Netflix switches gears

There's an interesting story in the WSJ about how the CEO of Netflix, one of the most successful companies over the past two years, is preparing for the day when his current business fades away.

As soon as four years from now, he predicts, the business that generates most of Netflix's revenue today will begin to decline, as DVDs delivered by mail steadily lose ground to movies sent straight over the Internet. So Mr. Hastings, who co-founded the company, is quickly trying to shift Netflix's business -- seeking to make more videos available online and cutting deals with electronics makers so consumers can play those movies on television sets.

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There's still significant risk that Netflix could falter or lose out to another company that figures out how to do it first. And having picked his battle, the intense former engineer may risk missing other growth opportunities: Mr. Hastings hasn't yet expanded internationally or mounted a direct challenge to kiosks, such as Coinstar Inc.'s Redbox, that let customers pick up $1-a-night DVD rentals.

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One of Mr. Hastings's biggest hurdles will be persuading Hollywood studios to give Netflix rights to show more and better movies through its Internet service at a time when many studios are protective of their DVD-sales revenues. Late last year, Sony Corp.'s Sony Pictures threw a hitch into Mr. Hastings's plans when it temporarily blocked access to some of its movies from Netflix's Internet video service in a dispute over whether Netflix had rights to them. Moreover, Mr. Hastings stumbled in an earlier effort to introduce a set-top box that would bring Internet video service into the living room. Netflix developed the hardware but then abandoned it after Mr. Hastings and other executives got cold feet.

Such long-term strategizing is exactly what the LAT and the newspaper industry in general did not do in preparing for the online age. I get into this in my Los Angeles magazine piece on the Times (June issue) and how it got to its current situation.

The Times long had been booby-trapped for disaster because, paradoxically, its culture was so steeped in success. A little failure here and there can act as a corporate wake-up call, but with such reliable--and massive--revenue streams there was no incentive to drastically change course. "It's a classic situation that when you dominate an industry, you don't appreciate the need to change," says Janis Heaphy, a former senior vice president of advertising at the Times and until last year the president and publisher of The Sacramento Bee. "You're sluggish. Everything around you is changing quicker."

In the business world there's nothing unusual about any of this. Companies typically go through a series of stages: innovation and creativity, consolidation and expansion, complacency and slow growth, and finally competition from upstarts who introduce their own versions of innovation and creativity. Then comes the moment of truth: Can the old model be revised to handle the threat? The once-powerful railroad industry took a spectacular tumble in the 1920s because its owners did not recognize how an expanding network of roadways meant more freight being transported by trucking companies and more people traveling by car. The Great Depression only added to their financial woes. After ignoring the competition for far too long and then failing to adequately bolster their service, the railroads ended up pleading for government subsidies.