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Netflix Inc. (NFLX) is going to offer what everyone's been talking about for years: the ability to watch movies and/or TV shows over the Internet. No more waiting for the mail to see your latest movie choice. Just look to your computer. With phone service, data, and text information through your computer, this latest service fulfills most of what the buzz about convergence has always been: everything through your computer, all the time.

Starting now, a relatively few of the 6 million Netflix subscribers can have immediate access to movies and TV episodes at no extra charge. Every week NFLX will allow another 250,000 subscribers to watch. In June all subscribers should be on the new program. The evolutionary approach allows Netflix to monitor its computers' capabilities for handling the demand.

Here's how it works: NFLX subscribers will receive a computer applet that takes about a minute to install. Once in your computer, you can watch between 6 and 48 hours of shows per month through an Internet streaming service that is piracy protected. Your viewing hours are determined by your service agreement. If you pay the most popular rate, $17.99 per month, you'll have "credit" for 18 hours per month to view online.

Not all movies and TV shows will be available. The company has spent $40 million to improve its data centers and pay for licensing agreements for about 1000 movies and TV shows that are the initial offerings of the program. In comparison, NFLX's DVD collection has about 70,000 titles. Most subscribers will still be seeing the majority of their picks on DVD's.

Besides the smaller universe of programs, there's also the need to have a high-speed Internet connection and your computer must run on Microsoft's (MSFT) Windows operating system. So don't dial in from your cellphone, TV or video iPods or computers that run on Apple's (AAPL) operating system.

The evolution continues. More of what we want is coming through the computer. This is another important step toward the time when seeing movies or TV over the Internet will be the preferred way of watching those programs. Eventually, we'll never have to leave our computers except to eat and sleep. I'm sure someone's working on those 2 elements now.

Netflix had to come up with something to slow the inroads from its major competitor Blockbuster (BBI). Blockbuster now offers the subscriber movies in the mail as well as the ability to return those movies to a local store and receive another one instantly. There's no waiting time involved with that. Remember, Wal-Mart (WMT) tried to get into the movies-by-mail business and dropped out in 2005. Netflix prevailed in that joust. Other companies, such as CinemaNow, MovieFlix, Movielink, Vongo and Amazon.com's (AMZN) Unbox already offer online movie delivery. Apple has its own library available through its iTunes store. It's also got a new device that will transport media from a computer to a TV.

Netflix signed up about 5 million subscribers in the last 3 years and has increased profits noticeably. In 2003, they were $6.5 million. For 2006, analysts think they'll show $44 million. And the big advantage for Netflix: major studios release their best material on DVD first, not through an Internet service. DVD's will remain the favorite for studios for some time since they produce large and profitable sales. Still some of the major studios are supporting Netflix's new service, names like NBC Universal, Sony Pictures, MGM, 20th Century Fox, Paramount Pictures, Warner Brothers, Lion's Gate and New Line Cinema.

Netflix is pushing the evolution of movies and TV to the Web. The head of Netflix believes Internet delivery will be the preferred way of watching within 3 to 5 years since it will take technology that long to seamlessly offer the service and persuade the studio executives that it's really the way to go. Netflix was founded on the inconvenience of returning movies and paying late fees. Can it differentiate itself well enough from other competitors when everyone can use the Internet to deliver programs? Only if its subscriber base feels there's better value, the same concern NFLX has to face with Blockbuster now. For the moment, 6 million subscribers believe there is.

Disclosure: Author has no position in NFLX.

Source: The Evolution of Video Rentals: Netflix Takes The Next Step