When Reed Hastings founded Netflix in 1997, his idea didn't make sense to a lot of people. DVD players had only been on the market for a few months, and many families were still using VHS tapes to watch movies. In spite of that, Netflix's movie inventory consisted exclusively of DVDs. Nay-sayers also doubted that people would want to wait for home delivery when video rental stores seemed to be everywhere. Critics wondered whether Netflix's unlimited subscription plans, launched in 1999, would be profitable.

Now, close to 10 years after opening its virtual doors, Netflix has nearly 6.8 million subscribers. [Source: Netflix]. In 2006, its estimated total revenue was more than $1.2 billion [Source: Netflix]. The company's goal is to have 20 million subscribers by 2012 -- that's about 20 percent of the households in the United States [Source: Business Week].

Image courtesy Netflix Media Center Netflix envelope and DVD

It can be difficult to pinpoint exactly where this success has come from. Some argue that it's the breadth of movies that Netflix offers; its library has around 75,000 different titles. Others contend that Netflix has been successful because it has attracted customers who want to watch a variety of movies rather than just new releases. Only about 30 percent of Netflix rentals are newly-released DVDs, but at most video-rental stores, 70 percent of rentals are new movies. [Source: Business Week]. This requires DVD stores to continually procure and eventually dispose of or sell lots of copies of the same title, while Netflix is able to purchase fewer new copies and continue mailing out older movies. Netflix circulates 95 percent of its titles every three months. Since some of the titles are more popular than others and are requested more of the time, this translates to 35,000 of the 75,000 titles in circulation every day [Source: Netflix].

There's a lot going on, both on the Netflix Web site and behind the scenes, to allow Netflix to deliver so many movies to so many people. In this article, we'll look into how Netflix delivers discs and decides which movies to recommend to you. We'll also explore the company's competition and the issues it may face in the future.

The two most visible parts of the Netflix enterprise are the red mailing envelopes and the Web site. The patented envelope is essentially an ordinary mailing envelope with an extra long, removable flap. This extra length of paper is what lets DVDs make the round trip from the Netflix distribution center to your home in just one envelope. When the envelope travels to you, the flap displays your address while covering up the shipping center's return address. You remove the flap when you seal the envelope to return it to Netflix, so only the shipping center's address remains.

The envelope has been through several revisions as Netflix has refined its shipping methods and tried to become more profitable. These include:

• The addition of advertisements on the back of the flap
• The addition of a small slot that displays the barcode of the disc inside
• The removal of instructions on how to place the disc in the mailer

The Netflix Web site has been through numerous revisions as well. The company has made major changes to the site as often as every two weeks, constantly evaluating how the changes affect the business. Numerous features have come and gone, but for the most part, the site has looked a lot like other online retail stores. The available movies appear as thumbnail images, sometimes in conjunction with a brief description. When you hold your mouse pointer over a selection, the site pulls a lengthier description from a database and displays it on the screen. This description includes information about the movie's plot, cast and MPAA rating. Clicking on a title takes you to a separate page with cast and crew information, technical specifications and rating information from Common Sense Media, a separate company with its own Web site.

The Netflix queue

You can browse the section by genre, check out critics' reviews or use the Netflix Top 100 to decide which movies you want to see. You can also use the Friends feature to see what your friends are watching and compare which movies you like. When you find a movie you want to see, you add it to your queue. If you want to see movie that Netflix doesn't have in its inventory yet, you can save it for later. Netflix ships your movies in the order in which they appear in your queue, and you can change the order or remove movies entirely as often as you want.

As you browse, you have three options for each movie you see on the site. You can give it a star rating, add it to your queue or tell Netflix that you're not interested in it. The choices you make dramatically affect which movies Netflix features on the site when you visit. Next, we'll take a look at the Netflix recommendation engine and how it works.