How Netflix Replaced Video Rental Companies

Charlene Annabel
Sep 27 · 4 min read
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Photo by freestocks on Unsplash

In 2000, when Reed Hastings, founder and CEO of Netflix, flew from Dallas to propose a radical merger idea with the then CEO of Blockbuster, John Antioco, he let out a laughed in front of Hastings that was “tiny, involuntary, and vanished almost immediately.”

Fast forward today, how did Netflix become one of the leading video content creators and distributors globally with thousands of millions of subscribers toppled the movie rental empire while traditional video rental companies like Blockbuster fall?

Creative Channel Disruption

Gaining inspiration from Amazon, Hastings, and co-founder, Mark Randolph, admired Bezos’s business idea of selling books online and wanted to do the same with other items — portable, desirable, durable to be sold online, and via post.

Back then, video rental stores dominated the home entertainment market. Hastings was frustrated that the market wasn’t customer-centric because customers had to pay a late-charging fee whenever they returned the rented movies late.

It was only in April 1998 that Netflix took up the opportunity by renting out DVDs by mail. It was a considerable gamble because VHS dominated the market, and not many people were using DVDs since it was a new technology barely released.

Regardless, both Hastings and Randolph took a leap of faith. Fortunately enough, almost 95% of households owned a DVD player eventually, which surpassed their initial forecast of having a viable business model with 20% of households.

Given the continual development of the Internet and the diminished sales of CDs and DVDs, Netflix decided to deliver videos directly online. Although the Internet’s speed in the late nineties and early 2000s was slow and couldn’t churn out high-quality videos, it was Netflix’s forward-thinking mentality that enabled video-on-demand services afterwards.

Not only was Netflix able to once again innovate its delivery channel, but it was also the first company that offered streaming services across all devices — smartphones, PCs, TVs, tablets, etc.

Innovative Revenue Model

Instead of paying for a single DVD, Netflix’s first business model was to let its users select as many videos online and have them delivered to their homes. To shake things up a little more, Netflix introduced a subscription-based model a year later where customers could rent as many videos as they want for a flat fee per month without any late-charging price.

Netflix’s strategy offered a lot more convenience and value to customers than traditional video rental stores. Customers had to travel miles to the store and physically carry those cassette(s) back home.

Unique Value Proposition

Big data algorithm is the core of Netflix’s capability to personalise and recommend videos to its users based on what they like. It uses a basic rating system based on the number of views, IMD ratings, viewers’ feedback, and if customers watched the video until the end.

Netflix’s value to its customers is the ability to understand their preferences and create a community with fitting content for everyone.

Compared to the brick and mortar video rental stores, customers had to browse through aisles of DVDs on display or request help from the store assistants to manually sieve out the movie they’re looking for — a reasonably inefficient service. Unlike Netflix, traditional video rental stores didn’t have an easy search and browse function, reasonable pricing, and customer-centric service.

Moreover, Netflix releases an entire season of the show without making its customers wait for weeks between each episode. Weekly releases are necessary for traditional TV platforms to maintain a habit and make viewers watch advertisements. Netflix, however, allows customers to binge-watch all they can without awkward interruptions of ads.

Original Content Creation

In 2013, Netflix started to create original content by either producing shows in-house or acquiring independent creators. The strategy that Netflix adopted is also known as the vertical integration model, where it owns several parts of its business value chain.

House of Cards was the first big hit that was created this way. In contrast, where studios were only wanting to make a pilot, Netflix already knew that this series would become a hit based on the big data it uses to study its viewers’ preferences and signed up for two seasons.

On the other hand, video rental stores from Blockbuster to Redbox only provide service to customers. They do not own or make the movies they rent. Therefore, customers do not receive more customised and faster service because they don’t have a robust algorithm system to analyse what kinds of show their customers prefer watching.

What Lessons Can Businesses Learn from Netflix?

1. Be Willing to Disrupt Yourself

Netflix capitalised on a technological and marketing opportunity to compete with video rental companies like Blockbuster with a subscription-based service. It was continually willing to innovate every step of its way from DVD subscription service to online video streaming to online on-demand streaming content.

Video rental companies only focused on their undisrupted position in the entertainment industry, prioritising their business model more than their customer needs (remember the late-charging fees).

2. Failures are the Key to Greater Success

While Netflix’s success was widely acclaimed, some initiatives have not worked out initially. In the mid-2000s, Netflix’s attempt to enter the film-making business was unsuccessful. Another critique in 2011 ridiculed Netflix of splitting streaming and DVD rental into two separate services resulted in thousands of customers quitting Netflix in the following months.

Blockbuster only decided to enter the online video rental business in 2004, but it was too late.

Thank you for reading!

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