The Netflix Problem

The iconic video streaming service isn’t a threat to television. It is television.

Stewart Schley
Feb 22, 2019 · 11 min read
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Arguments that swirl about in the digital video business these days usually revolve around differing visions of Netflix. One is the more granular view of Netflix as one of many participants in an evolving digital video economy; a leader, to be sure, but one that faces intensifying competition from media giants like Disney and AT&T at the same time that Netflix’s meteoric subscriber growth (or so goes the thinking) is bound to slow: someday, sometime, somewhere.

I think otherwise. I believe Netflix is more than a “disruptor” to television. Instead, Netflix is television. This is the true but unspoken reality. The legacy television industry is broken. Netflix not only broke it, but replaced it.

It happened in stages, and probably by accident more than anything else. But trace the evolution of Netflix in chunks and you can see almost exactly how and why it got to where it is. And why it will probably never be caught.

Netflix’s rise to power started before Netflix was born (in 1997, as a DVD-by-mail company); and well before co-founder Reed Hastings took the first halting steps to stream movies over the Internet (in 2007).

It started in the 1950s when “television” rose to scaled prominence in America’s living rooms. Black-and-white TV sets planted in living rooms and dens sucked citizens into an altogether new and novel world where stories and characters came to life on flickering screens.

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Photo: Wikimedia Commons

Then, and even now, the entire point of television was simple. When you turned the thing on, you wanted to find something good to watch.

Let’s rinse and repeat: You wanted to find something good to watch. On television.

That was it. You weren’t searching for answers to humanity’s persistent questions of existence. You weren’t exploring Zen. You weren’t looking to change your life. You might have just been idling away some time. You…just…wanted…something…good…to…watch.

You can see where this is going, can’t you?

Performance gap
In terms of scratching that itch, the medium was severely limited from the beginning. The gap between television’s capability and the innate human desire that fueled its rise was enormous. The appetite for good television was insatiable from day one. We loved TV. We couldn’t get enough. Because it couldn’t give us enough. If watching something modestly entertaining was the goal, achieving it was a crapshoot. You had to be a) in front of the TV set at b) a time when “something good” happened to be “on.”

Time-shifting of television didn’t exist. Enjoying television required an improbable intersection of content and moment. And still, we watched. Oh boy did we watch. Television’s rise to prominence was swift. By the mid-1960s leisure time came to be dominated by a medium that barely existed 10 years before. Because we were so enthralled, we were willing to overlook the elephant in television’s room: the realization that executives in New York City and Los Angeles dictated our life schedules. They demanded that we gather in front of the TV set at times of their choosing, not ours. We were willing to overlook that imperfection because the way TV worked was the only thing we had.

Even the modern-era cable TV revolution of the 1980s — the medium had existed since the ’40s, but mainly as an extension of the broadcasting system — failed to alter the fundamental imperfection of television. There were lots more channels, sure, but they followed the familiar motif of linear scheduling. If we happened to arrive home 12 minutes after the opening scenes of a Superstation WTBS sitcom, we were screwed.

Mechanisms to address this flaw started to crop up around the same time. VCRs enabled those of us with enough skills and willingness to tinker to record television and play it back later. That this was a stupendous departure from the TV norm was certain. That it was a flawed and limited way to achieve the goal of time-shifting at scale also was apparent. Most of us never even twiddled with the correct VCR clock setting; anecdotes about VCRs forever blinking 12:00 are common. Within a few years of their introduction, VHS and Beta machines instead were mainly used to play back pre-recorded tapes. Ritual Friday evening visits to the Blockbuster Video store became commonplace. We were learning both to time-shift and select our TV content, and we were willing to put up with bothersome friction (long lines at the store; empty shelves where the movie we wanted used to be stacked; penalties for failing to rewind tapes) to get to it.

Netflix’s Reed Hastings was in his late-20s when all this was happening. I don’t know much about his history, only that he went to grammar school in Cambridge, later joined the Peace Corps., and then studied computer science at Stanford in the late 1980s. Hastings, who likes to tell an instructive story about renting a copy of Apollo 13 from a local Blockbuster store, must have experienced what we all experienced: a glum acquiescence to imperfection. A demand that we machete our way through a jungle of inconvenience to get a movie or TV show to appear on our glass screen when we said so, not when the suits said so.

The lesson from the Blockbuster era was just that: there was a big appetite for on-demand video. And for choose-your-own content. But there was still no real scale to the process, no way to make it convenient, ever-present and easy. Pay-per-view, the cable industry’s imperfect and clumsily named answer to video rental, didn’t change things appreciably. You no longer had to drive to Blockbuster, but you still had to show up on time. Movies on pay-per-view suffered from the same inadequacy as television of the 1950s: you had to be there at 7:05 p.m. or you’d miss the starting scene.

The breakthrough would start in the late 1990s. I wrote a book about that era: Fast Forward: Video on Demand the Future of Television. It chronicled various investments and pursuits being made to achieve a sort of Holy Grail of television possibility: The ability to watch what you wanted (albeit from a limited selection of titles) and — this was the breakthrough — the ability to watch when you wanted. The movie’s “start time” was whenever you pressed “play.”

A TV three-way
It was a remarkable feat, borne of three separate pathways to the screen. One was the cable industry’s persistent work to make distribution infrastructure that was never intended to support two-way video do just that. Complicated deductions about the intersection of concurrent-viewing demand, digital server capacities, consumer demand patterns and Hollywood’s willingness to play were ingredients in a strategic and economic brew that would grow up to yield many of the precepts Netflix would ultimately adopt. A second approach to what-you-want-when-you-want TV came from the unexpected arrival of a supercharged VCR called the Digital Video Recorder, or DVR. Two visionary companies, TiVo Inc. and Replay Networks, wowed the crowd at the 1999 Consumer Electronics Show with new machines that could literally make television start and stop in its tracks. The third leg was streaming video, brute-forced to market by pioneers like Real Networks of Seattle, whose determined CEO Rob Glaser would tell anyone within listening distance that an Internet known for hopelessly frustrating wait times and drip-drip-drip page downloads could one day support video streaming at scale. (Glaser used a music video from the artist Jewel to demonstrate streaming video; not because he loved Jewel, but because she tended not to move much during her performances; the better for improving digital compression outcomes.)

Hastings would have been in his late 30s then. A few years before, per Netflix lore, he had famously mailed himself an audio CD in a blue greeting-card envelope in what has to be the greatest, simplest business case proof of concept ever realized.

The point is this: We were attacking video-on-demand with vigor and energy. We were recognizing television’s imperfection. We were figuring this stuff out. But we were doing it in incremental, halting steps. Nobody realized what we were setting up: An opportunity for a single company to harness the power of these disparate conceits in one fell swoop.

That’s what Netflix did. While cable companies were slowly and carefully beginning to build up their video-on-demand businesses over digitally empowered subsets of proprietary networks, Hastings was thinking about bypassing them entirely by putting video on the Internet where anybody with a computer and a web browser could get it. While DVRs were storming the landscape, Netflix was making an extraordinary sideline deal with the pay-TV network company Starz Media for gobs of movies Hastings could stream on the cheap. While cablecos and telephone companies steadfastly and heroically worked to usher in the broadband Internet era, Hastings waited, watched and (in my vision, at least) started doing that palm-rubbing thing people do when they realize they’re on the verge of something extraordinary that will make them fabulously rich.

This is the instructive part: Netflix didn’t invent any of this. What it did was swoop in. Cable was meticulous, guarded and careful with video-on-demand. Blockbuster was happy to continue renting videos, fulfilling an appetite for on-demand video experiences in a clumsy way. And TV networks kept relying on historical audience flow patterns divined from an earlier age of linear broadcasting. Meanwhile, amazingly, nobody in television was paying much attention to what was happening in Silicon Valley, where companies like Apple were preparing to introduce new forms of glass screens to a world that, until then, had known only one means to get moving pictures and sound to appear before its eyes.

I suspect around this time — this would have been mid-2000s, maybe a year or two before Netflix started transforming from a DVD-by-mail company to a streaming company — Hastings realized something. The person who could produce a symmetry of three things was going to rule: A massive content library; a mechanism for getting pictures and sound to people at massive scale; and a massive head start. Those of you who read closely noticed the repetition there of a key word.

His advantage was based on distraction and inertia and small thinking. Cable was too timid and too slow to realize what it had with early video-on-demand implementations. Television networks of the day were perfectly happy collecting billions of dollars for old-school linear distribution of content. Network infrastructure companies were thrilled to charge people for supercharged broadband Internet connectivity, which was growing exponentially.

Hastings was the first to sew it all together: a huge content library with a vast streaming infrastructure with an affordable price point that would travel over the Internet. He was way out in front by the time cable even looked up.

Why this matters is: Remember the original conceit for watching television. You wanted something good to appear on the screen. Decades of expansion of the original broadcast TV model made it somewhat more likely that you’d find something good when you happened to fire up the TV set; but still, you were relegated to sipping from a firehose of linear content that flew by and then vanished. The 1992 Springsteenian reality of “57 channels (and nothin’ on)” wasn’t just a line in a song. It was a real thing.

Nobody thought that there was a better idea out there. Or if they did, like the cable industry, they relegated it to a secondary role on the stage. Video on demand was never seen as a huge moneymaker for cable; it was a nice add-on and a handy successor to the limited pay-per-view idea. But good ‘ol linear TV remained the economic mainstay for an industry that had gotten big and stodgy.

And all along, this truth: People still just wanted to find something to watch. So here comes Netflix, bringing to scale and to life a mechanism to fulfill a known desire in a way it had never been fulfilled. Decades of work still hadn’t matched the product offering to the consumer desire. Netflix did it in the space of a year or two. It was a revelation. Like the priceless Geena Davis line from Thelma and Louise: “Now I know what all the fuss is about.”

It’s impossible — be honest here, Netflix bashers — not to find something that fulfills the yen for a satisfying couple of hours in front of a TV set (or a smartphone screen) on Netflix. I work with lots of smart people who count and catalog the bounty of content available from participants in the new digital video ecosystem. It’s astonishing to compare the range of choice available from Netflix to the TV offerings of yesteryear. Not so long ago, even with 200-channel cable systems, most viewers at any given moment effectively had at best 200 or so choices (allowing for duplicated network feeds) of what TV shows to summon to their TV sets at any given time. Maybe a few dozen more if their DVRs were loaded up. Maybe, if they were lucky, a few hundred more in the form of early-to-market video on demand services.

Today those numbers seem quaint. There are thousands upon thousands of TV choices available to an individual with a Netflix account or a borrowed password. They’re TV reruns, original series, movies, whatever. The point is there are a lot of them.

In terms of fulfilling the core consumer desire, Netflix has it down cold. It’s not terribly exaggerated to suggest that the essential and original human wish for television is encompassed purely within the boundaries of the Netflix home page. Do you really need much more? The accelerating momentum around “cord-cutting,” or eschewing the linear video bundles of old, suggests the answer for a lot of people is, “not really.”

You can quibble, and should, about the absence of live news and sports; I’ll give you that. But within the realm of entertainment/information, the gig is all but up. You never wanted 200 TV channels delivered in real time. You do want, and Netflix delivers, thousands of TV choices at any time.

One person I’ve heard recognize this truth is Barry Diller, the Hollywood impresario who has surveyed the new landscape and concluded that the TV establishment is basically…screwed. Never before, Diller says, has TV had to reckon with the likes of a Netflix (or its comrade in arms, the profit-eschewing, category destroying Amazon, which has taken the Netflix model and run hard with it).

“Netflix has won this game,” Diller said at a Feb. 2019 Recode appearance. “Short of some existential event, it is Netflix’s. No one can get, I believe, to their level of subscribers, which gives them real dominance.”

Like Barry Diller, I don’t think of Netflix as a sideline disruptor. Or a “streaming video” player. Or an appendage to a broader constellation of TV delivery technologies and platforms and networks. I think of Netflix as…brace yourself…television. Outside of news and sports, nearly every important technology and content advancement the TV industry has brought to bear since its 1940s inception is wrapped up in an $11 per month video service. The result if that if you’re in the TV business, Netflix isn’t your competitor. It’s your world.

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Stewart Schley

Written by

Writer, editor, media industry analyst. Fan of electric guitars. Believes in Santa Claus and baseball. Some light dusting.

Design and Tech.Co

Ideas for the 21st Century Hustler.

Stewart Schley

Written by

Writer, editor, media industry analyst. Fan of electric guitars. Believes in Santa Claus and baseball. Some light dusting.

Design and Tech.Co

Ideas for the 21st Century Hustler.

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