Netflix: Snail Mail Wins the Day (NFLX)

Abbi Adest submits: In an era of video downloads, DivX players, and the concomitant Hollywood ire, how is it possible for a company that relies heavily on "snail mail" (the good old post office), to reach a market cap of $1.57 billion? Why can't its customers get their favorite movies by paying the same fee and simply legally downloading them from sites like Movielink , which happens to be owned by a consortium of movie studios including MGM?

The answer, according to yesterday's NY Times, lies in a glitch in the current movie rights distribution structure:

...here's the rub. Movielink has a library of only 1,500 movies, fewer than a good video store. Likewise, Comcast, the cable company making a push into video-on-demand, offers just 800 movies. This may not surprise you if you have ever scrolled through the pay-per-view options and found nothing to watch. [Netflix stocks 60,000 movies]

The problem is that the studios have sold the exclusive digital rights for most movies (which don't apply to physical DVD's) 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 it's Hollywood's refusal to let go of its own arcane business models that allows Netflix "to thrive when the technology to obliterate it already exists". Don't forget, this is the same industry that had a mortal fear of both television in the '50s, and VCRs in the '80s. Today, DVDs, the latest incarnation of these technologies, are actually a huge part of Hollywood's profit margin.

The assumption is that eventually, the pressure from the digital revolution will phase out these types of aggreements and allow the movies to pour through the internet to paying consumers. In the meantime, don't expect those little red envelopes to disappear any time soon.