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With the advent of the Internet, the movie-rental business has become a much more dynamic industry, subject to rapid technological change. With its subscription DVD-rental service, Netflix (NFLX) has done very well in this space since 2003, posting strong growth in revenues and share earnings. The company also allows users to stream content directly to their televisions, although the number of total offerings available here is far less than its DVD rental library. Looking forward, Netflix is moving from a world in which it mainly competes with Blockbuster (BBI) to a far more complicated environment, where it faces rivals such as Apple (AAPL), Amazon.com (AMZN), Time Warner’s (TWX) HBO, and Google’s (GOOG) YouTube. Although DVD rentals will likely remain paramount for the coming years, the delivery of content via the Internet will be far more important over time. The company has forged a number of partnerships over the past couple of years with manufacturers of DVD-players and video-game consoles that allow the buyers of these products to have content from Netflix streamed directly to their televisions. It has also introduced the Netflix Player, a set-top box by Roku that also affords viewers this capability. Streaming should prove the future of Netflix’s business.

Netflix recently announced an agreement with Warner Brothers, a subsidiary of Time Warner. The deal will delay the availability of new Warner movies on Netflix’s web site for almost a month following the DVD release. This will give Warner Bros. a chance to sell more discs to customers who can’t wait a month (nearly 75% of DVD sales are made in the first month of availability). This should result in significantly greater sales of higher-margined DVDs for the studio. In return, Warner will make available to Netflix a greater number of its older films for digital streaming. This will enable Netflix to build its online catalog, which is a priority given the expected importance of online delivery in the coming years. In addition, Netflix will get a discount on Warner Brothers DVDs. This will allow it to purchase a greater quantity, which should alleviate customer wait times for these discs. Similar deals with other studios appear likely to follow. However,

Netflix isn’t the only online streaming player. There exists a large number of Internet television providers, which vary by country and network. Notable examples include Fox on Demand and NBC Direct in the United States and BBC iPlayer and Sky Anytime in the United Kingdom. Perhaps most popular is Hulu (limited to the United States). This web site (Hulu.com) offers streaming videos of television programs and movies from an array of networks and studios. Hulu is a joint venture of General Electric’s (GE) NBC Universal, News Corp’s (NWS) Fox Entertainment Group, and the Walt Disney Company’s (DIS) ABC Inc. The site has become very popular over the past couple of years, offering free-online viewing. This may soon change, however. Hulu’s advertising-based model will likely need to evolve to include subscriptions as part of its business. One plan would allow viewers to watch the several most recent episodes of a given TV show with no charge, but require a subscription of $4.99 a month to view older episodes. This is part of a broader trend of publishers and Internet companies looking to get people to pay for online content that has long been free.

Meanwhile, Google’s YouTube has made its first foray into the movie-rental business. YouTube has recently debuted rentals on a very limited basis, offering five different movies from the Sundance Film Festival. Moreover, a small collection of rental videos from other domestic partners in different industries will be made available in the coming weeks. Presumably, the eventual aim is to encourage movie studios to rent content through its web site. Studios would be able to set their own prices, with rental viewing windows ranging from one to 90 days. YouTube will receive an unspecified commission from each rental.

In sum, we anticipate significant changes to the video-rental business in the coming decade. At present, Netflix occupies an enviable position in the industry, though several rivals may prove to be formidable competitors in the coming years. Our view of the future remains clouded, and it may be several years before a clear picture emerges. The potential rewards for dominating this space can be considerable. Still, the ultimate beneficiary may well prove to be the consumer, who should be afforded greater and more convenient access to video content than ever before, at a fairly reasonable price.