Netflix Modifies Business Model As Online Movies Advance

Today, millions of DVDs in bright red Netflix envelopes flood US mailboxes, but that may change in the near future. Netflix, the nation's largest DVD rental-by-mail service, is now approaching movie studios directly to gain access to digital versions of films.

The move comes amidst a rapidly changing world of digital distribution that is affecting not just movies, but television, music, and traditional print publications. Netflix, along with traditional DVD rental stores such as Blockbuster, faces the reality that consumers are increasingly going online for entertainment.

Netflix isn't waiting to become obsolete; instead, the company is aggressively reinventing its brand. Netflix already offers online movies for instant viewing on computers, as well as the ability to download movies to a TV set-top box. More than 40 percent of the company's 11 million subscribers take advantage of instant viewing.

In the past, Netflix worked around digital movie rights through an agreement with a pay-TV network, but now, Netflix needs fast access to new films for streaming. That means Netflix will be negotiating with studios directly. The strategy could be risky, putting Netflix in competition with cable television operators and even some movie studios said to be developing their own digital distribution.

Netflix CEO Reed Hastings hopes to sell the idea with a compelling argument -- that Netflix will "pay studios more" as online viewing replaces DVDs. "We'll become one of the networks' and studios' largest revenue generators," says Hastings.

But will the adjustments by Netflix be enough to capture the changing home viewer market?