DAILY PRESS, CA 2002
BUSINESS LINE
POPULARITY OF DVD, INTERNET HAS FUELED NETFLIX'S RISE 06/02/02
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POPULARITY OF DVD, INTERNET HAS FUELED NETFLIX'S RISE 06/02/02
It’s happened to you, me and almost everybody. And it leaves a bad taste in your mouth. Yes, it’s annoying to shell out late fees time and again for videos that you rented and time forgot. Now, if only the time factor could somehow be thrown out of the equation, life would certainly be simpler ... and less embarrassing. And that’s exactly the escape route Netflix opens up for you — letting you forget without suffering the consequences. With revenues of nearly $76 million last year, up from $35.8 million the year before and $5 million the year before that, it’s quite evident that there is a market for people who like the idea that is Netflix. Netflix’s 50,000-square-foot operations center in San Jose handles about 80,000 DVD shipments a day. Early this year, Netflix impudently burst into the top 10 of the busiest on-line shopping sites, right on the heels of Web superperformers like eBay and Amazon.com. In these post-dotcom bust/post-recession times, success of a hitherto untried on-line business model is no everyday occurence. Netflix CEO Reed Hastings’ gamble seems to have payed off. When he started the service in April 1998, only early technology adopters were buying expensive DVD players and movie studios offered very few movies on DVD. It was not an easy decision for Hastings to plunge into those untested waters. Netflix, though, started with the traditional rental model, with customers paying for a limited period and subject to late fees. In September 1999, Netflix switched to the subscription plan — which proved to be the right strategic decision. Definitively proven by its 600,000 subscribers. The company’s standard subscription plan allows subscribers to have three titles out at the same time with no due dates, late fees or shipping charges — for $20 a month. Subscribers select titles at www.netflix.com — aided by its proprietary CineMatch technology — and receive them on DVD by first-class mail. Returning is made easy by using the company’s prepaid mailers. Once a title has been returned, Netflix mails the next available title in a subscriber’s queue. CineMatch technology, which powers the Personal Movie Finder service, contains a proprietary set of algorithms to compare a user’s movie choices with information contained in their database. This collaborative filtering technology allows customized recommendations — unique to each user. There are over 12,000 titles and more than 2.7 million total DVDs at its center in San Jose. On peak days, it has handled 120,000 DVD shipments and returns. The rise of the DVD has been a vital catalyst in the success of the on-line DVD rental market. DVD players have become the hottest-selling electronics product in the country. DVD players, which started to appear on the market in 1997, are now in one of every four households. Sales of DVD players are outpacing sales of VHS players, and the research firm IDC predicts 70 percent of homes will have a DVD player by the end of 2005. As the sales figures for DVD players continues to explode, Netflix has made marketing arrangements with Best Buy; and Netflix’s advertising inserts are packed into JVC, Panasonic, and Philips DVD player cartons. With the writing on the wall, stores like Blockbuster are reducing shelf space for VHS tapes by 25 percent to stack more DVD movies and players. Movie studios like MGM and Columbia are increasingly releasing older movies in DVD format only. Netflix went public on May 22, with a first day opening price of $16.19 (IPO price was $15). And its initial public offering has fared well. As a result of its IPO, Netflix can now boast of a $750 million market cap. At close Friday, its stock stood at $15.07. The largest chunk of Netflix subscribers — more than 50,000 — reside in the Bay Area. Currently, there are eight fulfillment centers across the country — too few for effective nationwide service. To keep Netflix’s “convenience” brand promise alive — DVDs have to reach the East Coast in the same short time they do West Coast customers. The recent cash generated by the IPO should enable the opening of more centers that will network the entire nation. While “no late fees” might be the unique selling proposition — there will be major customer dissonance if movies take too long to reach. Netflix states that it can set up regional centers for $60,000 each — this figure includes only the initial cost of leasing a facility and getting it up and running, though. One hopes Netflix won’t build $25 million centers like the ones that now-bankrupt on-line grocer Webvan constructed ... but it will have to spend a chunk of change just the same. In its S-1 filing, it says: “Rapid growth of the Internet is fundamentally changing the way consumers communicate, gather information and purchase products and services without regard to geographical constraints. According to International Data Corporation, there were 186 million Internet users worldwide at the end of 1999, and this number is forecast to grow to 503 million by the end of 2003.” No doubt. Netflix will be there.
WEB GAMING WILL END UP POPULARIZING BROADBAND 05/26/02
Gaming has fast become Hollywood’s favorite vehicle for promotion. A bit of number-crunching reveals why. Last year, U.S. consumers spent $9.4 billion on game software and game-dedicated hardware, such as the Sony PlayStation 2, Nintendo GameCube and Microsoft Xbox consoles. That exceeds the $8.3 billion Americans spent at the movie box office. The Electronic Entertainment Expo or E3, which concluded on Friday at the Los Angeles Convention Center in Los Angeles, revealed a list of franchise properties based on blockbusters: The Sum of All Fears, Blade II, Scooby-Doo, The Powerpuff Girls, Harry Potter, Spider-Man, Attack of the Clones and The Lord of the Rings. Hollywood wants its popular, revenue-earning productions to wear the gaming cloak and waltz all the way to the end of the rainbow. Game software spending alone grew from $3 billion in 1996 to $6.4 billion last year, and may well surge over $15 billion annually by 2007. Tinseltown cannot hope to ever match that kind of growth. Thus, it has to piggyback its way to greater earnings. A cornucopia of second-generation titles from GameCube, PlayStation and Xbox had gamers enthralled at the E3. Red-hot console titles were Mario Sunshine (Nintendo), Ratchet & Clank (Sony), Madden NFL 2003 (Electronic Arts), Resident Evil 4 (Capcom), Dead to Rights (Namco), Red Faction 2 (THQ), Star Wars Bounty Hunter (LucasArts), Dragon’s Lair 3D (Encore), Project Ego (Lionhead). The big three console manufacturers — Microsoft, Sony and Nintendo — have slashed prices. Microsoft's Xbox and Sony’s PlayStation 2 are now available for $199, $100 off their original prices. Nintendo’s GameCube is down $50 to $149. For those who like their equipment fancy, it’s worth checking out the TricK Controller game pad, which is compatible with the Xbox platform. Beyond ordinary controllers, it’s transparent green and totally mean: multiple button actions are a snap with its combo-shift programming in real time — you can record all your hard-to-manage complicated moves and execute them at the touch of a button. It retails for $29.99 at RadioShack, but Best Buy lives up to its name and offers the same for $24.99. On Monday, Microsoft outlined plans to launch an Internet gaming service for its Xbox game console. Xbox owners (only those who have a high-speed Internet connection) will be able to play each other through an on-line service called “Xbox Live.” Microsoft planned to incorporate on-line gaming since the inception of the Xbox by installing a hard drive and Ethernet port in every console. In addition, Xbox Live makes full use of voice communication, enabling players to talk to other players through the Xbox Communicator headset. And that feature will greatly intensify the real time, on-line experience. At launch, sometime this fall, consumers can purchase a starter kit for $49.95. At least three games are scheduled to debut with the launch: a football game, called NFL Fever 2003; the sequel to a popular shooter game called Unreal Championship; and a robot warfare game called Mech Assault. There are 50 games in development for release by the end of next year. Internet connectivity for video game consoles such as the Xbox or PlayStation 2 has been at the center of industry discussion and hype, but so far the only game console to let users play on-line has been the since-discontinued Sega Dreamcast. Once-prolific hardware giant Sega has retreated to the safety of third-party software publishing, where it should continue enjoying its recent tremendous success — porting hit properties onto all platforms. Microsoft has earmarked $2 billion to rev up its Xbox infrastructure. Microsoft Marketing Director John O’Rourke said a large part of the investment will be to build Xbox Live, which he described as the “world's first broadband Xbox-dedicated gaming system.” Being a newcomer, Xbox sales lag way behind Sony’s Playstation 2, which has nearly 30 million units in use worldwide, compared to Microsoft’s 3.5 million units sold. All told, the biggest hurdle facing Microsoft is not its late entry, but the slow consumer adoption of high-speed Internet connections. Only about 10 to 12 percent of U.S. households have access to broadband. High-speed connections are crucial to gaming on the Internet. The Xbox Web site exhorts gamers and would-be gamers to go broadband. Straight from the Xbox’s mouth: “You gotta have high speed, or broadband, Internet service. That's number one. If you don't have it, get it. (You don’t want to be the last on the block with dial-up — that's just embarrassing.)” Come to think of it, on-line gaming will probably be a tempting enough carrot for people to adopt broadband, with Xbox Live leading the way to the promised land.
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