an average week, said he was not bothered by the disruption.

"Netflix's service has been impeccable," said Miller. "I probably wouldn't have noticed if they hadn't informed me."

It was the second time in Netflix's history it was unable to ship DVDs due to a technical glitch, said Swasey, adding that this outage was worse than one in March. That was caused by an entirely different problem, which the company has since resolved, he said, without giving details.

In the previous outage, Netflix resumed shipping DVDs one day after a technological breakdown knocked out its site, and it offered 5 percent discounts on bills to members who did not receive DVDs on time.

"This time, the site's been up but our shipping system is down. It's worse than it was in March. We're really backlogged," Swasey said.

Notifies subscribers

Netflix sent e-mails to people who were due to receive discs and were unable to get them. The e-mail included the following: "We are sorry for any inconvenience this has caused. If your DVD shipment is delayed, we will be issuing a credit to your account in the next few days. You don't need to do anything. The credit will be automatically applied to your next billing statement."

The company has put significant pressure on DVD rental king Blockbuster, but it also faces challenges from online video providers like Apple and Amazon.com.

Late last month, Netflix posted a better-than-expected second-quarter profit and raised its 2008 forecast, easing analysts' concerns about higher costs related to its move to spend more for Web-delivered content as it expands its streamed content service.

Wedbush Morgan Securities analyst Michael Pachter also gave the company high marks for good service and for disclosing the problem quickly and said he estimated the outage could cost Netflix about $3 million or 3 cents per share -- assuming it was resolved on Thursday.

"These costs could be offset by savings elsewhere, either by buying less streaming content or spending less on marketing," Pachter said.

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