Is it time for Netflix to invest in system upgrade?

Hardware malfunction causes delays a few months after a separate problem causes a system crash. What does it mean that the video rental site has seen two meltdowns this year?

Netflix has traced the causes of a lengthy system outage this month that prevented the online movie rental service from shipping for several days to a hardware glitch.

The good news for the company is that it received lots of help from vendors to determine that the cause of the outage, which hobbled the company's ability to ship DVDs from August 11 to August 15, was a "key faulty hardware component." Steve Swasey, a Netflix spokesman, said the company's "strongest aspiration is to safeguard this from ever happening again."

The bad news for the company is that Netflix can't yet prevent these system outages. While a piece of hardware, about which Netflix declined to provide details, was the cause of the latest glitch, it was not responsible for the system crash back in March , Swasey confirmed.

In that earlier case, a malfunction knocked out the company's Web site, as well as its logistics and delivery systems, for 12 hours, the company then said. In both cases, Netflix was unable to ship movies "to a large number of Netflix customers."

Two major meltdowns in 2008 raises serious questions about the soundness of Netflix's system. Tony Wible, an analyst at Citigroup, estimated that Netflix lost $1.8 million to $3.6 million for each of the days it was down. The 15 percent credit Netflix is providing to affected customers will reduce the company's third-quarter revenue by $6 million, according to Michael Pachter , an analyst at Wedbush Morgan Securities.

As more and more competitors jump into Web video rental , annoying system blackouts could become more of a liability for Netflix.

In both outages, Swasey said many customers hardly noticed the delays. Many users who were expecting packages weren't put out very much by waiting a day or two extra for their films. Customers never lost money or personal information, and by most anecdotal accounts, the service remains extremely popular with users.

At the root of the problem is the fact that Netflix is quite different from most e-commerce companies. It relies on the Internet, the U.S. Postal Service, and a groundbreaking fulfillment operation that combines software, hardware, and plain old elbow grease to ship those little red packages.

Netflix has won accolades for using technology to wrest market share away from big brick-and-mortar video renters, such as Blockbuster. The company has amassed 8.4 million customers and ships more than 2 million movies per day.

But perhaps now is the time that Netflix would do well to invest in a major system upgrade. If Netflix customers continue to see delays, it could undermine the company's credibility. Does Netflix really want users to consider Blockbuster's in-store kiosks ? I don't think so.

 

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