What Netflix could teach Hollywood

"The result is a vast movie meritocracy that gives a film a second or third life simply because--get this--it's good.

That's right: every day, almost two of every three movies ever put onto DVD are rented by a Netflix customer. "Americans' tastes are really broad," says Reed Hastings, Netflix's chief executive. So, while the studios spend their energy promoting bland blockbusters aimed at everyone, Netflix has been catering to what people really want--and helping to keep Hollywood profitable in the process.

Today, Netflix sends and receives 700 million little packages a year, a logistical operation that has few peers outside of FedEx, UPS or the post office itself. The company's new head of operations, in fact, used to be the postmaster general.

Netflix has 39 of these warehouses around the country, one in each major metropolitan area. Because first-class mail service takes only a day within a 50-mile radius, most customers get a new movie two days after dropping one in a mailbox.

You can understand the doubts, too. At a time when cable and phone companies are running fat data pipes into homes, Netflix can seem a lot like the Sears catalog of the early 21st century. Surely, home movies will soon look more like iTunes than Netflix. Downloading, not envelope stuffing, is the future--or so people have been saying for years.

The problem is that the studios have sold the exclusive digital rights for most movies (which don't apply to physical DVDs) to a television channel, like HBO. The agreements last for years and, since they bring in millions of dollars, the studios aren't about to stop signing them.

So what's saving Netflix--allowing it to thrive when the technology to obliterate it already exists--is yet another attempt by Hollywood to hold onto a fading business model. Remember, this is the industry that filed lawsuits in the 1970s to prevent people from watching movies at home. "At the heart of any good investment, I tell investors, is a contrarian thesis that they and the company believe very deeply," Hastings said, "and that the rest of the world thinks is crazy." Netflix proved itself, but can it last? The distribution business is in such flux that's hard to place a bet, yet.