Dreams and DVDs: The Netflix Story
A $40 fine is what reportedly set in motion the idea that birthed a billion dollar company. A company that redefined media consumption for millions.
Yup, you guessed it. We’re talking about Netflix.
In this post, we’re unpacking how two guys came up with an idea during their drives to Silicon Valley, and transitioned it into one of the most valuable companies in the world today. Let’s get into it.
Ba-dum!
The making of a market
The story begins in 1997, in Scott's Valley, California, with two serial entrepreneurs. Reed Hastings and Marc Randolph wanted to start a new venture after Hastings' company Pure Atria was acquired by Rational Software (the largest merger in Silicon Valley at the time).
Hastings had a background in computer science, while Randolph had experience in direct-to-consumer marketing and mail order services. The two would often commute between Santa Cruz and Silicon Valley while the merger process was going on.
On these trips, they would brainstorm ideas for their next venture. Inspired by the growing success of a company called Amazon, the duo started thinking of things they could sell online.
Randolph would bounce ideas off Hastings, who'd usually be quick to shoot them down.
Custom sporting goods. Personalised shampoo. Specially formulated dog food. The plan to be the 'Amazon of something' was their primary focus.
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The story goes that around this time, Hastings failed to return a copy of the film Apollo 13 that he'd rented from Blockbuster within the due date, and was hit with a $40 fine.
This got the wheels turning. What if they could do what Blockbuster does, but online?
They briefly considered VHS tapes, but axed that plan as they were fragile and difficult to store, and rapidly losing out to the growing popularity of DVDs.
As a test, they mailed a DVD to Hastings' house.
It arrived intact.
At the time, the home video industry was worth roughly $16 billion. A perfect candidate for disruption.
Hastings invested $2.5 million into the venture, and in April 1998, Netflix — the world's first online DVD rental store — was launched.
They had 925 titles available.
Fun fact: Randolph briefly toyed with the idea of naming the project 'Kibble', using the name for test projects and documents. However, further discussion between him and Hastings led to the official name 'Netflix'.
By being online, Netflix had a larger library than any individual rental store. Customers just had to pick a title, pay about $4 rental and $2 in shipping, and wait for a DVD to be delivered, complete with an envelope to pack and return it in.
While Netflix also charged late fees initially, they quickly did away with it as the platform began to gain traction. Customers could only rent one title at a time, however. Once they returned it, they could choose the next one.
Disruption, meet subscription
But Netflix, as we know, has always been a smart operator. Within a year, the company had already launched an early version of the subscription service we're all familiar with.
Pay a flat fee, rent as many movies as you want (max. 3 at a time).
By 2000, Netflix already had 300,000 subscribers, and revenue was good, but expenditure from posting discs across the US was rising. At this time, Hastings considered selling the company to Blockbuster, pitching the idea of turning it into blockbuster.com.
In one of the biggest missed opportunities in recent times, Blockbuster turned down his offer. Today, Netflix is worth billions. Blockbuster operates a lone store in Bend, Oregon, which was used as an Airbnb for a few nights.
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Back in 2001 however, Netflix wasn't sure it would survive. The dot com bubble was collapsing, and the national sentiment in the US was at an all time low after the 9/11 attacks.
Entertainment wasn't on the forefront of anyone's mind.
Then, a couple of things happened.
Netflix's optimisation efforts led to the CineMatch engine, which would recommend new movies to customers based on what they watched, improving retention. Also, DVD players became affordable, and penetration skyrocketed.
The company managed to alleviate some of its burdens by going public in mid 2002. Around this time, Hastings was beginning to consider the cost implications of the Netflix business model, and aware of mounting competition from the likes of Walmart.
From DVDs to Downloads
As Internet speeds began improving, he was also increasingly aware of the potential of distributing Netflix's staggering library (pushing 12,000 titles at the time) digitally, saying as much in an interview with WIRED in 2002.
Excerpt: Today, it can cost more than $30 to send a DVD-quality film over the Internet. As that figure drops, Hastings will consider going digital. "In five to ten years, we'll have some downloadables as well as DVDs," he says. "By having both, we'll offer a full service."
By 2004, DVD players had found their way into 2/3rds of American households. Around this time, having successfully guided the company to IPO, Randolph left Netflix. In 2005, the Netflix library grew to 35,000 different films, and 1 million DVDs were shipped every day.
By the next year, the company was hitting critical mass, crossing the 5 million subscriber mark. At the end of the year, it had added another million. Product-market fit and demand was clearly not an issue.
But Netflix wasn't done.
In 2007, Netflix launched an online 'Watch Now' option, offering up 1000 titles for subscribers to watch at no additional cost up to 18 hours a month.
Streaming grew steadily, and the company kept adding subscribers at a breakneck pace. Over the next 3 years, Netflix doubled down on increasing titles available to stream, and began aggressively tying up with hardware manufacturers to integrate Netflix with their devices.
Blu-ray players, set top boxes, gaming consoles, and eventually Apple devices.
By 2010, Netflix expanded outside the US to Canada. This was also the year it crossed another important milestone — the number of streaming subscribers among its 20 million strong subscriber base eclipsed the number renting DVDs. 🚀
In Netflix's October 2010 earnings call, CEO Reed Hastings said the words that would alter the company's positioning for the new decade:
"By every measure, we are now primarily a streaming company that also offers DVD-by-mail."
As streaming grew, Netflix decided to split DVD rentals and streaming into different brands and separate subscriptions. The move was met with heavy backlash, with the company losing over 600,000 subscribers and sending the stock plummeting.
It eventually caved to customer demands and decided against the rebrand, offering both services under the Netflix name, but maintained them as separate subscriptions.
#DYK: US residents can still order DVDs from Netflix to this day from dvd.netflix.com.
From strength to strength
In the streaming era it helped kick start, Netflix has consistently moved quickly — strengthening partnerships, starting in-house productions, and expanding. In 2016, the company went global, expanding to 130 countries. 🌎
That small idea developed on car rides over 20 years ago has today developed into a global streaming behemoth. A service so popular it is reportedly responsible for single-handedly consuming 15% of all Internet bandwidth. 👀
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*Roll Credits*
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