High-tech Achiever: Netflix

Another problem for Netflix is its relationship with high-volume renters. These highly vocal customers, who aren't profitable for Netflix, believe the company is intentionally slowing down the pace at which it sends them movies, a practice these users call "throttling." Hastings says these film buffs do get lower priority than low-volume members if Netflix is in short supply of a DVD or if one of the warehouses gets overwhelmed with demand. But he denies any other penalizing of these members. "We're not saying they're bad because they watch a lot of movies," says Hastings. "God bless them, that's fine. But if we run short, it makes more sense to give it to the people [who haven't watched as many]."This group isn't the only challenge Hastings faces. Blockbuster Online, which launched last August, is growing quickly. Although the me-too service isn't yet profitable--and its corporate parent is badly ailing, losing $57 million in the second quarter--it added about the same number of subscribers as Netflix during the second quarter. Blockbuster gives away free in-store rental coupons, has begun using its stores as mini distribution centers, and is rolling out its own recommendation engine. A site redesign is planned for early 2006, and the company is looking into community features that may connect friends and family.

Even though Wal-Mart is out of the picture, Amazon could still enter the market, too. And as the game shifts to video on demand in the coming years, Netflix's competition will change again. The company plans to launch a video-on-demand test service by the end of the year, but Hastings warns it will be "underwhelming" because of limited downloadable movies. The service will help deliver movies to set-top boxes in the living room more easily than current download services like Movielink or CinemaNow, but the cable companies, which already have their own versions of video on demand, will fight to remain kings of the couch. And then there's the Jobs factor: Could Apple work its magic with movie downloads, too?

For now, though, Netflix looks to be in the director's chair. "It's Netflix's market to lose," says Mario Cibelli, portfolio manager at Marathon Partners, which owns Netflix in its fund. "The best companies continue to innovate and listen to their customers and come up with things they'll like. I think that's how Netflix operates."

That's evident one recent Friday on the grounds outside Netflix's Los Gatos, California, headquarters. About 150 or so employees, many in black T-shirts reading What's in your queue?, are waiting to feast on pasta salads, hamburgers, and Indian samosas (potluck, mind you--even the food here is homemade). The cause for celebration: signing up 10% of Netflix's subscribers to the Friends network.

Friends product director Chris Darner stands up to speak. "I'd like to thank . . ." he begins, naming a list of folks who helped his team move from "sneak peek" (Netflix's customer-friendly phrase for "beta") to "prime time." "So this is sort of like Oscar night?" Hastings says from the back. Everyone laughs, but Darner has one more name to thank. "Last but not least, I want to thank the customers. We did this for them, and I wish all 300,000 of them could be here. We certainly have enough food!" With more than 50,000 DVDs and a buffet of customer-focused innovations, Netflix's customers should continue to stay well-fed indeed.

See the full 2005 Customers First Awards.