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Netflix Wins Patent on DVD Rental Process

June 26, 2003
For a while there, it looked like the movie rental-by-mail business was getting competitive. But Netflix has won a patent on more than 100 elements of its first-to-market DVD rental process, giving it a leg up over new rivals Wal-Mart and Blockbuster.

With Blockbuster and Wal-Mart both trying to muscle in on little Netflix, it looked like consumers would enjoy the benefits of a price war -- at least for a while. But if they were successful in squeezing over Netflix, the two giants would have the power to increase prices and slack off on customer service.

The ruling by the U.S. Patent and Trademark Office potentially gives Netflix the ability to stop others from copying its process. Or it could choose to charge them stiff royalties.

Netflix has about 1.1 million subscribers and reported revenue of $56 million in the first quarter of the year -- an increase of 82 percent of the previous year. That sounds big but it's a tiny fraction of the $10 billion market for all VHS and DVD rentals.

Even with its new patents, Netflix could be vulnerable. Wal-Mart could bury Netflix if it chose to simply give away DVD rentals for a year with the purchase of a DVD player, for example. Blockbuster is counting on its ability to integrate video rentals-by-mail with its in-store system.

Netflix was founded in 1999 in Los Gatos, CA. It has developed a system highly praised by most consumers. For a set price per month, currently about $30, consumers can check out up to three DVDs for an unlimited time. When they send a DVD back, the next one they have chosen is shipped to them.

Unlike Blockbuster, which has become infamous for imposing a mind-numbing variety of late fees and special charges on its customers, Netflix allows customers to keep their selections as long as they choose, but limits the number of DVDs a single customer can have at any one time to three.

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