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Netflix Flicks Switch on DVD Rental Centers

On the heels of a successful initial public offering last month in which the online DVD rental service pocketed $82 million in cash, Netflix, Inc. Thursday announced the expansion of its U.S. distribution centers.

Betting its chips on the skyrocketing popularity of DVD rentals and sales that are quickly outpacing those of VHS, the Los Gatos, Calif.-based company has opened 10 regional distribution centers in an effort to develop a national user base and provide faster postal delivery of DVD rentals.

The new centers will be based in Atlanta, Boston, Denver, Detroit, Houston, Los Angeles, Minneapolis, New York, Seattle, and Washington, DC, and each will have the capacity to handle an estimated 50,000 DVD orders on a daily basis.

"Now that the majority of our customers are getting their DVDs more quickly, we believe that faster service will have a positive impact on our continued success," said Reed Hastings, Netflix CEO and co-founder, who is aiming to increase his 600,000 subscribers, mainly based in the West Coast, to between 5 and 10 million over the next five years or more.

"Netflix is about creating an online movie community of subscribers who love movies and help each other find the gem," said Hastings.

Just at the inception of the DVD craze in the late 1990s, Netflix saw a niche angle in the market and decided to fill it. The company launched its Web site in 1998 as one of the first online DVD rental services with a library that has grown to include more than 11,500 titles, and now commands 98 percent of market share among only a handful of mom-and-pop online video rental sites.

Although movie rental behemoth Blockbuster, a unit of Viacom, has announced plans to open an online rental site this summer, which may pose a formidable threat to Netflix and its comparatively small following.

The advantage Netflix has over larger entities like Blockbuster is that its service does not charge late fees, a revenue source that accounts for between 18-20 percent of Blockbuster's overall profits. Additionally, Netflix only charges a flat $20 monthly fee for unlimited DVD requests, which cost-wise would only account for between four and six DVD rentals per month at traditional video stores.

The drawback is that Netflix consumers don't get the kind of instant gratification they would from a visit to an offline video store, and instead must wait one to four days for delivery of their DVD of choice.

Subscribers to the site create a movie wish list and right off the bat receive their first three DVD requests on a trust basis, since Netflix has no due date or late fee policies. DVDs are delivered directly to the subscriber's address by first-class mail in postage-paid mailers, which eliminates the hassle of getting postage to return the DVD, and once the first batch of DVDs are returned the next title on the list is automatically mailed out, and so the cycle begins.

The site also provides DVD movie fans with news on upcoming DVD releases, movie reviews, member reviews, critic's picks, and movie industry trivia and links.

But Hastings' vision doesn't just stop there. The former engineer and current president of the California State Board of Education plans to roll out a second division of his company over the next five to fifteen years that will deliver high-speed digital movie downloads to consumers via their PCs or set-top boxes, much like video-on-demand services intertainer.com and CinemaNow are already doing.

The only holdup is that at present only a small percentage of U.S. household can get high-speed Internet access, and as it stands the online movie download companies that currently exist are limping along due to restrictions in bandwidth speeds. Until availability and speed issues are resolved and broadband becomes a national priority., Hastings will keep his money on the tried and true reliability of the U.S. postal service and a more streamlined business strategy.

"Today, 100 percent of U.S. households have postal delivery and very few have broadband," Hastings was quoted as saying to CBS.MarketWatch.com. " If that ever changed, which might happen in five or 15 years, then we'd look at other cost-effective distribution mechanisms such as broadband, but there will always be a substantial part of the country reachable only by mail."

Richard N. Barton, president and CEO of Expedia, Inc., and Mike Ramsey, CEO of Tivo, are both active members of the Netflix's board of directors.