60 minutes rewind the way we americans watched movies has changed dramatically in the last few
years because of the man who thought up and started up a company called netflix
now more and more of us rent movies by mail today netflix rakes in about 50 million dollars a month
and the company was started by a math teacher turned software tycoon
he asks his subscribers to pay a flat monthly fee most people take the 18 package and then order
dvds they want over the internet it's an idea that makes a lot of people say why didn't i think of
that and when you hear how the ceo reed hastings thought it up you really want to shoot yourself
because you've probably been in the same boat he was in what how did it come about and i was hoping
you wouldn't ask that because it's a it's a little embarrassing i ran into vhs and i had misplaced it
and it was six weeks late so it was a 40 late fee and i remember it because i didn't want
to tell my wife because you know i knew what you would say what would she say what would you do oh
an eye roll an eye roll they could kill and i thought oh great now uh now i'm thinking about
lying to my wife about a late fee and the sanctity of my marriage for this thing i mean is this crazy
and it was on the way to the gym and i realized whoa video stores could operate like a gym with
a flat membership fee and it was like i wonder why no one's done that before
the eureka moment yeah most movies were still on vhs nine years ago and vhs tapes were too
bulky and too expensive for the mail then a friend told him about a new technology
called the dvd and he thought hmm so i ran down a tower and bought a bunch and mailed them to myself
and then i weighed he threw him in the i threw them in the mail and wanted to
see where they're going to get destroyed in the mail and i opened them up and they were
fine and i thought oh my god this is going to work this is going to work and so far it has
more than 5 million americans are getting their movies in skinny red envelopes by snail mail
and keeping them as long as they want with no late fees
reed hastings took us to their main warehouse which is in silicon valley and houses a staggering
26 million dvds row after row of big ticket blockbusters this is all spider-man 2.
look at this box office bombs puddle cruiser never heard of that one tv shows rescue me
and thousands of other videos you've never heard of sex and the girl you don't do pornography
right no none zero no there are more than 65 000 different titles if it's ever been put on dvd
chances are it's here there's 40 of these warehouses around the country right so that nearly
every customer gets next day delivery here's how it works the warehouse opens at 4 00 a.m
when the post office delivers the dvds netflix renters sent back after watching them we get in
a hundred thousand returns we open them one by one with necessary it's all by hand now
every day we do this every dvd is examined for scratches before the ones on order are repacked
and shipped out again by late afternoon nationally netflix moves more than 1.5 million dvds a day
making reed hastings one of the post office's top 10 customers for first class mail
oh you're fast look how fast she does that she's stuffing a thousand envelopes an hour and so
she and all the other workers associates they call them break every 90 minutes stretch time
fingers from mandatory exercises push your back to ward off carpal tunnel
this is where it gets cool netflix uses the same sorting machines as the post office these are
running through 17 000 envelopes an hour grouping them by zip code this pre-sorting gets them a
postal discount these are going to palo alto and these are going to los altos and these are
going to san francisco special netflix software keeps the dvds in almost constant circulation
most returns are sent right out again without going back to the shelves
they ship it right out hastings first job was as a math teacher in swaziland for the peace corps
after graduate school he started his first company called pure software you said that you were not a
good ceo and you needed to turn that over to somebody else i definitely struggled as ceo
we became one of the 50 largest software companies in the planet but i definitely struggled and then
it was acquired for a pile of money pile of money reportedly three-quarters of a billion dollars
and that gave me the money to be able to start netflix with this is the netflix website netflix
earned 688 million dollars in revenues last year but what are these stars those are those stars
are the key to the system okay they show what other people that have my movie taste think of
this movie that's part of their recommendation system so let's say you rent on the waterfront
i could have been a contender and give it five stars netflix software searches for what other
on the waterfront renters have rated highly figures out from other movies you've rated
whether it's brando you like films in black and white or mob flicks and voila i'm going to make
them an awfully camera few they offer you other movies hastings thinks the recommendations have
transformed the movie business by giving new life to thousands of forgotten or overlooked films
we need to help one another like hotel rwanda i cannot leave these people today i did very little
theatrical business but our members like it a lot they rated it very highly so our website promotes
it to more and more people and now hotel rwanda is the number five all-time rented film at netflix
which is above wedding crashers which is a great mainstream film the story will continue after this
for customers bob and bobby henkel it's those art house movies the back catalog films that
sold them on netflix do you like the same kind of movies no no they get about five dvds every week
i like action movies and i like the stories that have depth character you know forget the action
your problem with netflix is bob yes yes totally well not totally they live in northern maine
and their dvds never get here the next day when they've tried to complain communicating with
a computer leaves a lot to be desired we'll have you ever try to call them on the phone
actually no i don't know what their phone number is you can't find them no it's not listed
you can't it's very difficult to contact the company we asked reed hastings what customers
like the henkel should do to get through by phone i'll show you that here it took forever
how do i contact customer service even the ceo couldn't find the phone number
okay it's all by email hastings has to worry about things like this because of competition
blockbuster is nipping at his heels with its own dvd by mail service but there's an even bigger
threat that could make all dvd rental obsolete says media reporter scott hetrick and that is
downloading getting a movie straight off the web how much of a threat is downloading to the future
of netflix do you think i think it's a very real threat if people can get things electronically
maybe they don't need a physical disk anymore but netflix itself will be a movie downloader says
hastings who claims he'll be able to beat the big dot-coms like apple that have announced they're
getting into the game too we are making available over 75 films online more successful than apple
with the ipod and all of that more successful than apple yahoo amazon absolutely because those
companies they focus on a lot of things you know books and music we think that we can be
the winning firm by focusing on movies somewhere between 20 and 25 of investors have gone short
on your stock they're betting that downloading will eat you for lunch so i think the message
that you're just giving me isn't out there oh i the message um i think that we intend to be the
leading company is out there what people wonder about is how will we do no one really knows do
you think that netflix has a chance to maintain a lead in that market when you start converting into
downloads that's a very different kind of business that anybody can play at and not just apple and
itunes google video yahoo video myspace all the studios now having said that they will still be
able to be players they just won't be able to be as dominant in the category as they are now
even small companies are getting into downloading bruce eisen is the president of cinema now
which is already up and running how long does it usually take though to download a full movie
an hour but right now for most people who would go to your site to download a movie they would
have to watch it for the most part on their computer right you hit the nail on the head it's
using it as easy connecting it to the tv where most people do want to watch it isn't easy yet
unlike most of us eisen has the internet connected to his tv new equipment to do that will probably
be widely available in the next year or two and yet hastings thinks it'll be five to ten
years before downloading hits big so his plan now is to try and quadruple his dvd customers
he just added two new warehouses in maine and alaska netflix there's a new ad campaign
late fees forget about it and this summer netflix staged a traveling road show with screenings of
famous movies in the places they were set like field of dreams on that baseball diamond in iowa
and jaws on martha's vineyard and you're going to watch it you're going to stay not
only am i going to watch it i can try and go for a swim afterwards
up to now hastings has been a big fish in a small pond but with the downloading wave coming
his confidence about the company comes with nagging questions
about himself i think for sure in my first company i had a lot of self-doubt
and i have some now but it's manageable now where it was uh troubling before you feel that you've
mastered whatever it was that you were struggling with before being a ceo is a lifetime of learning
so i would never say the word master but continuing to really enjoy the learning of it
apple plans to boost its new downloading business by introducing itv within six months
it's a box that'll connect the internet and tv reid hastings told us he'll unveil plans for his
own download service in january and netflix has posted a customer service number on its website