Netflix Still Needs a Fix

Updated from 11:51 a.m. EST

Netflix (NFLX Quote) signaled Tuesday that it's taking a step toward its long-term goal of distributing movies over the Internet, but its biggest hurdle still lies ahead.

Over the next six months, the company plans to roll out a new "watch now" feature on its Web site that allows subscribers to watch some movies and TV shows immediately on their personal computers.

While customers can continue to receive DVDs by mail, they will have the additional option of watching around 1,000 titles using technology that allows a video to be viewed at virtually the same time it is being delivered to a user's computer over the Internet.

The move marks the beginning of Netflix's quest to cut the U.S. Postal Service out of its business model. The company, however, can only offer limited selections with its new service because most popular film titles are tied up in long-term electronic subscription distribution agreements between the major film studios and premium cable channels, like Time Warner's (TWX Quote) HBO and Liberty Media's (LCAPA Quote) Starz Entertainment Group.

"This is the next step of the evolution of Netflix's business, but acquiring content is going to be a long painful process for them," says Michael Goodman, analyst with The Yankee Group. "Distribution is going to be a huge roadblock for them for at least four or five years."