Netflix (NFLX) on The Long Tail in movie rentals (quotes from the Citigroup presentation)

Netflix has revolutionized the movie rental business by offering a far larger choice of movies than is available from a regular rental store; as a result, a larger proportion of Netflix' rentals are "back catalog" rentals as opposed to new releases. Netflix CEO Reed Hastings discussed the economics of catalog versus new release movie rentals at his presentation at the Smith Barney Citigroup investors conference.

Here's what he said:

…the way they [movie rental companies] make money is to manage the costs very carefully… the cost profile in rental is different than in sell-through business. In rental, the costs are all around utilization. .. can you find consumers who want to rent your catalogue, which is already depreciated? …the more you can do that the more you improve economics.

…if all we did is rent new releases, then our cost will probably be $18. If all we did is rent catalogues, our costs will probably be $6. Cost for us is around $11. It's in the middle. …it's all about the ratio of catalogued and new releases.

…the easy way to… rent all catalogues is to be out of stock of the new releases. But…  that generates very bad customer satisfaction, high churn.

    And the art that we have learned over the last 5 years was how to shift the curve so we can have both high satisfaction and low cost, high margin. …Blockbuster is at the very beginning of this curve and they have, we believe, a much higher cost than us and much higher churn.

And it's all about the software and merchandizing to be able to shift that curve.

(Quotes are from the CCBN StreetEvents transcript; permission to reproduce explicitly granted in writing.)

Reproduced from The Internet Stock Blog. Full permission granted.