Love MicroFlix? You'd rather loathe it, apparently.

You can't envision Microsoft (NASDAQ:MSFT) and Netflix (NASDAQ:NFLX) combining. You think it's a rotten deal. "At the end of the day, I don't really see Netflix needing to sell to anyone. They're doing a great job as it is," wrote one CAPS All-Star.

Fair point. Netflix, now 10 million subscribers strong, crushed Street estimates in the fourth quarter. Yet CEO Reed Hastings and his team aren't settling. They're asking members whether they would be willing to pay $9.99 more per month for streamed access to HBO's original programming. Take a bow, sirs.

Or don't. Another reader argued that all Netflix has going for it is a mail-order DVD business that Hastings will one day be forced to mothball, and that Microsoft would be, um, silly to pay billions to acquire it.

Really? Netflix is doomed? Teetering toward disaster as downloadable media destroy the market for DVD-by-mail? I'm not buying it.

A brief history of disruption
That's not to suggest that DVD-by-mail isn't a mature business. Certainly it is. Between Blu-ray and Hulu, among other services, we're witnessing wholesale changes in how digital media are packaged and delivered.

Obsolescence is sure to follow at some point; it's a natural byproduct of innovation. But we also tend to romanticize the process. Tales of the Next Big Thing, told by the Silicon Valley cognoscenti, captivate us. We come to believe that terrestrial radio is dead, slain by Sirius XM (NASDAQ:SIRI). Or that CDs are dead, muted by Apple's (NASDAQ:AAPL) iTunes. Or that books are dead, made irrelevant by's (NASDAQ:AMZN) Kindle e-book reader.

All three technologies are still alive, though Westwood One isn't any better off than Sirius XM is right now and CDs are beginning to look like drink coasters (sales dropped 15% last year).

Yet the point remains; we often overstate the impact of new technology. Take Napster. Today's above-board music downloading service began as a controversial file-sharing system in 1999 that practically birthed a black market for ill-gotten tracks. Apple opened the iTunes Music Store four years later, but it took five more years -- till last April -- for it to become the top U.S. music retailer, surpassing Wal-Mart (NYSE:WMT).

The rub? A decade after Napster and half a decade after iTunes, the recording industry still sells CDs. (My guess is Beatles albums, mostly. The Fab Four have yet to strike a deal with iTunes or a competing service.)

Can I at least get a standing 8-count?
So if we're only now seeing the death of CDs, isn't it fair to think that DVDs -- and DVD-by-mail -- have plenty of fight left, like an aging boxer who still packs a wicked right cross? Most of the video download services operating today first arrived in 2006.

Netflix, meanwhile, is charging a premium for Blu-ray rentals and quietly taking ever-bigger bites of the DVD rental market:


DVD Rental Revenue*

Netflix Revenue*

Est. Market Share





























Sources: Capital IQ, The Digital Entertainment Group. 
*Numbers in millions.

Eat that, Blockbuster (NYSE:BBI).

No doubt Netflix's core business is going to suffer a shift at some point. Hastings has said as much. But he also has years to figure out how to make the transition smooth for customers and investors. You're welcome to bet that he won't be able to. Just don't ask me to do the same.

Grab the popcorn. Further Foolishness is about to begin: