Media Maverick

RealNetworks and Viacom plan to spin off the Rhapsody subscription music service, the companies announced Tuesday.

Rhapsody, which has struggled for years to grow its subscriber base, was operated by a joint venture formed by Real and Viacom, parent company of MTV Networks.

At the same time, Real has decided to give up a controlling interest in the music service. The company will no longer own a majority stake in the company and will hold slightly less than 49 percent of the company's shares. Viacom owns a similar amount.

Real agreed to contribute $18 million to the new company. Under Real's control, Rhapsody has never really caught on with music fans. Rhapsody has suffered from what has dragged on most subscription services. Music fans generally prefer to own their songs; they don't want to risk losing their music libraries, should they fail to keep up their monthly fees.

The move comes after a major leadership shakeup at Real. Rob Glaser, Real's founder and former CEO, was pushed out last month, according to reports. The spinning off of Rhapsody appears to be the first significant move made by Robert Kimball, who is interim CEO and is being considered for the position permanently.

Blockbuster was once one of the cornerstones of weekends and movie viewing, nearly as much a part of home entertainment as the TV set.

As Blockbuster yet again rethinks its move-rental business, the beleaguered company continues to lose ground to Netflix and Redbox.

No more.

Amazingly, Blockbuster's stock is trading at 40 cents a share following the company's announcement that it had undergone another round of layoffs and corporate restructuring. Last month the once dominate video-rental chain informed investors that it would miss revenue expectations for the fourth quarter due to lagging holiday sales. Blockbuster said it expects to report a loss of up to $193 million for 2009.

Jeanine Poggi at theStreet.com last week interviewed Blockbuster CEO James Keyes, who acknowledged that Netflix and Redbox continue to snatch away market share from his company. Last month Keyes said at a conference that Netflix was taking "demand out of the market."

Blockbuster, which in May of 2002 was trading at over $29, said previously that it planned to close 20 percent of its stores by next year. The company is now betting on a multiplatform strategy and plans to replace stores with kiosks and compete online with Blockbuster digital.

There was a time when many on Wall Street argued that Netflix would never threaten Blockbuster or video stores because ordering online was too complicated and nobody would ever want to wait days for the mailman to deliver a film. Nothing meant immediate satisfaction like the local video store, or so they said.

Netflix proved otherwise. At the same time that Blockbuster's stock trades for less than the price of a postage stamp, Netflix's stock and revenue are soaring. Netflix shares were trading at over $61 on Tuesday and last month the company reported that profits rose 36 percent to $30.9 million while revenue grew 24 percent to $445 million.

As for the future, it's hard to see how Blockbuster will ever catch Netflix. After striking partnerships with dozens of set-top box makers, Netflix enables subscribers to stream movies from the Web to TV sets at no additional cost to their monthly fees.

And with Redbox boosting the number of its automated video-rental kiosks, the traditional video-store business model appears doomed. At this point, Blockbuster appears headed for the same fate as Movie Gallery. At one time, Movie Gallery was one of Blockbuster's biggest brick-and-mortar competitors, but last week it filed for bankruptcy protection for the second time since 2007.

If you thought the Recording Industry Association of America was hard on illegal file sharing, consider Dorin Dehelean.

Dehelean, an Internet security analyst, was in charge of tracking illegal file sharing at the University of Georgia until he tried to shake down the student downloaders he caught.

Last week, police arrested the 37-year-old Dehelean on a felony extortion charge, according to a report published by the Web site of the Athens Banner-Herald. Police allege that Dehelean contacted a female student two weeks ago to tell her that he'd caught her violating school policy by illegally downloading copyright materials.

He also told her he could make the "situation go away in exchange for money," Jimmy Williamson, chief of campus police at the university, told the Banner-Herald. "All he was doing was (offering) to keep the information from going to Judicial Programs."

The student, who apparently could have faced disciplinary action for the downloading, told Dehelean that she didn't have the money and then informed a school official about the conversation. The police were contacted and they sent a plainclothes officer to meet with Dehelean posing as the student. After Dehelean accepted a payment of an undisclosed amount, he was arrested and the school immediately fired him.

Police believe Dehelean tried to extort other students and may have been paid off by at least one student. No word yet on whether the female student was disciplined for the downloading.

Netflix, the Web's hottest video rental service, is worried that bandwidth providers could abuse their position as the gatekeepers of Internet access to hamstring competing Web-video distributors.

As the Federal Communications Commission continues to consider proposals for Net neutrality regulations, Netflix recently asked the agency (PDF) to adopt rules that protect Web video fans from anti-competitive practices.

(Credit: Netflix)

"Network operators control the delivery pipes and generate significant revenue from content that travels over those pipes," Netflix wrote to the FCC. These operators "provide both the means and motive for discriminating against new ventures that might threaten revenue sources of the network operators."

Netflix's comments to the FCC, first reported by The Washington Post on Monday, is a signal that the company sees a showdown coming with Comcast, Time Warner, and other broadband providers over the distribution of online video.

While seemingly everyone predicts the Web will one day be the preferred means of distribution for on-demand film and TV shows, Netflix has aggressively prepared for that day by building up its Web-streaming service and partnering with set-top box makers that enable users to watch Internet-video on TV sets. But in the future, cable and satellite companies may have the upper hand when it comes to acquiring Internet rights to films and TV shows.

The bigger network operators possess huge numbers of subscribers (for example, Comcast boasts 25 million cable TV subscribers and 15 million Internet customers), and can afford to pay big bucks for content. The cable guys have also established strong ties to the studios after decades of heavy spending in Hollywood.

Netflix has 12 million subscribers--many of whom pay only $10 a month for the service--and has at times clashed with the studios over acquiring access to content. Typically, Hollywood sees far better returns from cable and satellite providers than Web services, such as Netflix and Apple.

In comments to the FCC, Netflix wrote: "There is substantial discrimination and consumer harm if a network operator uses its ownership affiliation with a (studio or TV network) or even its bulk buying leverage with a video content provider, to deny attractive programming to a competing online video service."

The "ownership affiliation" that Netflix is obviously referring to is Comcast's proposed merger with NBC Universal. The deal would give Comcast, the nation's largest cable company, a huge say in where NBC's content goes. /p>

Comcast has said that it has no intention of hurting NBC by limiting how the company distributes shows. Another concern for Netflix is that ISPs could use the so-called TV Everywhere initiative as another means to control distribution. TV Everywhere calls for cable and satellite companies to offer subscribers Web access the same content they can watch on their TVs--just as long as they keep paying that subscription fee.

In a statement last summer about TV Everywhere, Comcast said that it intends to roll out the service in a "manner that is consumer-friendly, pro-competitive and non-exclusive."

This is what Netflix would like to see the FCC do nonetheless.

First, Netflix supports a proposed rule known as a "transparency principle" that calls for network operators to disclose "practices that affect the consumers' ability to access content, use devices or services, and run applications," Netflix wrote.

"The Commission and consumer and other watchdog groups can monitor these disclosures," Netflix added, "to ensure that the associated practices do not violate the other open Internet rules."

Netflix wants the FCC to create a group assigned to determine what kind of information network operators must disclose.

Finally, Netflix doesn't want the proposed "managed services" exception to be able to circumvent the FCC's open Internet policies.

In the FCC's Notice of Proposed Rulemaking (NPRM), the group ponders the idea of "managed services." The FCC asks whether some services should be exempt from some or all of the Net neutrality rules. Netflix is very wary of this one.

The company wrote in its comments that a task group "would help assure that the 'managed services' exception does not become so extensive as to in effect create a 'fast lane' for service offerings from network operators and their affiliates while relegating all unaffiliated entities to the 'slow lane' of the open public Internet.

Spotify, the already much-buzzed about European music service, has seen speculation about an impending U.S. launch cranked up to such high levels that it's hard to separate fact from fiction.

On Tuesday, Billboard's Glenn Peoples landed an interview with Spotify CEO Daniel Ek and asked him when the popular service will finally land in the United States. This is what he said: "We're in the final stages of setting up. Yesterday we signed a data center contract, which is huge for us...So, we're gearing up for a U.S. launch. I can't say if it's in one month's time or two month's time, but it's looking pretty good."

Daniel Ek could announce Spotify's U.S. launch date at the South by Southwest Conference in March, but before that happens he still has a lot of negotiating left to do with the major labels.

(Credit: SXSW.com)

Spotify managers have been more specific about a launch date in private conversations with music executives, according to multiple record industry sources. They say Spotify would like to announce a launch date at the South by Southwest conference on March 16, when Ek is scheduled to participate in a keynote interview.

That's six weeks away.

Fantastic, but there's just one thing. While Spotify may have signed a "huge" data-center contract, the London-based company has yet to acquire U.S. music rights from any of the four largest recording companies, according to numerous industry insiders. In addition, Spotify must also come to terms with a large number of music-publishing companies, the sources said.

One music exec quipped that if Spotify, which already missed its original 2009 U.S. launch date, hopes to roll out a site featuring music from all four major labels within two months--as Ek told Billboard--managers there "had better step on it."

Jim Butcher, a Spotify spokesman, said "Obviously, (there is) a huge amount of speculation--most of it false--flying around at the moment regarding our upcoming U.S. launch."

But some of the speculation floating around Spotify hasn't anything to do with the launch. One rumor that was buzzing about the music sector on Wednesday, which Butcher declined to comment on specifically, was that Spotify is for sale and recently discussed a possible acquisition with smartphone maker Research in Motion.

If true, why RIM would even consider acquiring a start-up music service, even one as noteworthy as Spotify, at a time when BlackBerry owners are clamoring for software and user-interface upgrades is anybody's guess. RIM representatives did not respond to interview requests.

That Spotify may be an acquisition target doesn't surprise anyone in the music sector, however. Not since Apple launched iTunes in 2001 have we seen a music start-up generate as much excitement from music fans. Spotify, which has developed peer-to-peer software that enables users to listen almost instantly to their music without any buffering delays, is supposed to be the most potent iTunes challenger that's come along in a while.

According to a story published in The Los Angeles Times on Tuesday, Spotify now has 7 million users from across six European countries, but most come from the United Kingdom and Scandinavia. Spotify has seen the kind of word-of-mouth viral love most companies can only dream of.

"Spotify is so good," Mark Zuckerberg, the Facebook founder, wrote on his Facebook page last August.

For that reason, and because no other U.S. service has managed to launch a significant challenge to Apple's iTunes music service, the record labels are eager to see what Spotify can do on this side of the Atlantic. Music industry sources say that they see little from preventing these deals from eventually happening but they just may not happen as fast as Ek would like.

If and when Spotify launches here, Ek must still prove Spotify's model can generate profits.

The company makes money from the sale of ads and subscriptions, although the word in the music industry is that Spotify has struggled to move users from the free, ad-supported service to the paid offering. The Times reported that about 250,000 people pay between $14 and $16 a month for the subscription service. That comes to about 3.5 percent of 7 million total users.

As for going it alone with an ad-supported model, TechCrunch reported last year that Ek favors offering a service that's free to the public. The labels are enormously skeptical of ad-supported services after seeing a bunch of them fail to make the model work.

For example, SpiralFrog and Ruckus were forced to close their doors last year, and Imeem sold for pennies on the dollar.

Perhaps, Spotify will wow U.S. audiences enough to entice them to pay. Or maybe Ek will follow Tim Westergren, founder of Pandora, and find a way to make the advertising model work for music.

After 10 years, Pandora recently posted its first profitable quarter. For Spotify's sake, it better not take the company as long.

Tree huggers rejoice.

E-readers are a hit, or rather 93 percent of owners surveyed by research company, The NPD Group, say they are "very satisfied" with their device. Only 2 percent of buyers reported being dissatisfied, according to the research firm.

What this means is that technology appears to be improving upon an information-distribution system nearly 4,000 years old. It also means that book publishers better get on the ball.

Most of those surveyed owned either an Amazon Kindle or a Sony Reader, the leaders in the e-reader space, Ross Rubin, NPD's executive director of analysis, told CNET. Owners of e-readers are clamoring for more tech, not less of it, according to the data.

A man reads his Kindle on a New York subway.

(Credit: Greg Sandoval/CNET)

NPD said 60 percent of owners said wireless access was their favorite feature while 23 percent enjoyed the touch screen best. Rubin said that many of those surveyed want to see even more improvements, such as color print and graphics and brighter screens.

I'm sure I'm not the only one who knows some annoying person who will go on--usually inarticulately-- about how paper books are just superior to gadget readers. A woman I know who is highly anti-tech recently told me she preferred a paper book because it's easy on the eyes, is easy to carry and can be read under heavy sun. She said if she loses a book, it's no big financial loss. "It just works for me," she said.

That's fine, but could the experience be improved? I told her that Amazon's Kindle and Sony's Reader, the devices owned by most of the people surveyed, feature E-ink technology in their display screen. Most computer screens are back-lit and not only is that tough to look at for long periods but it's also hard to see the screen in bright light.

What E-ink does is manipulate tiny cells full what is essentially ink and paper, so it's as easy on the eyes as reading a book and you seeing the words is a cinch while reading at the beach. Check that one off.

As for size, I carry eight books in my iPhone, which is equipped with Amazon's Kindle-reader software. A Kindle device can carry more than 200 books and weighs 10 ounces, or about the same as one paperback.

Apple's iPad, which was announced last week, is supposed to be a Kindle-killer. It comes with a large--albeit back-lit screen-- but the device also connects to the Web, plays movies, music and games. Although most e-reader owners surveyed aren't using their devices for much else but reading, according to Rubin.

"Consumers are focusing on the book reading aspects," Rubin said. "They aren't using them for surfing the Web or playing back music."

Some of the same technological forces that have consumed large portions of the music sector appear to be eating away at the film industry.

Sony Pictures Entertainment, one of the six biggest Hollywood film studios, told employees Monday that in March the company will lay off 450 workers, the equivalent of 6.5 percent of its global workforce, according to a story in The Los Angeles Times.

"Our industry is affected by two things: It's affected by the economy, of course, and it's affected by technology," Amy Pascal, the studio's co-chairman, said in a video message to employees. "Over the last two years, it's changed people's DVD-buying habits, which has had a huge effect on our company and the industry at large."

(Credit: Greg Sandoval/CNET)

Sony Pictures, which has produced such recent films as "2012," "This is it," and "District 9," saw an earlier round of layoffs less than a year ago. In March 2009, the studio cut 250 jobs.

Pascal's reference to changes in DVD-buying habits is easy to trace. In a down economy, people have sought to cut costs and one of the ways they do it is by logging on at illegal download or video-streaming sites. Video codecs and compression technologies have improved and downloading large digital film files has never been easier.

Internet entertainment continues to grow. Netflix subscribers more and more are opting to watch videos via the company's Web-streaming service instead of waiting for physical discs to be delivered. Apple's iTunes rents and sells films to millions of iTunes users. Hulu, YouTube, and Sony's own Crackle.com offer ad-supported video films and TV shows to consumers free of charge.

Part of the problem is that movie theaters and TV networks have much more competition now. Where once we had to choose among watching four TV channels, visiting the neighborhood movie house, or throwing an album on the turntable, we now have cable, video games, user-generated video, social networking, and Pandora.

This all appears to be adding up to one important problem for Hollywood: the decline of the cash cow that once was the home viewing market. According to the Times, DVD and Blu-ray sales have plunged more than 13 percent in the U.S. over the last year.

If DVD revenue continues to fall, expect fewer films and possibly a shakeout among the largest studios. This is being predicted by some top filmmakers and studio power brokers.

Francis Ford Coppola, "The Godfather" director, said at the Beirut Film Festival last year that he expected some of the studios would go out of business.

"The cinema as we know it," Coppola said, "is falling apart."

Update 9:30 a.m. PT To include e-mail exchanges between Qwest employees and Cathi Paradiso.

All Cathi "Cat" Paradiso knew for sure, as she learned that her Web access was being shut off, was that she was losing her struggle to stay calm.

To Paradiso, the customer-service representative from Qwest Communications on the phone with her could have been speaking Slovenian for all the sense it made. Her Internet service was suspended... Hollywood studios accused her of copyright violations... she illegally downloaded 18 films and TV shows..."Zombieland," "Harry Potter," "South Park..."

Cathi Paradiso, a Pueblo, Colo.-based artist, was wrongly accused of pirating movies, and a watchdog group says safeguards need to be put in place to protect against mistakes.

(Credit: Brandy Meggison)

South Park? What would a 53-year-old grandmother want with "South Park" she thought to herself? But this much about what the Qwest rep said sank in: if Paradiso was accused of copyright infringement once more, her Internet service provider would have no choice but to terminate her account. Paradiso said she was also told that she would have a hard time acquiring new service as the other ISPs in the area would know her name and what she did.

"Take me off your hit list," Paradiso wrote in a January 15 e-mail plea to some of the studios who had accused her. "I have never downloaded a movie. Period... You'll need to admit you made a mistake and move on to the correct perpetrator... I am saying this once more: My computer is not a toy. My livelihood depends on my ISP's reliability. Look for the perpetrator and leave my service alone."

Paradiso, a technical recruiter who works out of her home near Pueblo, Colo., would eventually be cleared. Last week, Qwest had a technician investigate--after CNET began making inquiries--and he discovered that her network had been compromised, according to Monica Martinez, a Qwest spokeswoman. So Paradiso is off the hook, but she wants to know what would have happened had she not gone to the media. There was no independent third party to hear her complaint. There was no one to advocate for her.

If ISPs are to become copyright cops, a role that companies such as Comcast, Verizon, Cox, and others appear to be warming up to at the request of the entertainment sector, then what this case suggests is that there's a need for better safeguards to prevent people from being wrongly accused and cut off from the Web.

"This goes to show that there's a problem with due process in these kinds of situations," said Fred von Lohmann, senior staff attorney for the Electronic Frontier Foundation, which advocates for Internet users and technology companies. "If you're going to kick somebody off the Internet, there's a lot of procedures that need to be put in place to protect the innocent. It doesn't look like those were in place here."

An attorney who works closely with one of the studios involved and asked to remain anonymous, said these issues are being addressed. Entertainment companies and ISPs agree that there should be some kind of review process and people accused of copyright violations must also be properly informed before any service disruption takes place. One possible way is to redirect an accused customer's computer screen to a warning notice or to send warnings via certified mail.

For ISPs, protecting customers from being wrongly accused of piracy is just one of the hurdles confronting them. They have been thrust into the middle of a digital tug-of-war between people who illegally download video games, music, and films and the creators of those materials.

Entertainment companies see bandwidth providers as natural gatekeepers that can easily set up road blocks against piracy. Both the film and music industries want ISPs to adopt some version of what they call a "graduated response" program. This calls for a series of warnings to be issued to people accused of infringing intellectual property. If ignored, the warnings would eventually be followed by some kind of service interruption--suspension or termination.

The idea of booting paying customers makes some ISPs very squeamish. AT&T said last year that it would never terminate service unless it received a court order. That hasn't stopped AT&T and other ISPs from issuing more and more warning letters to customers accused of copyright violations. For example, Verizon has a long history of defying the entertainment industry's attempts to draft it into antipiracy efforts. Nonetheless, Verizon began sending letters on behalf of the film industry in April and started doing it for themajor music labels in November, according to entertainment sources.

Qwest's approach
Some ISPs are more aggressive in helping copyright owners than others. Cox Communications has said it has terminated Internet access of a tiny number of customers accused of multiple copyright violations. Qwest is apparently another ISP that takes a strong stand on protecting intellectual property.

Martinez said that any customer accused of violating copyright is notified by e-mail or letter before Qwest initiates any service interruption. The company works with customers who believe they are wrongly accused and it "routinely results in good resolutions" for all, she said. "We will work with them if there is a security issue or a mistake as much as we can," Martinez said. "What we can do is sometimes limited."

Those "limitations" may be how Paradiso nearly fell through the cracks. Qwest, however, doesn't appear to have acted hastily in Paradiso's situation.

The film industry began flagging her Internet protocol address in October. Before Qwest finally suspended her service, nearly three months had passed and 18 separate claims of copyright infringement had piled up.

Martinez declined to specify exactly what occurred in Paradiso's case, citing possible litigation. Paradiso, who said she never received any e-mails or letters from Qwest notifying her of the problem, has hired Lory Lybeck, the attorney representing Tanya Andersen, a woman wrongly accused by the music industry of illegal file sharing five years ago. Lybeck told CNET he is investigating Paradiso's case.

Do the companies that tracked file sharing back to Paradiso bear any responsibility for the mix-up? Mark Ishikawa, the CEO of BayTSP, an Internet security firm, says the answer is "no." Ishikawa notified Qwest that Paradiso's IP address was being used to download "South Park" and "Transformers: Revenge of the Fallen," both owned by Viacom.

Ishikawa said that BayTSP has systems in place that do multiple checks to ensure that the people fingered for piracy are correctly identified. He added that mistakes are very rare and those wrongly accused represent only a tiny fraction of the people flagged for illegal file sharing. But he says there isn't much anyone can do when a network is unsecured. "That's like leaving your keys in your car," Ishikawa said. "She essentially became the neighborhood's ISP."

Ishikawa raises an important question: is it right to penalize someone for not being tech-savvy enough to properly secure a wireless network?

Paradiso doesn't think so. She says she did her best to lock down her network, but she acknowledges that she's not an expert. She says there are lots of people who might have made the same mistake (Qwest is working to help her prevent any more security breaches). Paradiso, an artist who has sold several paintings, says that if one of the reasons for enlisting ISPs to help fight piracy is that it generates less public animosity than suing fans, then Hollywood loses those benefits when it falsely accuses people.

"I'm the last person that would steal somebody's art," Paradiso said. "I've never downloaded a movie or song in my life. I'm against it. After going through this, I realize this is the kind of thing that could really hurt artists. I'm so paranoid now, I won't buy music or movies online ever."

Below are recent e-mail exchanges between Qwest's employees to Paradiso. More to come.

From: Cathi [mailto:REDACTED]
Sent: Wednesday, January 27, 2010 9:37 PM
To: REDACTED, Howard
Cc: Martinez, Monica
Subject: Hey Howard

Thanks for your help. Sorry I missed your call. When you say the matter is resolved, does that mean I won't be getting any more threatening letters or does it mean my DSL is working again?

Cat Paradiso

[REDACTED]

-----Original Message-----
From: Howard [mailto:REDACTED@qwest.com]
Sent: Thursday, January 28, 2010 7:54 AM
To: 'Cathi'
Cc: Martinez, Monica
Subject: RE: Hey Howard

Well, it should be both! Since you're using only wired (Ethernet) connections for your computers the wireless light on your DSL modem should be out. Since this was the source of your problem...no more threatening letters. I like to call this a "win - win" ;-)

Howard REDACTED

-----Original Message-----
From: REDACTED@qwest.net [mailto:REDACTED@qwest.net]
Sent: Wednesday, January 13, 2010 10:47 AM
To: REDACTED@msn.com; Cathi Paradiso
Subject: [REDACTED] DMCA Complaints - Update

Qwest: Hello,

In response to your email: (Editor's note: Qwest included the next paragraph that was sent to them by Paradiso): "This is NOT my IP address or port.. I NEVER NEVER NEVER download movies. The IP address below is included in a range of IP addresses owned by a school district in Colorado Springs. It appears they are the culprit and not me. I would like this matter resolved."

(Qwest's response) Your user ID is dynamic, meaning the IP can change frequently. If there is a connection with the school that means you have an unprotected wireless system that is being used to download these items. It is still your responsibility to protect and secure your computer. This is just the first time that your user ID has been placed into the Qwest Consumer Protection Program, but our policy does allow for permanent deactivation at some point. Please seek outside help if necessary. The entire list of 18 items was also resent to your email address today.

Here is a list of IP that user (REDACTED) has been logged in for the last 30 days: (REDACTED).

As Netflix continues to build one of the most formidable online movie services, investors continue to send the company's stock price soaring.

For that reason, Amazon.com may be considering an acquisition of the Web's No. 1 movie rental service, according to a report Thursday in The Wall Street Journal.

Reed Hastings, Netflix CEO

(Credit: Greg Sandoval/CNET)

Rumors that Netflix is an acquisition target are nothing new and the Journal story is definitely long on speculation. But the author makes a good case for why an acquisition makes sense. For the past couple years, Netflix has been one of the tech sector's most compelling growth stories. This week, the company reported another blowout quarter, as profits rose 36 percent to $30.9 million and revenue jumped 24 percent to $445 million. Netflix also boosted the number of subscribers by 1 million, giving the company a total of 12 million.

Since reporting those numbers on Wednesday, Netflix's share price has jumped more than 20 percent. The stock closed trading Friday at $62.25, up from $50.97 on Wednesday.

Netflix has posted a run of good quarterly reports, but what really puts a shine on the Los Gatos, Calif.-based company is that there isn't another service offering consumers a better price or viewing experience. Most of Netflix's Internet competitors can still only deliver films to computers. None of the them have made the leap from the PC to consumers' TV sets as successfully as Netflix--not Apple, Hulu or YouTube.

Netflix staked out the territory from the Internet to the living-room TV by cutting deals to offer its service on almost every major set-top box and several high-profile TV sets, including Microsoft's X-box, Sony Bravia, the Roku Box, and most recently on Nitendo's Wii.

In perhaps the Netflix's most masterful move, the company continues to add to its online film library though Hollywood has long been wary of distributing through the Web rental store. By giving Netflix access to films, the studios run the risk of alienating better-paying customers, such as the cable operators.

Earlier this month, Netflix CEO Reed Hastings stirred controversy by announcing the company wouldn't rent newly released DVDs from Warner Bros. for 28 days. This is intended to help the studio boost disc sales.

In exchange, the studio agreed to give Netflix access to more catalog titles. Pundits and many subscribers howled, arguing that Hastings sold out his customers. What they don't understand, however, is that to continue growing the streaming-movie library, Netflix needs to find something to trade with. If he just pays outright for expensive Internet rights to movies, subscription fees will likely go up. Right now, Netflix provides most subscribers the ability to rent physical discs and stream movies for the same $9.

Netflix's potential problems with its Hollywood suppliers is a potential threat to the company's growth. If Amazon is sizing up for Netflix, one question to ask is whether the service can continue to acquire film rights for the streaming service once bigger players, such as the cable companies, start to wade deeper into Web streaming? Or will the cable companies outbid Netflix for content? And will Hastings stick around after an acquisition?

Who at Amazon or anyone else for that matter has proven to have the kind of deft touch Hastings has in dealing with the studios?

The thing with Netflix is that it has built a large community of supporters by mailing movies to consumers for a low monthly price. What happens to the company when movie viewing goes online and Netflix's massive and expensive DVD-distribution system is no longer a barrier to entry for would-be competitors?

The real question Amazon must ask is whether Netflix can continue to obtain Internet rights while offering all-you-can-eat viewing for a low price? Or will the cable companies muscle their way in and just move their subscription models to the Web?