LOS GATOS, Calif. — To any outside or inside observer, Reed Hastings is at a crossroads, regardless of whether he acknowledges it.
Hastings is quietly and successfully challenging the traditional movie rental model, combining the Old Economy tool of the U.S. Postal Service with the Internet and the high-tech medium of DVDs.
And while Hastings contends he's a true outsider, the insiders are noticing his Netflix.com, the nation's fourth-largest video rental outlet with 500,000 paying subscribers who rent DVDs through the mail.
Netflix.com is the weapon Hastings, 41, is using to shatter the way people view movies. He gave up on renting movies from rental giant Blockbuster Video when he owed a $40 late fee and set out to start a movie rental business of his own. The result was the creation of Netflix.com in March 1998.
"I've always wanted to watch more movies, and I had been frustrated with Blockbuster," he said. "I wanted to run a service that didn't have late fees or due dates and really improve on the movie rental experience."
The first big drawback Netflix faced was that few homes had DVD players.
"DVDs were just emerging," said Tim Haley, who led Institutional Venture Partners' investment in Netflix. "It was a bit of a leap of faith."
It took time for Hastings to build the Netflix model. At first Netflix marketed itself in the same way a traditional video store does with set rental fees and due dates for its DVDs. Then it allowed a limited number of rentals per month for a set fee.
In 2000, the current Netflix concept was born, more than two years after Hastings started the company. Netflix allows unlimited rentals for $20 a month — an idea that has stuck. Renters keep three movies out at a time for as long as they want — no late fees, no due dates. When a movie is returned free of charge, the customer's next choice, which must be preselected by the user at an online library, is shipped.
The average customer rents about five or six movies a month. Netflix ships DVDs to most of its customers from distribution centers in San Jose, Boston, Los Angeles and Sacramento. It has a library of more than 11,000 titles and stocks several thousand copies of the most popular films, along with a few hundred copies of lesser-known independent films.
"We keep in stock every DVD ever made, other than porn," Hastings said.
Hastings likes being an outsider in the business and isn't worried about Blockbuster, the nation's largest video renter. He expects Blockbuster to eventually enter the market, though the Dallas-based company said it has no plans to rent online.
Despite Blockbuster's strong name, Hastings says he has a head start on his rivals.
"We take them seriously because they're 50 times larger than us," he said. Hastings said he wouldn't rule out a takeover by one of his competitors.
"Obviously, we pay attention to any way people are getting home entertainment," said Karen Raskopf, a Blockbuster spokeswoman. "We always look at all those things. We have not seen a business model that's financially viable long-term in this arena."
Raskopf said online rental services are "serving a niche market. It doesn't mean it's a market we shouldn't be paying attention to."
Hastings isn't upset with the niche label.
"All businesses start out as a niche player, particularly when they are innovative," he said. "The longer Blockbuster considers us a niche, the better for Netflix."
GartnerG2 analyst P.J. McNealy said Netflix may be beyond the "niche" label.
"It's one of the few early business models that have successfully taken advantage of the Internet being its front face," he said. "It's a service industry that people seem willing to pay for."
But Netflix still must change the way people rent movies. Rather than go to the video store on Friday night, they must build a library ahead of time and hope they have the right DVD on movie night.
Customers browse the Netflix selection and place them in a list in the order they'd like to see them. Most customers get their top choices, Hastings said. DVDs take anywhere from one to four days to arrive.
"In time, customers want faster service," Hastings said. Netflix hopes to use IPO money and future profits to build more distribution centers to speed up service.
One advantage is that movies can be requested months ahead of release, even before they're in theaters.
The privately held Netflix plans to go public in the future, though it hasn't announced a share price or timing for the offering. It backed off plans for an earlier initial public offering when the dot-com bubble burst.
Netflix has never posted a profit. Last year it had sales of $76 million but still lost $38 million. That was before it hit the 500,000-customer plateau Hastings said would result in at least a break-even performance. Hastings hopes to report a profit by next year.