Netflix has come a long way from its roots as a small rental DVD business in the late 90s. Now an established tech company and entertainment streaming powerhouse, Netflix is front and center in developing modern content.
The rise of Netflix is both entertaining and inspiring. The start-up faced considerable challenges. For starters, Netflix did not have original movies and films to showcase. It was relying on licensed work from independent creators and small networks. This content was usually outdated and subpar compared to what the big studios like Time Warner and cable networks offered.
However, today, when you think of binge-watching, the Netflix platform is probably what comes to mind. The company significantly disrupted the entertainment and film industry. Their streaming platform had an effect hard to replicate, despite not having quality content at first.
So how did Netflix do it?
Netflix did not hesitate to shift its business model as often as possible to adapt to emerging technology and changing customer tastes. They understood that you could build an audience for any content with the right platform, even if it sucks.
It also helped immensely that Netflix’s rivals were hesitant to follow suit. By the time media giants like Blockbuster moved onto streaming, it was too late.
So, was it luck, planning, and foresight, or both?
1997: The Founding of Netflix
The Very Beginning
Netflix was founded by two gentlemen who knew what they wanted to build and fearlessly fought for it. Reed Hastings and Marc Randolph were the brains behind Netflix.
The exact details about how the idea of Netflix came to be are hazy. The famous story that the two men rented a Blockbuster DVD and had to pay a late fee for the rental is more anecdotal than true. Hastings has even admitted to making up the story just to easily explain their business model and motivation for starting Netflix.
Whether or not the story is true, Netflix was born out of the need to better deliver DVDs to customers.
Marc Randolph was a Geology graduate who founded and ran several mail-order companies such as MicroWarehouse and direct-to-customer companies before he moved on to Netflix with Hastings. He was working as a marketing director for Hasting’s company, Pure Atria.
Reed Hastings was a tech genius. In 1991, he founded a software development tool-making company called Pure Software, which he later sold for $700 million to Rational Software Corporation in 1997. We can attribute, in part, the success of Netflix to Hasting’s tech knowledge. The algorithm he and Marc Randolph built was superior in every way. (More on this later on.)
How the media and entertainment landscaped looked in 1997
While Hastings and Randolph were working on the idea for Netflix, Cable and TV guides dominated the entertainment landscape. Customers were used to regular programming that released episodes on specific days every week.
Blockbuster (the biggest movie and film rental in the country) and cable channels like HBO offered premium and new release content that controlled the market. The cable networks and studios enjoyed a dual stream of income from subscriber fees and advertising.
The Initial Business Plan
When it started, Netflix wanted to become an ‘Amazon’ for DVDs. The plan was to offer movie rentals over the internet compared to Blockbuster, whose customers had to drive to a physical shop.
Hastings supplied seed capital of $2.5 million to develop their website, algorithm, and distribution centers. The algorithm helped them to identify which locations to store certain titles so they could reach customers faster. This is how Netflix managed to operate their overnight delivery services.
Along with the logistics centers, Netflix partnered with the United States Postal Service to mail DVDs to their customers. The USPS eventually processed millions of DVD rentals on behalf of Netflix.
Early Value Proposition: What made it appealing when it launched
When Netflix originally started, it was offering something that Blockbuster could not; convenience and no late-fee payments. Coupled with affordability and a wide selection of films, Hastings and Randolph were sitting on a gold mine.
Netflix appealed to customers who lived far away from a rental store or dreaded driving to the store only to return empty-handed because the DVD they wanted was not available.
The start-up also played into people’s curiosity and fascination with the internet. It had a ‘cool’ factor that brick-and-mortar rental stores were slowly losing. Millennials were buying in on the rise of the internet, and Netflix capitalized on this. Netflix was focusing on the consumer, observing what they wanted and adapting accordingly.
1998-2000: Netflix.com & the move to a subscription model
1998: Netflix.com launch
After working on their product for at least a year, Hastings and Randolph launched Netflix.com in April 1998. They had very few staff and secured just under 1000 movie and film titles.
Netflix.com went life and charged $4 for each rental with an additional $2 charge for postage. They had a 7-day maximum rental policy, so once the customer was done, they simply placed the DVD in the Netflix envelope and posted it back to Netflix. The process was fairly simple.
1999: Subscription Service is launched
In 1999, Netflix introduced the subscription model on their website after getting a cash injection of $30 million by Group Arnault. The subscription service was the first of its kind. Instead of paying for each DVD, the customer could simply pay a flat monthly fee to give them unlimited access to movie and film titles.
Netflix now offered a new and improved value proposition for its existing and potential clients. Subscribers could now rent unlimited movies (with a maximum cap of three at a time) without the need to pay for postage or handling fees. This model was more affordable because the customer was paying less for more.
By this time, Netflix has over 3,100 titles, and of the thousands of subscribers, only 20 did not sign up for the services after sampling the free trial. It was a win for Netflix, but the success was short-lived.
2000: A year of wins and loses
2000 proved to be a mixed bag year for Netflix. On the one hand, they pioneered their personalized movie recommendation system, which helped them predict the browsing behaviors of their customers. No one was doing this.
However, despite having reached over 300,000 subscribers, Netflix was losing money. They were not making enough and would soon go broke. Hastings reached out to their competitor, Blockbuster, and offered to sell them Netflix for $50 million. Blockbuster rejected the offer.
As luck would have it, 2001 would bring a significant turnaround for Netflix.
2001-2009: Lady Luck, going public, some tough competition & the launch of the streaming service
2001: Lady luck
One key thing happened for Netflix in 2001, September 11. As tragic as it was, the attacks in New York City terrified the general American public. Many people were afraid to venture outside of their homes to purchase a DVD. The number of monthly subscriptions doubled, and Netflix survived without selling.
2002: IPO listing
Finally, in 2002, with over 600,000 subscribers in the US, Netflix made its first public offering on the Nasdaq market. The stock was valued at $15 a share, and they were offering 5,500,000 shares to the public. By the end of 2002, Netflix was sitting at 857,000 subscribers. This was huge.
Soon after, Netflix reached 1 million subscribers in 2003. The company also applied for a patent at the USPTO for its subscription and rental service and other extensions. By 2006, Netflix had 5 million subscribers.
2007: The big shift to streaming & tough competition
Hunt for the problem, deliver the solution. That is what Netflix set out to do. It’s impossible for anyone to predict the future, but it seems Hastings could. With the technology he had painstakingly spent years on, and the sharp decline in video store popularity, he could see that consumer demand was shifting. He wanted Netflix to change with it.
He could sense that while cable and TV were not going anywhere, a certain customer segment was hungry for an alternative. College students, or young working professionals who could not afford or had no interest in it TVs and cable, needed an alternative.
The streaming service he had instructed his team to work on in 2004 was finally ready. There were a few challenges, though.
The first challenge was trying to convince people with TVs to stream on a small computer screen. The new streaming service was a good idea but, it only worked on computers with an internet connection. The average American was buying home TV theaters and bigger TVs to watch their favorite cable shows.
The second and biggest challenge was that Netflix had only 1000 titles, and most were bad or outdated. Hastings approached HBO to strike a deal for licensed premium content. Although the content the company was hoping to score was not fresh, it was mainstream. He got the boot from HBO. No one wanted to license to the good stuff to Netflix.
Last, high-speed internet was not available to everyone, and the watch hours were capped using a monthly time credit system. So, customers could only watch 10 hours or 18 hours’ worth of free titles, depending on the membership plan.
So, Netflix had a good plan that wasn’t working out, and it should. Unfortunately, some tough competition from Blockbuster would add to the streaming woes that Netflix was facing. At this point, Netflix and Blockbuster finally drew out guns against each other.
Battle to the death: Blockbuster vs. Netflix
Perhaps one of the most entertaining and cut-throat rivalries in start-up history was between Netflix and Blockbuster. Dirty tricks, snide comments, and showdowns heavily marked the relationship between the two. It was a cold war.
The sub-title is by no means exaggerated; it truly was a battle to the death. From the very beginning, Netflix directly competed with Blockbuster, but the giant paid them no mind at first.
When video stores lost business, Blockbuster realized it was in trouble. Unfortunately, it was $1.2 billion in debt and didn’t have the capital to be as risky as Netflix could. But the media giant went on the offensive anyway.
It launched Total Access as a direct response to Watch Now. The site allowed subscribers to return DVDs to any of its 7000 US stores and rent a new one immediately. They gained millions of subscribers, and Netflix realized it had underestimated its competitor. Blockbuster tried to mimic Netflix’s website and distribution centers by any means possible.
They implored several dirty tricks; Blockbuster would hire people to create Netflix accounts, order DVDs, and mistakenly ‘drop’ them off at the distribution center. Several people managed to get inside the center to take pictures by pretending to be Netflix fans. Blockbuster sent spies everywhere, including to the USPS, to get Intel on how Netflix was operating.
The tricks didn’t work for one simple reason; Blockbuster did not have the Netflix algorithm. Total Access was a brilliant idea, but Blockbuster couldn’t afford it. They were making a $2 loss with every transaction, and Netflix had the financial freedom to take chances that Blockbuster couldn’t. The Total Access website was full of glitches and would often crash.
Eventually, Netflix outmaneuvered Blockbuster because of their superior algorithm that governed every aspect of their operations and because Blockbuster was broke.
2008: The great recession
While the online war with Blockbuster is still ongoing, Hastings sets out to find the best content he could for Watch Now. He also made it his mission to put Netflix on any mobile device that could stream the content. He pushes his team to look for deals with electronic companies, and in 2008, Netflix partners with Xbox 360, Blu-ray disc players, and others. This approach widened Netflix’s distribution channels and solidified its relationship with some of its key partners.
His saving grace is the recession and, once again, the algorithm. The intricate data capturing details of the algorithm keeps Netflix from losing subscribers. But more than that, the cash-strapped cable networks and studios are desperate for money. Netflix had it. Netflix partners with a small paid TV movie channel called Starz, giving Netflix access to some mainstream content like “Pirates of the Caribbean” and “Spiderman 3”.
By the end of 2008, Netflix had over 10,000 titles and 9.4 million subscribers. Netflix could now offer the same movie titles that paid TV channels offered at a fraction of the price.
At this point, Hastings, still feeling the sting from HBO’s rejection, makes a bid for “House of Cards”. He gets the show by outbidding HBO, Showtime, and other networks. Netflix is now working towards launching its own original programming.
2009: Apple + Netflix = Magic
Hastings gets an email from Steve Jobs launching the iPad and asks if Netflix wants to be the featured streaming app on the device. As soon as people experience watching content on the iPad, there is no going back.
Netflix strikes deals with Playstation and smart-TVs, PS3, and other devices with an internet connection. By the end of 2009, Netflix sat at 12 million subscribers. The success is unmatched, however; it starts to get into Hastings’ head who then makes an almost fatal mistake in 2011.
2010-Present: Going global, some major blunders, new competitors, the birth of binge-watching, and a few awards
In 2010, Netflix launched its service in Canada and started a campaign toward global domination. By the end of 2010, it has over 20 million subscribers, with Hastings remarking;
“By every measure, we are now primarily a streaming company that also offers DVD-by-mail.”
This was a turning point for the company. The following year, Hastings makes the biggest blunder in Netflix history.
In September 2011, Netflix announced it would rebrand and restructure the DVD rental service, calling it Qwikster. Up to this point, both the streaming and the DVD services came as a package deal.
This move forced customers who wanted both to open another account. The price skyrocketed. Instead of forking out just $10 for the DVD rental and unlimited streaming, customers who wanted both would have to pay either $7.99 or $15.98 each, depending on the package.
There was an uproar, Netflix lost over 600,000 subscribers, and its stock plummeted to just half of what it was worth at the beginning of the year. Hastings immediately saw his mistake and, against the advice of his team, attempted to apologize personally on a Youtube video.
The video backfired immediately and had him in hiding until Netflix reversed the decision.
This was a rare but painful miscalculation by Hastings.
2013: Original content and the birth of binge-watching & the Netflix Effect
2013 was an exceptional year for Netflix, who were still licking their wounds from the Qwikster debacle. Netflix produces its own original content. The rise of streaming had roped in marginalized and professional writers. There was now a great need for new and uncensored content.
It was a writer’s dream. Unlike cable networks, streaming platforms like Netflix did not have to stick to censored guidelines about the content they could show. It was a no-holds-back fiasco, and the atmosphere was buzzing.
Netflix transformed the relationship between writers and networks. Before, the networks would only approve a show based on a pilot that met certain metric standards. Netflix scrapped all that and offered writers, producers, and showrunners contracts that mandated them to create entire seasons. Netflix spends over $ 2.4 billion on this content creation. It was unheard of, and networks like HBO had to adapt.
Binge-watching & the Netflix Effect
When Netflix released all the episodes of “House of Cards”, “Breaking Bad,” and “Orange Is the New Black” at once, the industry went crazy. Binge-watching had just been unleashed upon the customers, and TV would never be the same again. Now the power was in the hands of the consumer. They could watch as little or as much as they wanted when they wanted. It was a hit.
Netflix receives Emmy and Oscar nominations, a space once dominated by HBO. The wins were non-stop. Netflix’s flagship shows became seasonal hits. Unlike as predicted, binge-watching had not reduced the number of Netflix subscribers. The opposite had happened. Customers were ready for more of this type of TV.
2013 also birthed a new term; the “Netflix effect”. There were so many good shows on cable and free TV that were mildly successful. “Breaking Bad” originally aired in 2008 on the American Movie Classics (AMC) TV network. However, when the old episodes of the show aired on Netflix, the audience growth was astounding. The season four finale was viewed by less the 2 million people. After Netflix, when the series finale aired two years later, viewership was up to 10 million.
Netflix could grow viewership by finding new audiences for TV shows hanging by a thread or just doing okay and turning them into hits.
Success came with its own set of controversies. For starters, the no-holds-back approach to content creation by Netflix produced shows that were a little bit over the edge. There was a rise in nudity, sexually explicit scenes, and violence that some customers could not stomach.
There was also some criticism over Netflix’s $1 million contest it had launched in 2006. The coding competition required participants to beat Netflix’s algorithm and predict a more accurate movie recommendation system. There were cries that the competition invaded the viewing privacy of the customers. Netflix ultimately canceled the competition in 2010.
The success of Netflix as a content creator raised some eyebrows. New competition emerged.
HBO vs Netflix
HBO was a giant in the media and entertainment industry. Owned by Time Warner, it had a massive and loyal subscriber base and mainstream, good quality TV. Shows like Sex and City (1998-2004) and The Sopranos (1999-2007) were a tremendous hit. People were paying for the content.
HBO was the first to realize that quality content is lucrative when delivered easily to customers using the latest technology. As one of the oldest American cable service providers, HBO was considered a giant compared to Netflix.
The two companies have had a steady competitive relationship throughout the years, although not as fierce as Netflix had with Blockbuster. HBO is more focused on streaming original content and with great success (Game of Thrones comes to mind.) By vying for original content in 2013, Netflix was stepping into HBO’s turf and vice versa when HBO launched its subscription-free online service.
Amazon vs. Netflix
What gave Netflix a run for its money was Amazon. Amazon did not focus its energy on the DVD rental market. Instead, it poured resources into streaming services. In 2004, Netflix abandoned plans to launch in the UK when rumors circulated that Amazon was about to establish a competing service in the country. Netflix instead focused on expanding its US customer base and lowered prices as a bid to pre-empt Amazon.
Amazon replaced Blockbuster as a more direct form of competition. Both were tech companies, so their shareholders were more willing to forgo profit for expansion. This is unlike the cable networks and studios that regularly post profits, so their risk-taking level was mitigated.
Despite their competitive relationship, Amazon and Netflix engage in several partnerships today. For example, Netflix uses Amazon Web Services for most of its storage and computing needs. This includes databases, analytics, video transcoding, and so much more.
Other notable competitors include Disney+ and Hulu who are both working towards dominating the streaming market and producing original content.
2016: Netflix is finally global & the launch of the new ‘Download’ feature
Between the years 2013 to 2015, Netflix continued to grow. In 2015, Beasts of No Nation is released as Netflix’s first feature film. It was a huge success.
By 2016, Netflix was available in over 190 countries and offered programs in 21 languages. Their new ‘Download’ feature allowed subscribers to watch their favorite shows and movies online.
2017-present: Oscar wins and market dominance
In 2017, Netflix won an Oscar (its first) for the Best Documentary Short Subject for “The White Helmet”. It also finally surpassed the total number of cable subscribers in the US, ending the year at 50.85 million subscribers, compared to cables 48.61 million.
As of January 22, 2019, Netflix was approved for membership into the Motion Picture Association of America MPAA. It is the first streaming service to become a member of the association.
Netflix has a market cap of 217,32B and a share price of 490,35 USD, and Blockbuster is a thing of the past.
So, will Netflix kill off the cable industry next?
Netflix arrived on the scene as a small-time DVD by-mail rental company. Over the years, it morphed into a “friend” of the studios, acting as a marketing tool for some of their biggest hits like “Breaking Bad”.
Slowly, the cable bundle unraveled, and it is still unraveling, but will Netflix kill cable? Some experts argue that Netflix is bulldozing its way into content creation by the numbers. They argue that the content doesn’t have the ]longevity that traditional network shows like “Friends,” “Law and Order,” or “Grey’s Anatomy” have enjoyed. Netflix is still piggy-backing off the very backs of the industry it is credited for killing.
Whether Netflix and its streaming tech will kill cable is hard to tell, the jury is still out on this one.