Netflix has deployed the largest "legacy adapter layer" business process that I can recall. This is a great example of how to start a business where the end-state model is dependent on things outside of its scope of control (or even influence).
When Netflix started in 1997, Most of its potential customers were using dial-up, and there was no way Hollywood would have allowed digital distribution anyway. So, they rode on top of some existing infrastructure: (1) the US mail system, and (2) existing laws that allowed physical media movie rentals.
My wife and I have been Netflix subscribers for years. However, most of our viewing is now done via the little Roku box, and physical disk delivery is of a much secondary importance (their streaming media is better than DVD but not as good as Blu-Ray).
Netflix is in this fantastic position of having a large customer base that can shift from its relatively high marginal cost* business model to its new, much lower marginal cost* * one.
* postage and manual labor.
* * I presume the movie studios are getting paid per-view?
About marginal cost, it's not obvious to me that postage both ways plus sorting is more expensive than bandwidth plus royalties. Given that postage gets more expensive and bandwidth gets cheaper, streaming should be cheaper at some point if it isn't already.
I think I've read that Netflix has an agreement with the studios where they pay per shipment rather than per DVD. So, having 1000 of a new DVD on hand costs little more than having only a few. The studios like it because it aligns Netflix's cost structure with their own (basically fixed), so agency costs are minimized.
I'm sure that Netflix pays less for bandwidth than Amazon sells theirs for. So, we can presume streaming a two gig movie (probably much less in reality) would cost much less than 30 cents -- postage one way for a DVD. Add in a few more cents for data center, etc. and they're still better off relative to postage.
But:
number of customers that want to sit on couch in front of TV and watch rented movie with family
>
number of people who want to watch download on computer * (1 - fraction of computer capable watchers do this for free)
Tiny sales compared to DVD players, almost all download uses require you to do something 'techy'
Netflix market is families and film fans - not people that know what HDMI stands for.
Netflix will definitely be online only one day, probably before Amazon goes the same way, but not for a few years.
When Netflix started in 1997, Most of its potential customers were using dial-up, and there was no way Hollywood would have allowed digital distribution anyway. So, they rode on top of some existing infrastructure: (1) the US mail system, and (2) existing laws that allowed physical media movie rentals.
My wife and I have been Netflix subscribers for years. However, most of our viewing is now done via the little Roku box, and physical disk delivery is of a much secondary importance (their streaming media is better than DVD but not as good as Blu-Ray).
Netflix is in this fantastic position of having a large customer base that can shift from its relatively high marginal cost* business model to its new, much lower marginal cost* * one.
* postage and manual labor.
* * I presume the movie studios are getting paid per-view?