Interesting Forbes article about the future of Netflix after their deal with Wal-Mart.

My take? Netflix’ web site usability and supply chain infrastructure kill Blockbuster’s. Will Blockbuster catch up in that regard? Maybe. The big benefit Blockbuster has now is packaging a free in-store rental coupon with their mail order service. That’s a huge advantage. We had Netflix at one time for a few months and really liked it but just didn’t use the service enough to justify the monthly expense, and not being able to get a movie on a moment’s notice is a tough sacrifice (and we hated to go to Blockbuster and pay for a movie we could get for “free” as part of our Netflix service).

And all of this will be meaningless in a few years, as this article rightly points out. By that time movies on demand will be much more prevalent and user-friendly (mate movies-on-demand with a TiVo-like recorder and time-shifting of movies becomes feasible, so you can rent a movie and automatically download it to your player, and watch it any time during the agreed-upon rental time period - a day, three days, a week, etc.). This process is expedited by ubiquitous broadband to the home and the convergence of computers and television (and after the MPAA and others figure out DRM issues for movies).

So the real question is how well positioned Netflix is to capitalize on their current market leadership and transition to a digital download service rather than a mail order service. They’ve got a good customer base of early adopters and a pretty good barrier to exit (all those saved preferences and order history and the resulting recommendations from the system). But they’ve invested heavily in their supply chain, and that mail order supply chain won’t be a competitive advantage any more when their distribution network isn’t the USPS but it’s the Internet.

And I think that’s why Wal-Mart got out of that business. Not that Netflix can’t make it, but it doesn’t make sense for Wal-Mart to invest in all that infrastructure for a business model that’s going to be obsolete in a decade. Netflix has already made the investment, so it makes sense for them to continue. But I’m sure they’re doing it with one eye (or both eyes) toward digital distribution, probably with a pilot project of some sort within the next year or two.