Startup Stories, The Netflix Special Ep.2

How Netflix scaled to rule the world

If you’re looking for Ep. 1 click here

The mid-2000s were a time of airbrushed shirts, boy bands, and internet speeds sufficient for browsing. Dial-up was being replaced by the new kid on the block, broadband. Dial-up internet was so slow, you could literally watch a page load. It tied up the phone lines and made an eerie (to some, nostalgic) sound every time you wanted to get on the net. The visionary engineer, Hastings, didn’t name his company dvd-by-mail. It was called Netflix because he eventually wanted to make movies available online. The internet was getting fast enough to do that. The initial idea of online movie watching was using a Netflix box. You would download movies on this box overnight and watch them the next day. This idea was scrapped after the engineers working on it saw how streaming was developing on another hot startup, YouTube. The box idea was spun off into the Roku, and Netflix opted to stream movies, instead. At that time, YouTube videos were grainy, and if Netflix wanted to stream higher fidelity content, they would need the infrastructure to do that. Since revenues from the DVD-to-mail service might not have covered these costs, Netflix went public in 2002, but Blockbuster tried desperately to steal the spotlight. Blockbuster thought of itself as bigger and stronger than Netflix, so they initiated a price war. They entered the U.S online market and priced their subscription cheaper than Netflix, then Netflix lowered their price. Blockbuster went even lower before both companies settled on their rates. Netflix had warded off their perennial enemy, but more formidable ones would emerge.

In 2007, Netflix started it’s video on demand streaming service. For some time, they enjoyed a monopoly on movie streaming, accompanied by monopoly profits. However, it would take time for the traditional film community to take the scrappy startup seriously. In a 2010 New York Times interview, Time Warner CEO Jeff Bewkes downplayed Netflix as a threat to more traditional media companies. Bewkes told the newspaper, “It’s a little bit like, the Albanian army going to take over the world- I don’t think so.” This probably didn’t faze Hastings because he became Fortune’s Businessperson of the year for 2010. Hastings was on top of the world. Then, a decision made in 2011 caused Netflix’s fledging empire to fall apart like a house of cards.

Hastings is known to cut any aspect of the company that is not core to his business. We saw this with the Netflix box concept being spun off into the Roku. The company was focused on streaming, so it was time to prune the DVD-by-mail component. Customers had access to unlimited streaming and DVD-by-mail for the same low price. Netflix decided to split the mail and streaming service. The DVD-by-mail service was renamed Quickster and stopped being part of what a customer got with their subscription. The early adopters felt stabbed in the back. So, when the company simultaneously raised prices, they felt like the knife was being twisted. It was time for pitchforks and fire-sticks. 800,000 customers unsubscribed from the service, and the company’s stock plummeted. Hastings was rated one of the worst C.E.Os for 2011 by the New York Times. Well-financed companies were eyeballing Netflix like vultures, seeking to pick them apart via an acquisition. Like Rocky in all 6 of the eponymous movies, Netflix was on the ropes…again. And just like Rocky, this was the time to stop the bleeding and put up a defense to avoid a knockout. They quickly got rid of Quickster, but to prevent a hostile takeover, they had to become a more valuable company. Their next series of moves shook Hollywood to its core and created an entirely different way of watching shows. Cue the uplifting music.

The company released Lilyhammer, the first Netflix Original Series. No one noticed. But there was potential afforded by Netflix’s business model. Creators did not have to make sure plots crescendoed right before commercial breaks and cliffhangers were at the end of each episode. This gave writers the freedom to take their time building characters and story arcs. It was a freedom taken for granted in books but never realized on screen. That liberty meant you could create complex stories loaded with three-dimensional characters and nuance. Creators could explore inscrutable branches of society or create new worlds. A few years later, Netflix purchased a political thriller for $100 million. This series flexed the muscle of this newfound autonomy. It was so damn good, it won 7 Emmy’s, 2 Golden Globes, and 2 Screen Actors Guild awards. The drama helped the company add 4 million new subscribers within a year after launching and surpass $1 Billion in Revenue. This political drama, starring Kevin Spacey and Robin Wright, is House of Cards. The company also started investing aggressively in more original content and purchased series that were cancelled from traditional television networks. Customers loved the choice of being able to consume content however they wanted. They could watch one episode of their favorite show per week, or they could binge. Some customers even used Netflix content to enhance their dating experience, commonly referred to as Netflix and chill. The company changed the way series were watched, and they became a pop culture sensation. Cable television subscribers opted to cut their cords and switch to Netflix. Welcome to 2018. Blockbuster was exiled to one location in Alaska, and it’s closing. Acquiring Netflix is now off the table, but the business model is successful, so companies copied it. Netflix is facing an attack from the clones. Hulu, HBO Go, YouTube Red, and Amazon Prime are just a few. Amazon copying Netflix comes with a tinge of irony. Large media companies, like Disney, are seeking their own streaming services, so they’re pulling their content off Netflix. Hollywood is deciding if Netflix is a friend or a threat to its empire. The company’s future is not unlike one of its series. There’s a complex plot building that involves the world that Netflix is creating, fast followers and defenders of the establishment. Hollywood is collectively the king of feature film, but Netflix is showing they are not afraid to go after the crown by premiering a feature film on their platform.

Sometimes, when we look at companies, we tend to believe their success was overnight and full of luck. That could be discouraging. It helps to understand what products they started with, who their initial customers were, what problem they solved, and how they solved it. It also helps to know what rising technologies helped turn a startup into a success. The real startup stories could be more entertaining than a blockbuster movie.

So, if the unverified $40 late fee story is not what inspired Hastings to build Netflix, then what actually made him want to build a DVD-by-mail service? How did he know a nationwide media distribution system was possible? He was inspired by a startup that was on a meteoric trajectory selling books, and our next story is about them.

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