Netflix Set-Top Box Delivers Movies Via Broadband

SAN FRANCISCO – Preparing for the eventual extinction of its DVD-by-mail rental service, Netflix Inc. on Tuesday is introducing its first solution for subscribers who want entertainment delivered directly to their television sets with just a few clicks on a remote control.

The breakthrough comes in the form of a 5-inch-by-5-inch device tailored for a year-old service that uses high-speed Internet connections to stream more than 10,000 movies and TV shows from Netflix's library.

Although it's provided at no additional cost to most of Netflix's 8.2 million subscribers, the streaming service has had limited appeal until now because it doesn't include the latest movies and couldn't easily be watched on anything but a personal computer.

At $99.99, the Netflix set-top box is priced like a DVD player and is just as simple to hook up to a television.

A high-speed Internet connection can either be plugged into the box or the device can pick up a wireless signal.

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Similar Internet-to-TV devices made by Apple Inc. and Vudu Inc. cost $229 to $295.

"We think this is something that offers a big value at a low cost," said Reed Hastings, Netflix's chief executive officer.

The Netflix box, made by Silicon Valley startup Roku Inc., is the first of several devices that will pipe Netflix's streaming service to TV sets.

LG Electronics is expected to include the streaming capability in a Blu-ray DVD player that it plans to debut during the second half of this year.

Without providing further details, Netflix has said two other major consumer electronics companies are working on set-top boxes for its streaming service.

Hastings is confident that the demand for DVD rentals will remain strong for at least several more years, partly because movie studios aren't ready to fully embrace digital distribution.

But as technology makes it easier to rent and buy movies within a few minutes instead of waiting for them to be delivered through the mail, Hastings realizes his Los Gatos-based company won't survive unless it evolves.

That's why Netflix has poured more than $40 million into its streaming service, called "Watch Instantly," and is now trying to encourage its subscribers to use it more frequently even though it doesn't generate more revenue.

If anything, the streaming service is eroding Netflix's profits because the company's licensing fees are based on how frequently subscribers use it. And any customer who pays at least $8.99 per month for a DVD rental plan gets unlimited access to the streaming service.

Because the new set-top box figures to spur more usage, Netflix expects its profit margins to be squeezed later this year.

Even so, the company is still projecting a profit of as much as $83 million this year, up about 20 percent from last year. The bright outlook has helped lift Netflix's market value 16 percent so far this year.

Hastings eventually hopes to recoup some of the added expense by having to spend less money to attract and retain customers as more people enjoy the convenience of the streaming service. Netflix has no plans to start charging an additional fee for the streaming service this year.

Cowen and Co. analyst James Friedland believes the number of Netflix subscribers interested in purchasing the new set-top box will be relatively small.

Part of the problem is that few recent movies are available on Netflix's streaming service. That's a major shortcoming because nearly one-third of the rental requests on Netflix's DVD service are for new movie releases, Friedland said.

"You can't really drive consumers to do anything before they're ready," Friedland said. "You can only give them options. And Netflix seems to be trying to deliver as much as it can (with the streaming service), given the current limitations of the studios and technology."

Netflix offers more than 100,000 movies and TV shows on DVD, about 10 times the streaming service's selection.

Although the streaming device bears the Netflix brand, it's the brainchild of Roku's founder and CEO, Anthony Wood.

After temporarily leaving his startup to work on the streaming device as a Netflix employee, Wood returned to Roku earlier this year. At that point, Netflix paid $6 million for an undisclosed stake in Saratoga-based Roku. Several other former Netflix employees also work at Roku.