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Turns out, the so-called Netflix box could be even cooler than initially thought.

The tiny black device from Roku was introduced to the world in May as the first box that could stream Netflix's "Watch it Now" option directly to a television.

But the company is saying there could be more where that came from.

(Credit: Roku)

Roku's vice president of consumer products, Tim Twerdahl, said Wednesday that, yes, more content partners are coming, but, no, he's not saying who just yet. That makes the $99 price tag look that much more attractive.

So who will it be? YouTube seems obvious, as they've been partnering with a bunch of hardware makers lately: Panasonic, Sony, Apple, Hewlett-Packard.

Or what about Hulu, as my colleague and CNET's resident home theater expert John P. Falcone suggests?:

The Netflix vids use the VC-1 codec, but the box can handle H.264 as well. Of course, because all of these players--Apple, Microsoft, Netflix, and Sony--are already trying to sell you videos, it's unclear why they'd want to provide a free competitor that's just a click away. So even if a Hulu option is technically feasible, business considerations may keep it relegated to the drawing board. But hey, we can dream, can't we?

Either way, Roku will have to differentiate. Rumors are flying fast that at E3 next month, Sony or Microsoft (or maybe both) will announce support for Netflix's "Watch it Now" feature as well, for the PlayStation 3 or Xbox 360, respectively.

And though far more expensive than $99, both game consoles have large install bases, and are also far more functional beyond just streaming video.

People aren't waiting for Microsoft to announce a deal with Netflix.

Someone has already figured out how to hack the Xbox 360 video game console and enable it to play Netflix streaming movies.

At Lifehacker.com, Adam Pash writes that all anyone needs is an Xbox 360, a Windows Vista PC, a Netflix account, and a free Windows Media Center plug-in called vmcNetflix.

Here is some of what Pash says an Xbox 360 owner can do following the hack: stream Watch Now movies directly to the Media Center player; download Watch Now movies to a "Watch Later" gallery; search for movies by keyword; browse DVDs; Watch Now movies by genre; and add, remove, and move movies in your queue.

Of course, this is more functionality than the $100 Netflix Box offers. Roku has received favorable reviews for streaming movies from the Web to television sets without long delays and at a reasonable price.

Soon, a hack may be unnecessary. Rumors are that Microsoft will announce this year that it has cut a deal to deliver Netlix's Watch Now service on the Xbox.

news analysis Netflix, don't take half steps with your digital-delivery service. Give your users what they want, and what they want is the latest hit movies.

CEO Reed Hastings and his management team have hit a home run--or at least a solid run-scoring triple--by partnering with Roku, the company behind the Netflix Player. The $100 device enables customers to stream movies from the Web to their TVs. Most reviewers have applauded the device for its low cost, easy setup, and viewing quality (a good Internet connection means no stalling or long download delays).

But a month after the Netflix Player went on sale, I haven't read a single review that hasn't deducted points for the lack of films available with Netflix's streaming service. It's the biggest complaint from device owners I've spoken with.

The Netflix Player by Roku

(Credit: CNET Networks)

Mr. Hastings, you've done a good job by setting up your "Watch Now" streaming service with 10,000 catalog titles, but you need to go further. Let customers purchase new releases on a per-video basis if they want. Some might resent being asked to pay in addition to their monthly subscriber fees, but if you explain that Hollywood charges more for new releases, your customers will understand. Give us choice.

"Why would anyone feel alienated by this?" said Michael Pachter, a financial analyst with Wedbush Morgan Securities. "You can't get a better deal elsewhere. Netflix would be essentially giving you Apple TV without charging you for the Apple box."

This is an important comparison because Apple has already begun offering new releases for rent via iTunes. Trust me on this Netflix, you don't want to fall behind to Apple. And let me be clear. Hollywood hasn't barred Netflix from obtaining the latest releases. Netflix managers have acknowledged that they could have received the same deal as Apple. They chose not to, and I think that's a mistake.

Pachter disagrees with me. While he said he wouldn't be surprised to see Netflix experiment with streaming new releases, he likes the current hybrid approach: offering catalog titles for Internet streaming and mailing new releases in the form of physical DVDs.

"What Netflix is saying to customers is 'We're going to give you new movies on a disc and we're going to give you as much catalog and streaming as we can possibly deliver to you for (the same monthly subscription),'" Pachtel said. "That's a smart business model."

Netflix executives said during the company's investor day last month that most of the movies it rents are catalog titles.

But by ignoring the digital distribution of new releases, the company is leaving the door open to competitors.

In January, Apple cut a deal with the movie industry that allows iTunes to rent new releases 30 days after the flicks become available for sale on DVD. It would be nice to get them sooner, sure, but Apple is providing an option that Netflix is not.

It's important to note that Netflix's traditional mail-order business isn't affected by the same 30-day restriction. This is one of Netflix's biggest advantages over anyone delivering movies over the Web or on VOD.

Netflix buys physical DVDs as soon as they go on sale and, by law, Hollywood is powerless to dictate what the company does with its property. This means that by the time iTunes or VOD services are allowed to start renting movies, Netflix has been shipping those little red packages for a full month.

But discs are not the future. And I'm not the only one who thinks this way. Hastings predicted last month that DVD rentals will peak within the next 5 to 10 years, yet Netflix is leaving the Internet delivery of new releases to Apple and other competitors.

Here's why they may have gone this way.

Netflix doesn't serve a la carte
Subscription fees have helped make Netflix the No. 1 online video rental service. Founded in 1997, the company started out charging customers on a per-video basis and switched to subscriptions two years later. Not long after that, Netflix began offering unlimited rentals for a flat fee.

Since then, Netflix has steadily grown and snatched market share. In the quarter ended March 31, Netflix saw net profits jump 36 percent to $13.4 million, or 21 cents a share. The number of subscribers grew 21 percent to 8.24 million.

So why go back to charging users for each video they rent? They obviously are attracted to the all-you-can-eat model.

Netflix customers will gradually move to the Web
The Web hasn't taken over yet. There's plenty of time to boost the quality of Netflix's streaming library and consumers may not fully embrace Internet video until it's as good as watching a DVD.

While Roku's Netflix device offers easy access to movies and does away with the long download delays, it still doesn't offer the best-looking picture.

But improvements in download and streaming technology are coming rapidly. The Roku device is perhaps the best example of this. Adoption of Internet movie rentals could occur faster than anyone realizes.

And remember that advantage Netflix enjoys by being able to mail DVDs a month before Internet or VOD distributors? It's possible that might vanish soon.

The studios have a distribution structure whereby they cut deals to provide exclusive access to films for specific periods known as "windows." Theatrical releases typically come first, followed by home-video release, then pay-per-view channels, then regular cable, etc. This is why Apple and VOD services must wait 30 days before distributing rentals.

Take a look at this excellent story from the Los Angeles Times. Executives at some of the major studios, who used to believe that the Web and VOD services could hurt DVD sales, are experimenting with limiting the time an outlet has exclusive access to films. Others studios are testing whether it pays to make Web and VOD rentals available when DVDs go on sale.

Early indications are that Web sales don't eat into DVD sales.

This means Hollywood could conceivably break down the walls and give VOD and Web-movie distributors access to films as soon as Netflix gets them.

And look at the growing competition that's swarming into the sector. Apple, Amazon, Microsoft's Xbox, cable companies, and Hulu are all out to use digital distribution to offer consumers instant gratification.

Reader, I don't know about you but I'll choose instant gratification over waiting for the postman every time. I'm a film buff. Why should I be forced to decide what I want to watch in advance? Let me push a button and choose whatever movie I want.

I'd be willing to pay a premium for that.

So come on, Netflix. Spend big, move fast. Get your customers thinking of you when it comes to instant gratification. Gather expertise on streaming technology and pricing before your competitors.

The Internet and movie rentals are supposed to be your turf.

Michael Pachter, an analyst with Wedbush Morgan Securities, said Tuesday that he likes Netflix and has no wish to see the company kill its nascent streaming movie service.

I wrote Monday that Pachter was being too short sighted by questioning the size of Netflix's investment in a streaming-movie service. After reading the research report Pachter issued last week, I believe his arguments deserve closer examination.

Quotes from Pachter appeared in a story last week in Portfolio.com (via Wired.com) about how the costs of establishing a digital rental service are making some Netflix investors nervous. Pachter speculated in the story that if Netflix was spending $70 million on a service that may have only 100,000 users it would cost the company $700 per customer. He called such spending "crazy" and said the strategy was attractive only when large numbers of users were involved.

He said much the same thing in his report: "If there are fewer than 1 million regular users," Pachter wrote, "the cost per user may be significantly higher, and we would be far more likely to criticize the investment."

His doesn't know exactly how many subscribers use Netflix's streaming service because the company hasn't disclosed those numbers and Pachter has called on managers to offer details.

In the report, Pachter makes clear that while he is skeptical about a download-to-rent business model (ala Apple) he thinks Netflix's idea of wedding a streaming-video service to its traditional DVD-by-mail business "borders on brilliant." He called Netflix's management "smart, resourceful, and at times visionary." He added, however, that there should be limits to how much the company spends on building a digital distribution.

"In our view, spending $2-5 per month per user (of the streaming service) may be justified to build loyalty...this implies usage of between 1 (million) to 3 million users."

I think it's a mistake to fence in Netflix CEO Reed Hastings here. The company is facing a dramatic technological shift that could render its traditional mail-order business obsolete. I don't think you can read too much into Reed's prediction last week that Netflix's DVD business will peak in five years.

The stakes are too high and too many signs indicate that movie-rentals are going digital for Netflix to skimp The latest example of the transition came Tuesday when Roku, the company that makes the Netflix Player, a device that enables Netflix customers to watch streaming video on their TV sets, said it sold out of the boxes only two weeks after they went on sale.

Someone soon is going to come up with a service that provides reasonably priced movies in HD quality and deliver them straight to consumers' TV sets. This is a more convenient way to rent movies and Netflix knows the power of convenience.

After all, didn't the company grow to prominence in part by helping people avoid the drive to the local video store?

There's more proof that the Netflix Player is a hit.

Start-up Roku, the company behind the device that enables Netflix subscribers to watch movies streamed from the Internet to their TVs, has run out of inventory two weeks after launching.

"Due to the tremendous coverage and initial success of this product we're now in a two-week backorder situation," said Tim Twerdahl, Roku's vice president of consumer products. "We have boats coming in weekly from China with additional products, and we're doing everything we can to get them out."

The shortage comes after the device has received favorable reviews from The New York Times, CNET Reviews, Wired.com, and Gizmodo.

Consumer demand for movies distributed via the Web has been lukewarm up to now. Download services have been plagued by expensive set-top boxes, poor quality video or limited movie selection.

The box, which is is sold directly from Roku's site, has received accolades for being inexpensive ($99), easy to install, and for doing away with long download times.

The selection offered is mainly older titles, but it still offers more films than most competitors.

There have been some complaints from consumers of the video stalling. Twerdahl said this is often due to people watching on "marginal Internet connections." He said that Roku's customer service wants to hear about these issues.

Twerdahl would not reveal sales numbers. He said that the company was not overly conservative in its sales projections. On the contrary, he said, "We were very aggressive. Sales have outstripped our expectations."

He cautioned that customers who wait until the next shipment arrives before ordering may miss out. He said the number of orders are already gobbling up those boxes.

A correction was made to this story. See details below.

Here's hoping that Netflix managers have the confidence to carry on with a plan that isn't just necessary for growth, but is essential to the company's survival.

Netflix CEO Reed Hastings is being second guessed by Michael Pachter, an analyst with Wedbush Morgan Securities. According to a story in Portfolio (via Wired.com), Pachter "would prefer that Netflix stick to selling movie-rental subscriptions."

Like many on Wall Street, Pachter can't see past the next quarter. He crunched the numbers and argues that Netflix is spending too much on building a digital-delivery service that enables users to download movies.

Netflix may drop as much as $70 million this year on the digital service. That equals to about 70 cents per share in 2008 profits. The company had to pay Hollywood studios $40 million last year for the rights to offer 10,000 films online. Pachter, who wants Netflix to reveal more details about the online service, said that if Netflix paid $70 million to service 100,000 customers, the company would be paying $700 for each.

"I would say they're crazy; it's not worth it," Portfolio quoted Pachter as saying. He added that he only likes the deal if most of Netflix's customers switch from receiving DVDs through the mail and start getting their flicks via the Web.

But that's not going to happen overnight. What Pachter doesn't seem to get is that the online distribution of movies is coming whether investors like it or not. Hastings said last week that he expects his DVD revenue to peak within five years. Perhaps the best proof that the move-rental business is on the threshold of dramatic change is the set-top box introduced two weeks ago by none other than Netflix.

Pachter should try the Netflix Player by Roku. The $99 device enables Netflix users to watch downloadable movies on their TV sets. Most Netflix subscriptions allow for the viewing of any movie at no extra charge. Netflix streams the films, which means no extended download times. The major flaw is that there isn't enough titles to choose from. That will come in time unless Pachter gets his way and Netflix doesn't shell out for a better film library.

Regardless, the service is cheap. It's easy to hook up. The quality of video is comparable to digital TV.

But will anyone be willing to watch their Netflix movies without fussing with red envelopes or waiting for the mailman? Hastings isn't the only who thinks they might. Heavyweights such as Apple and Amazon have jumped into the Web movie-rental business. Others are sure to follow.

"Netflix is betting that during this time, we can establish ourselves as a leader in the space," said Barry McCarthy, Netflix's chief financial officer, last week at the company's investor day.

To be sure, online video is still in its infancy. It will take time before it goes mainstream. But it's hard to find anyone in entertainment or technology circles that doesn't believe consumers will eventually embrace it.

The big question is whether Netflix can afford to wait to build a digital business and possibly watch its competitors cut its grass. I don't think it can. Putting off a digital strategy is a bet against the Web, and that's the opposite tack Netflix took to build itself into a movie-rental powerhouse with 8 million subscribers.

Blockbuster and Movie Gallery are examples of companies that hesitated to embrace the Web. Now, Blockbuster continues to try to prevent Netflix from taking more of its customers. Movie Gallery went bankrupt last year.

SAN FRANCISCO--Netflix is banking on the belief that streaming movies to people's living rooms is the future.

CEO Reed Hastings said during Netflix's investor day here that he expects the business of renting physical DVDs to peak within the next five years. However, Netflix representatives later said they forecast that DVDs will remain strong for at least a decade.

The company also plans to experiment with pricing, including both increases and decreases.

Netflix, however, is already moving beyond DVDs. Its $99 set-top box for streaming movies came out earlier this month, generally to positive reviews.

Hastings said that through streaming, Netflix could grow to 20 million subscribers worldwide. But the company cautioned that it will be some time before its streaming-movie service, which is offered free to consumers, will pay off big.

Some of the hurdles Netflix faces in Web delivery are competition from video-on-demand providers, as well as Internet services such as those from Apple and Amazon.com. The number of rival VOD players will likely grow, according to Netflix executives.

Netflix's streaming-video service will be frequently blocked from getting access to newly released films because the flicks might be locked up in exclusive agreements the studios have with pay channels such as HBO or other outlets.

It's important to note that Apple has cut deals that allows iTunes to rent movies from the top Hollywood studios without worrying about these exclusive deals. But it's early yet, and Netflix hopes that it can establish a foothold in the still-untested streaming-movie sector. To do this, Barry McCarthy, Netflix's chief financial officer, says the company is uniquely positioned to help movie enthusiasts transfer their rental dollars toward Web services.

It's going to be hard for "a free-standing service to compete until it has enough content," McCarthy told the crowd. The sector is in transition, and "Netflix is betting that during this time, we can establish ourselves as a leader in the space," he said.

Another interesting tidbit from Netflix's investor day: Blu-ray Discs are more fragile than standard DVDs, according to Andy Rendich, Netflix's vice president of operations. The next-generation movie discs are still a small part of Netflix's business, Rendich said, but so far, the "break rates" are higher.

He said the company is working with the disc makers to help make improvements.

The straightforward interface of the Roku Netflix Player

(Credit: CNET)

The Netflix box is finally a reality.

The Netflix Player by Roku is the first product that allows subscribers to have movies and TV shows from the service's Instant Viewing feature (aka "Watch Now") to be streamed directly to their TV screen. Previously, Instant Viewing was available only to Windows PC users through the Internet Explorer browser. With the release of the Netflix Player, subscribers need only have a wired or wireless broadband connection to access the entire Instant Viewing catalog through their TV. The full review--with hands-on video--is available at CNET Reviews. But for those who prefer to cut right to the chase, here's the short and sweet version:

March of the Penguins: the only movie in Netflix's top 100 that you can stream

(Credit: CNET Networks)

The "Watch Now" feature on Netflix is a great idea: instant access to thousands of movies and TV shows, available for instant streaming to your browser at the touch of a button. There's just one big problem: despite an advertised library of over 8,000 titles, very few of them seem to be movies or TV shows that I want to watch.

Out of 41 titles currently in my queue, only 4--The King of Marvin Gardens, Das Boot, The Good German, and Pickup of South Street--are available to be streamed. OK, fine--my taste for older movies is probably throwing things off. Surely plenty of newer, more popular movies are available to be streamed, right?

Wrong. ... Read More