Preparing for the eventual extinction of its DVD-by-mail rental service, Netflix Inc. on Tuesday is introducing its first solution for subscribers who want entertainment delivered directly to their television sets with just a few clicks on a remote control.

The breakthrough comes in the form of a 13 x 13 centimetre device tailored for a year-old service that uses high-speed internet connections to stream more than 10,000 movies and TV shows from Netflix's library.

Although it's provided at no additional cost to most of Netflix's 8.2 million subscribers, the streaming service has had limited appeal so far because it doesn't include the latest movies and couldn't easily be watched on anything but a personal computer.

At $99.99 US, the Netflix set-top box is priced like a DVD player and is just as simple to hook up to a television. A high-speed internet connection can either be plugged into the box or the device can pick up a wireless signal.

Similar internet-to-TV devices made by Apple Inc. and Vudu Inc. cost $229 to $295 US.

"We think this is something that offers a big value at a low cost," said Reed Hastings, Netflix's chief executive officer.

The Netflix box, made by Silicon Valley startup Roku Inc., is the first of several devices that will pipe Netflix's streaming service to TV sets.

LG Electronics is expected to include the streaming capability in a Blu-ray DVD player that it plans to debut during the second half of this year.

Without providing further details, Netflix has said two other major consumer electronics companies are working on set-top boxes for its streaming service.

Internet streaming expected to replace DVD rentals

Hastings is confident that the demand for DVD rentals will remain strong for at least several more years, partly because movie studios aren't ready to fully embrace digital distribution.

But as technology makes it easier to rent and buy movies within a few minutes instead of waiting for them to be delivered through the mail, Hastings realizes his Los Gatos-based company won't survive unless it evolves.

That's why Netflix has poured more than $40 million US into its streaming service, called "Watch Instantly," and is now trying to encourage its subscribers to use it more frequently even though it doesn't generate more revenue.

If anything, the streaming service is eroding Netflix's profits, because the company's licensing fees are based on how frequently subscribers use it. And any customer who pays at least $8.99 US per month for a DVD rental plan gets unlimited access to the streaming service.

Because the new set-top box figures to spur more usage, Netflix expects its profit margins to be squeezed later this year. Even so, the company is still projecting a profit of as much as $83 million US this year, up about 20 per cent from last year. The bright outlook has helped lift Netflix's market value 16 per cent so far this year.

Cowen and Co. analyst James Friedland believes the number of Netflix subscribers interested in purchasing the new set-top box will be relatively small.

Part of the problem is that few recent movies are available on Netflix's streaming service. That's a major shortcoming, because nearly one-third of the rental requests on Netflix's DVD service are for new movie releases, Friedland said.

"You can't really drive consumers to do anything before they're ready," Friedland said. "You can only give them options. And Netflix seems to be trying to deliver as much as it can [with the streaming service], given the current limitations of the studios and technology."

Netflix offers more than 100,000 movies and TV shows on DVD, about 10 times the streaming service's selection.