I have written several posts about the interesting space that Netflix fills between physical stores that cannot offer a sizeable library or customization features and digital delivery with its bandwith issues and pricing problems. In my last Netflix post I noted that:

“… Netflix never saw delivery by the mails as a permanent solution to the “watching movies at home and on the go” industry. As I mentioned before, their relatively luddite service was possible because Blockbuster sucked and digital delivery hadn’t (and even with Apple’s entrance, still has not) been perfected. Like Apple, Amazon, Walmart, and a host of other companies, Netflix always planned to offer a digital service when it becomes feasible.

Well, Netflix launched its Media Center today to select customers and will be rolling it out to its entire customer base over the next six months. The Media Center will digitally deliver movies to users in a matter of seconds. According to Netflix:

The new immediate viewing feature differs from current services in that it does not require the often lengthy downloading of a large video file. The Netflix feature uses real-time playback technology that allows video to be viewed at virtually the same time it is being delivered to a user’s computer. Following a one-time, under-60-second installation of a simple browser applet, most subscribers’ movie selections will begin playing in their Web browser in as little as 10 to 15 seconds. Movies can be paused and a position bar gives viewers the ability to immediately jump to any point in the movie. In all, the instant watching feature requires only Internet connectivity with a minimum of one megabit per second of bandwidth. The more bandwidth a consumer has, the higher quality the video displayed, ranging from the quality of current Netflix previews to DVD quality with a three-megabit-per-second connection.

Download time is the major bottleneck to adopting digital delivery. If Netflix can truly solve this, they will have a huge leg up in the race. Another major problem over time, of course, will be whether users can seamlessly watch movies on their televisions through this service. I’ll watch movies on my computer, but the average citizen (read my parents) will not.

Netflix is including the service at no additional charge. Customers electing the most popular plan, $17.99 for unlimited DVD rental and three discs out at a time, will have access to up to 18 hours of online movie watching per month. This is preferrable to the a la carte pricing offered by the able companies Movie On Demand services and Apples downloading features.

Netflix seems to have its head screwed on straight here. Here’s hoping Netflix’s latest offering meets our lofty expectations.

Michael Arrington points an article in Business Week that claims that Apple will begin selling movies for download this month. According to Business Week, Walmart is up in arms because Apple is getting a better wholesale price.

I was surprised by Arrington’s closing remarks:

“Given that it will be trivial for iTunes users to simply burn a DVD of these movie downloads, Walmart has good reason to be worried. Netflix should be nervous, too.”

When the stars align and bandwith providers, movie studios, consumer elctronics makers, and digital distribution partners like Apple, Amazon, Walmart, AOL and Netflix get digital distribution right some old business models will certainly be eclipsed. But I think it’s a little early for Netflix to worry.

As Mark Cuban notes, download times are still abysmal:

“Easier to download a movie? Maybe. Easier to download 2 or 3 movies than going to the store to buy or rent ? Never. Never, ever, ever. (Which means not in the next 5 years).”

You think going to the movie store is a pain in the arse? How many of our average citizens will be able to endure the download time, much less figure out how to burn a dvd of the movie? That’s assuming, of course, that all of the aforementioned players above allow one to freely do so.

I am sure the Netflix never saw delivery by the mails as a permanent solution to the “watching movies at home and on the go” industry. As I mentioned before, their relatively luddite service was possible because Blockbuster sucked and digital delivery hadn’t (and even with Apple’s entrance, still has not) been perfected. Like Apple, Amazon, Walmart, and a host of other companies, Netflix always planned to offer a digital service when it becomes feasible.

No doubt, Apple launching any service should make its competitors nervous. But in this case, I don’t think Netflix has anything to worry about for quite sometime.

Interesting article in today’s NYTimes about Netflix and how they are succeeding despite the fact that the technology exists for digital delivery of movies. Interesting fact from the article: Netflix carries roughly 60,000 movies. How many of them are rented by users everday?

35,000 to 45,000.

Shocking.

If someone told me a few years ago that I would pay $20.00 a month so that I could get up to 3 movies at a time - in the mail - I would have laughed. I would have been laughing at the “in the mail” part of the statement. How, in an era of digital delivery is a traditional mail service laying the lumber to Blockbuster? I laugh thinking about the Blockbuster execs that spent all of their time (hopefully) worrying about how they were going to compete with the On Demand services from cable providers only to have Netflix come out of nowhere and steal their cookies with a mailbox.

How did that happen? And what made the folks at Netflix think that they could even do it? If I was the one that had the Netflix brainstorm, I would have stopped the moment the two way necessity of the United States Postal Service came into the picture. It just doesn’t make sense.

Netflix beat Blockbuster despite the need for mail for 3 reasons:

1. Browsing and searching and cross referencing movies, actors, directors and key grips is easier, faster, and more effective when done online. Going to a physical store before deciding what movie you want to watch is the stuff that ends relationships. Who really thinks in terms of Drama, Action, and Comedy when they get to the store? I don’t. I want to see another film by David Fincher. I want to see something kinda like Cidade De Deus. I want to see anything that my friend Luke recommends. Blockbuster doesn’t make this possible. Netflix does.

2. The Netflix Queue has changed my life. It isn’t perfect yet, but it has transformed the way that I consume movies. I have 350 movies in my queue at anytime - movies my friends recommend, movies that star actors who’s work I enjoy, movies that are recommended by Netflix after seeing my rating activity of movies that I have seen. No more walking into the store, a tabula rasa. No more trying to remember the name of the movie that Luke recommended to me 2 years ago. Forget browsing the suspense shelves, hunched over like Quasimodo, only to realize, after looking at every title, that Panic Room is actually filed under thriller.

3. Late fees. Nuff said. Actually. No. This one is huge. Even Blockbuster tried to do away with late fees but they couldn’t. They couldn’t because if they let me keep the Broadway and 8th copy of Raging Bull for 2 months, then no one else could watch it. Their model of physical locations prohibits them from allowing me to keep a movie for a lengthy (and it is lengthy) period of time.

While not an exhaustive list, Netflix’s queue, their open and cross-referenceable database, and their open ended rental periods are what allowed them to beat Blockbuster. But interestingly, On Demand and other digital delivery mechanisms have the same advantage over Blockbuster and they have obvious advantages over Netflix. When the cable companies or the content providers learn the Netflix lessons, they might very well make Netflix obsolete.

Cable needs to immediately implement the following Netflix lessons:

1. Give me the option of paying a monthly fee. This would eliminate the cable version of a late fee whereby after 24 hours I can no longer view the movie that I purchased. I paid for it, let me watch it when I want to watch it. Hell, let me watch it twice.

2. Let me see any movie ever made (or at least the 50,000 that Netflix offers). When I had cable, nothing was worse than going to OnDemand only to realize that I had seen all of the movies that they were currently offering for the month (50 or so).

3. Offer me the queue function as a service. When I turn on my T.V. I should see a channel - my channel - that has a browseable list of the movies that I have said that I want to remember to watch.

4. Add good search functionality. Make it easy for people to find good movies. This need not be on my television. As evidence by Netflix, users are willing to go online to search and choose movies and then have them delivered in another medium. If they are satisfied to keep a queue online and then wait for movies in the mail, they will be thrilled to choose movies online and then walk into their living room, turn on the television, and watch it.

Once cable companies have implemented the features above, then their natural advantages should knock Netflix out of the box. Digital delivery has several natural advantages. Digital delivery is instant. The one problem I have with Netflix is that my “movie mood” sometimes shifts (drastically) while the movies are in USPS transit. If I add a movie to my queue and it is instantly available on my television, my movie mood is synched to my available movies. Digital delivery is inconsumable. Blockbuster has late fees because they need that damn disk back so they can sell it again. While Netflix has a better distribution structure, they still are still hampered by physical assets that can only be in one place at a given time.

In the end, it is weird that we had to go to a middle step between physical stores and digital delivery - and even weirder still that the middle step involved the mails, but if cable learns the Netflix lessons, then consumers will get an amazing service, one that has been in the wings for a long time now.