the internet has completely changed the waywe watch television. gone are the days when the whole family wouldgather in the living room to enjoy the exact same program as everyone else. technology has advanced to the point wherewe’ve dumped the old immovable boxes in favor of our phones and computers.
apple share price history 2004, in today’s world you can watch whateveryou want, whenever you want, on-demand straight from the internet. we are now in the age of video-on-demand,and so this week on behind the business we’ll be taking a look at the company that liesat the heart of this recent revolution: netflix.
the year is 1991 and reed hastings was gettingready to start his first company. hastings was a rather unusual tech entrepreneur:he came from minnesota and after graduating from college and serving briefly in the military,he decided to travel to swaziland with the peace corps to teach math. after returning to the u.s. and getting amasters in computer science, he and two of his friends started a company in 1991 calledpure software. the company sold a range of debugging toolsfor unix operating systems at a time when there were few good ones on the market, andso it rapidly became a big player in the it world.
it doubled its revenue every year for 4 yearsin a row and in 1996 it was sold to rational software for 700 million dollars. in the span of half a decade hastings hadbecome a millionaire. life seemed great, but in 1997 he sufferedan inconvenience that would eventually become a world-changer. hastings had forgotten to return his video-rentalof apollo 13 and as a result was slapped with a 40 dollar late-fee. he was embarrassed and didn’t want to tellhis wife, and that got him to thinking of a solution.
not just a solution to his own late-fee problem,but a solution to everyone’s problem; an entirely new system of film-rental that wouldmake late-fees obsolete. together with a friend of his, on august 29th1997 in scotts valley, california, hastings founded a brand new movie-rental service callednetflix, with the idea of mailing dvds to paying customers. the creation of netflix was essentially abet on the dvd player. now, the dvd player had been invented in taiwanin 1994 by sony, but it wouldn’t be until march 1997 that one was first sold in theus. back then a player cost over a thousand dollars,and when netflix was formed, less than 1 percent
of americans actually owned one. in a move that seemed insane at the time,hastings gambled everything on the potential of dvd technology to replace the bulkier,lower-resolution videotape as the nation’s format of choice. in 1997 it was almost impossible for peopleto rent dvds because very few places had any. after trying over 200 different mailing packagesand testing them out by mailing them to himself, hastings discovered that he could safely shipa dvd for the small cost of a first-class mail stamp. this way netflix could guarantee that mosttitles would be in stock, and by enclosing
a stamped return mailer, they could make theexperience of film-rental as convenient as possible. thus, on april 14, 1998, with 30 employeesand an assortment of 925 titles, netflix opened for business. their first offer was for a 7 day rental atthe price of 4 dollars, plus a 2 dollar shipping fee. they also introduced something that is nowone of netflix’s proudest hallmark: smart suggestion algorithms. once a customer had rented enough titles,netflix could automatically suggest new movies
that were likely to interest them. nowadays when google and facebook know everythingabout us, it’s easy to take such algorithms for granted, but in 1997 they were practicallyunheard of. netflix started strong and just 48 hours afteropening they had to upgrade their website’s bandwidth due to excessive traffic they werereceiving. soon netflix signed promotional deals withtoshiba, hewlett-packard and sony, whereby they offered free rentals to people who boughtnew dvd players. in july, 1999, netflix secured a 30 milliondollar capital injections from groupe arnault, which allowed them to start a subscription-basedservice called the marquee program.
for just under 16 dollars per month, customerscould rent out as many dvds as they wanted, as long as they had no more than 4 dvds atany given time: no late fees, no due dates; it was perfect. by that point netflix was already receiving10,000 dvd orders every day, but their total revenue was sitting at barely 5 million dollars. compare this to blockbuster’s 4.5 billiondollar revenue and you’ll probably see why netflix decided to try to team up with them. blockbuster was one of the oldest video rentalcompanies and it was by far the largest, with 60,000 employees and 8,000 stores spread acrossthe us.
as the popularity of netflix grew, everyonethought blockbuster would soon enter the market, and with their vast resources they would’veprobably crushed their young competitor. that is why netflix decided to act first,and so in the early year 2000 they invited blockbuster to become a strategic partnerand investor. netflix would become the internet arm of theblockbuster brand, dropping the netflix name altogether in favor of blockbuster.com. blockbuster laughed them out of the boardroom. they were certain netflix would crumble, asit has yet to turn a profit three years after its creation.
instead, a few months later blockbuster partneredup with enron broadband, a division of the energy company you probably know today forits notoriously fraudulent accounting practices. of course at the time nobody knew that andso investors praised blockbuster’s decision. the situation for netflix looked grim. they were losing money fast and by the endof the year they reported a net loss of 57 million dollars. despite doubts coming from all sides, hastingswas convinced that dvd technology would prevail. the only thing that mattered to him was tosimply survive until that happened and 2001 was the year when things finally started goinghis way.
the price of dvd players plummeted, with somegoing around for less than a hundred bucks. 2001 also saw the 9/11 terrorist attacks. fearful americans took refuge in their homesand netflix subscriptions skyrocketed. despite growing at an unprecedented rate,netflix still hadn’t turned a profit, and so in 2002 they went public to keep the companygoing. in 2003 they crossed the 1 million subscribermark and finally had their first profitable year. just as their fortune started to turn, however,in 2004 blockbuster finally released their own online dvd mail service.
before long walmart also joined the fray,and a three way battle to undercut one another ensued. blockbuster and walmart, however, were a bitlate to the party. hastings admitted that “if they had startedtwo years earlier, they probably would have won.†on an end of year conference call hastingsdeclared: “blockbuster has thrown everything but the kitchen sink at us.†when the ceo of blockbuster heard that, hepromptly had a kitchen sink delivered to the netflix office; a fairly creative way of declaringwar.
as the competitors undercut one another, netflixsaw its brief profitability evaporate and its stock fell by 75 percent. despite losing money they kept on growingand by 2005 netflix was shipping 1 million dvds every day from their assortment of over35 thousand titles. eventually this drawn-out battle of attritiontook its toll and in 2005 walmart decided to quit. blockbuster followed suit, and as the eraof brick-and-mortar video rental came to an end, so did their success. in 2008 the same ceo that had rejected netflixwas fired and by 2010 blockbuster had filed
for bankruptcy. netflix had emerged victorious and in 2007it celebrated the delivery of its billionth dvd. then, in a single announcement, hastings beganthe journey of making the very bedrock of his company obsolete. this was his end-game; the reason he had beenwilling to sacrifice profits for so long and the same reason he had prophetically citedback in the year 2000: video-on-demand. netflix first started offering streaming ofon-demand videos in 2007, and initially the service was at no additional charge.
at first movie rights were hard to come by,and the videos available to stream on netflix were ... well, pretty awful. but in october 2008 they signed a deal withpremium cable outlet starz, which brought in some huge disney and sony library releases. the deal cost netflix only $20 million dollars,a price that they soon discovered was an absolute bargain. the reason netflix got such a great pricewas because they were the only big player in town, and pretty soon they signed dealswith paramount, mgm and lionsgate. netflix were also pushing for partnershipswith other brands and before long they were
featured on nearly every major entertainmentsystem on the planet. they buddied up with apple, playstation, xbox,nintendo wii and a bunch of other brands. by 2010 nearly 30 percent of all north americanbroadband traffic during peak hours came from netflix. they expanded into canada in 2010, latin americaand the caribbean in 2011, and europe in 2012. 2011 turned out to be a year of huge surprisesfor netflix. in response to the ever increasing cost ofcontent streaming licenses, netflix announced the production of their first piece of originalcontent. it would be a political drama called houseof cards, featuring kevin spacey and directed
by david fincher. netflix managed to outbid hbo by orderingthe first two seasons upfront for 100 million dollars. in october of that year, however, netflixmade a much less successful move. they introduced a new service called qwickster,which, yes, is spelled with a “wâ€. in reality there was nothing new about qwicksterat all; it was basically the spin-off of netflix’s old dvd rental service. the branding was sloppy, unimaginative, andjust not thought-out, but the public’s response to qwickster was even worse.
netflix lost 800,000 subscribers in a singlemonth and three months later their shares had lost two thirds their value. unsurprisingly they shut qwickster down thevery next month, bringing the two arms of the business back together. the first piece of netflix original contentwas lilyhammer, which aired on february 6, 2012. it was a relative success and it paved theway for the bigger shows that were to follow in 2013. first and foremost was house of cards, whichfirst aired on february 1 and became one of
netflix’s most acclaimed titles. airing the entire 1st season all at once wasa bold move by netflix and it revolutionised the way people watch tv shows. following the same format came arrested developmentin may, and orange is the new black in july. netflix continued to use suggestion algorithmsto keep people glued to their computers watching series after series, each available in itsentirety on-demand. these algorithms have become exponentiallysmarter in recent years, and they can now spot gaps in the market, giving netflix anedge in developing new shows. at this point netflix can create originalcontent based solely on what their customers
want before they even know that they wantit. that strategy has worked out marvelously forthem so far and in 2013 netflix received 14 emmy nominations, nine of which were for houseof cards. they continue to create original content — fromtv series to documentaries to movies, though perhaps their faith in adam sandler, withwhom they are releasing 4 new movies, is somewhat misplaced. by the end of 2016 netflix will have released600 hours of new original content for the year and they will have spent a whopping 6billion dollars on content acquisition. this aggressive expansion is the only optionthey have, with amazon and hulu knocking on
the door with their own on-demand servicesand original content. recently netflix integrated its service withcomcast’s x1 platform, a deal that could bring them upwards of 4 million new subscribers. in such a competitive market, however, a singlemistake can be deadly and there are more than enough companies out there eagerly awaitingnetflix’s next stumble. it’s still on top at the moment, but thereal question is, how long can it stay there? hey everyone, hope you enjoyed the video! thank you to everyone who supports us on patreon,it really means a lot. if you’d like to know the topic of our nextvideo you can visit our subreddit.
as you know, we’ve started letting you guyspick the companies we cover through a vote on our patreon page, so if you’ve got acompany you really want to see featured, you can head on over to patreon by clicking here. in case you missed it, you can watch our previousvideo by clicking over there. it’s about the history of red bull, fromtheir lesser known origins in thailand to their rise as a global marketing empire. if you’d like to watch the full behind thebusiness series you can click here, and you can find us on social media by clicking anyof the icons down there. once again, thanks a lot for watching, andas always: stay smart.
