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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.

Disney has begun showing full-length movies online, beginning with Finding Nemo, the studio said Tuesday.

It's the first time Disney has done so, and it's notable as such, but don't confuse the move with a full-on YouTubization of the company. Each movie will only be available for a few days after they air on ABC's Saturday-night TV show Wonderful World of Disney. Finding Nemo, for example, can be watched online through June 13, Disney said.

Disney.com now streams Finding Nemo.

(Credit: Disney.com)

It's free, but don't expect a full-immersion cinema experience.

The movies are available through a "watch now" link on the upper-right side of the Disney.com Web site. I had to sit through an ad for Cocoa Pebbles cereal, then an equally high-fructose introductory Disney promotional video. And the window showing the movie is surrounded by an encrustation of further garish ads.

But ads clearly pay some of the bills here, and streaming video takes a lot of bandwidth and server horsepower, so I can't complain too much. (Especially since my own paycheck comes from ad revenue.)

I didn't see much in the way of Snow White-era classics on the schedule, but presumably this is just for openers:

• Monsters Inc. airs on ABC June 14 and is available online June 16-20.

• Haunted Mansion airs on TV June 28 and online June 30-July 4.

• Confessions of a Teenage Drama Queen is on TV July 5 and online July 7-11.

• Princess Diaries 2 is on TV July 12 and online July 14-18.

• Freaky Friday is on TV July 19 and online July 21-25.

• Peter Pan is on TV August 2 and online August 4-8.

Disney also is showing Camp Rock online on June 23.

In the opening scene of The Player, Tim Robbins' character is meeting with writers who are pitching movie ideas they hope the Hollywood producer will agree to make. One idea is pitched to him as, "It's Pretty Woman meets Out of Africa, without stars."

(Credit: Blockbuster)

Applying that Hollywood approach, the latest idea from Blockbuster can best be described as "Netflix meets YouTube, without the convenience." That's basically the pitch Blockbuster Chairman and CEO James Keyes made at his first annual shareholders meeting on Wednesday when he unveiled an in-store kiosk he hopes consumers will use to download movies.

The plan, as outlined by The Hollywood Reporter, is for consumers to bring portable devices into Blockbuster stores and download movies, usually in about two minutes. Blockbuster expects to begin testing the kiosks, which were produced by airline-kiosk maker NCR, in about three weeks. Initially, the system will work only with Archos devices, but Blockbuster expects the kiosk to be an "open system" that is compatible with a range of devices. Keyes declined to predict how many titles will be available on the kiosk, noting that Blockbuster was still in negotiations with the major studios for content.

I wasn't at the meeting, but I have to wonder if reporters giggled at this idea:

Keyes acknowledged that the kiosk pilot is likely coming well ahead of broad consumer demand for such services and should therefore only be seen as one additional distribution channel for the company as it tries to offer entertainment content whenever consumers want in whatever form they want.

"Well ahead of broad consumer demand for such services." Huh?

Talk about an innovative idea. Amazon.com, Microsoft's Xbox Live, and Netflix already deliver movies directly to PCs; TiVo, Vudu, and Apple TV, as well as cable and satellite services offer video on demand to TVs; and electronic copies of movies are being sold alongside DVDs. So what makes Keyes think people want to leave their homes to drive to a store with a laptop-size device to download movies from an ATM?

People don't want to make the trip to the video store. Convenience is why Netflix is kicking Blockbuster's butt. Blockbuster seemed to have a road map for getting back on top with its acquisition of movie download service Movielink in 2007, and its idea for a set-top box for streaming video seemed to show promise (Indeed, my colleague Greg Sandoval reports that Netflix sees video streaming eventually overtaking physical DVD rentals). But this is also the company that has been kicking around the idea of buying electronics retailer Circuit City for $1 billion.

I could see these kiosks appealing to airport travelers, but otherwise this strikes me as an expensive remake of a soda machine.

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.

Trips to the video rental store may be a thing of the past sooner than thought.

Netflix and Blockbuster are already offering DVD rental service by mail. Amazon.com, Microsoft's Xbox Live, and Netflix deliver movies directly to the PC. TiVo, Vudu, and Apple TV--not to mention cable and satellite companies--are doing the same for TV sets. Local independent stores notwithstanding, the only major brick-and-mortar options left for renting discs are Hollywood Video/Movie Gallery, which is close to bankruptcy, and Blockbuster.

(Credit: Blockbuster)

But The Hollywood Reporter says Blockbuster may be giving customers more reasons not to visit its stores. The rental chain is said to be making a set-top box that will allow video content to be streamed directly to a television. The announcement should come sometime later this month, according to THR

A Blockbuster spokeswoman said it is "talking to numerous companies" about ways it can provide "access to media content across multiple channels--from our stores, by mail, through kiosks, through downloading, through portable content-enabled devices--so it's not surprising that there are rumors out there."

The service would take advantage of video-on-demand technology from Movielink (which Blockbuster bought last year) that allows movie downloads from Universal Studios, Paramount, Sony Pictures, MGM, and Warner Bros.

There was no mention of price or how such a service would work in the report. But let's think about this: to compete with Apple TV or Vudu, the device would have to cost around $200, and rentals of movies and TV shows should be around $3 to $4 each, which would be slightly cheaper than rentals of new releases from Blockbuster currently. The big advantage Blockbuster would enjoy over Apple TV, Vudu, and TiVo, it seems, would be selection. Considering its longstanding relationships with the studios, it would likely have the largest library of films and TV shows to choose from. See my colleague John Falcone's excellent comparison of set-top rental boxes.

No matter the details of the how the device would work, this represents a new direction for Blockbuster and the video rental market. Money spent on DVD ownership and rentals has been decreasing steadily for the past four years, according to the Digital Entertainment Group, which tracks sales of disc media. And though there's no indication Blockbuster would eliminate its brick-and-mortar stores, a streaming video service would clearly cannibalize some of that business.

Assuming the report is spot-on, and Blockbuster attempts to make this transition to digital content, it's time to wonder how much longer physical media will be a factor for mainstream movie renters.

Last.fm says streaming leads to bigger music sales.

(Credit: Lastfm.com )

Free streaming music turns people on to new music and encourages them to buy, says social-networking site Last.fm. In the music industry, this will not come as a huge revelation.

Last.fm, acquired by CBS last May, announced Wednesday that since the company launched its on-demand streaming service two months ago, CD and download sales through its partnership with Amazon.com have more than doubled.

So what does that mean?

Music discovery continues to be one of digital music's greatest vulnerabilities. Nobody has come up with a sure or simple way to help people wade through the millions of tracks available on the Web. Last.fm's numbers seem to confirm long-held beliefs of many that enabling people to sample full-length tracks is one way to spur demand.

So Last.fm can take pride in knowing it was early to an offering that some music fans might find useful--albeit one that isn't exclusive to Last.fm.

Indeed, when it comes to allowing users to test drive music before they buy, Last.fm is definitely in the back seat. Imeem offers unlimited plays while London-based Last.fm only allows a user to listen to an individual song three times.

In addition, MySpace.com is preparing to launch its own streaming service that will offer unlimited plays.

Christian Ward, a Last.fm spokesman, said the company is talking to the labels about rolling back some of the restrictions, presumably the three-play rule.

"We wanted to see how this service works first," Ward said. "(The spike in sales) will encourage more discussion about pushing those limits back."

Ward added that his company isn't worried much about competitors. He said what separates Last.fm from the others is its music-discovery engine that can suggest songs based on what a user has listened to in the past.

"Offering free access to music is one thing but finding your way through all that is another," Ward said. "Music discovery is a lot easier on Last.fm."

CBS Radio has agreed to share online streams from all 140 of its stations with AOL's online radio service.

According to an announcement posted to CBS's Web site, the media conglomerate will now power AOL's Web radio. Financial terms were not released.

"CBS Radio will drive advertising sales for AOL's more than 200 award-winning stations," the companies said in the statement, "in addition to its own online streams of more than 150 radio stations and custom channels."

In the spring, CBS plans to release a new online music player that will allow audiences to toggle between stations, song titles, and album information.

Although streaming video on the Web is nothing new, it has yet to make its way onto YouTube. But that could change over the next 10 months, co-founder Steve Chen tells Sarah Meyers in a Pop17.com video report posted Thursday.

Meyers' report, cited on Friday by one of Pop17's sponsors, TechCrunch, highlights her personal interest in the prospects for live video on the Web and includes a brief interview with Chen at at the Terminal 5 club in New York.

Live video has long been on YouTube's wish list, Chen says amid the din, but with Google's resources at hand, it's expected to become a reality sometime in 2008.

(Credit: Sling Media)

It's been hinted at for months, but Sling Media has finally officially confirmed that a BlackBerry version of the company's SlingPlayer software is on deck. The software--which allows live TV to be streamed from any Slingbox model--is designed for broadband-enabled (3G wireless or Wi-Fi) BlackBerry smartphones. The software will cost the same one-time $30 fee as the similar versions already available for Windows Mobile, Palm, and Symbian phones. Sling will be demoing an early version of the software on the Pearl 8120 at CES next week, and the company hopes to have it ready for public release by the end of 2008.