Greetings from the year 2010! How did I get here? The explanation is complicated, completely fictional, and possibly illegal. Simply know that I'll be spending the next few days -- in your time -- going over what a few of your favorite companies look like in two years. Today, I'm looking at Netflix (Nasdaq: NFLX ) .
'Flix to the future
A lot has changed at Netflix since 2008, even though many of the company's 9.6 million subscribers still get their Blu-ray discs through the signature red mailing envelopes. The mailers aren't as rectangular as they used to be, so they don't jam up the automated postal sorters anymore.
Yes, high-def DVDs are still around. Bandwidth and storage costs are still too high for companies to seamlessly deliver high-def video. Movie buffs still have a thing for DVD special features, such as director commentaries, bloopers, and production notes.
But don't assume that Netflix isn't a major player in digital delivery. Its most popular monthly subscription plan is no longer the unlimited three-discs-at-a-time monthly rentals. That's so 2008.
Today's hot seller is a flexible plan that gives subscribers a wider variety of media to choose from. Instead of three discs out at any given time, my plan allows me to have one Blu-ray rental, one video game rental, and one digital rental out at any time.
Flexibility is the key. My parents have no interest in splurging on the upcoming PlayStation 4, and they lack set-top boxes to deliver Netflix's digital streams, so they stick with the old-school three-discs-at-a-time model.
Rentals and games
I may be getting ahead of myself. Did I throw you off when I mentioned that Netflix is renting video games or digital flicks here in 2010? Both? Let me backtrack.
Blockbuster (NYSE: BBI ) is no longer Netflix's biggest threat. Its stores have evolved beyond just offering rentals. The Redbox kiosks dried up Blockbuster's stronghold of new releases. Widening its offerings to compete on selection just wasn't feasible.
Blockbuster still rents movies, but that's just a small fraction of its business. The chain has become more like a RadioShack (NYSE: RSH ) , making the most of its small-box footprint as a Jack of all trades that specializes in media entertainment. Some of its stores are even installing private home-theater rooms, so customers can enjoy fresh releases with a store-delivered meal. It's wacky, but I hear that some of the test stores have a waiting list for the weekend time slots.
With Blockbuster out of the way, Netflix's biggest rival is Amazon.com (Nasdaq: AMZN ) . Once Amazon bought significant stakes in both Gamefly and Blockbuster's Total Access in 2009 -- buying majority stakes instead of outright purchases in complicated deals, to avoid the forced sales-tax issue through its namesake stores -- Netflix had no choice but to follow Amazon into video-game rentals.
Netflix limits its stock to titles that will stand the test of time. It will carry the annual installments of sports games only if developers are willing to concede deep price cuts, or liberal returns within the first year.
Netflix also moved beyond simply streaming unlimited indie flicks through PC connectivity. The major studios balked at the value proposition of participating, so Netflix introduced a DRM-shackled solution that will keep only one rental active at a time and cap the number of monthly digital rentals. It was the only way for major studios to see the kind of revenue-sharing return they were getting through other channels.
More than just subs
You're probably still thinking of the Netflix that relied on subscription fees for nearly all of the $1.2 billion in revenue it generated in 2007. Subscriptions are still the major contributor here in 2010, but the company is paddling through a lot more revenue streams these days.
Advertising is a big moneymaker for Netflix. Its mailers have evolved. They feature more ad inserts. If companies have demo discs or lightweight samples that won't affect postal rates, Netflix is willing to negotiate deals to piggyback that marketing onto its mailers.
Perhaps the biggest non-subscriber driver is Netflix's status as one of the bigger publishers in Microsoft's (Nasdaq: MSFT ) ad network. Google (Nasdaq: GOOG ) and Microsoft entered a bidding war to serve up ads on Netflix's pages, though everyone knew that Microsoft would come out ahead, since Reed Hastings is still sitting on the Microsoft board of directors.
Teaming up with Microsoft allows Netflix to make a little bit of money with in-game advertising through Microsoft's Massive platform. But you may be most surprised to learn that Netflix.com is now one of the hottest websites in cyberspace, because it's no longer restricted to current subscribers.
Netflix has become a huge social network for movie buffs, right up there with Flixster, RottenTomatoes, and Amazon's IMDB.com. It made a gutsy call just after the 2008 holiday season to open up its film-recommendation platform to everyone, months after failing to wrestle Flixster away from IAC/InterActiveCorp (Nasdaq: IACI ) . Netflix figured that the move would make its award-winning recommendations engine stronger yet keep non-subscribers within marketing reach. As a result, Netflix has evolved into a truly multifaceted media-content provider.
Jealous at the thought of waiting two whole years to get here? Be patient, Fools. I've divulged only some of the skinny. Getting there will be half the fun.
For 2008 Netflix Foolishness: