Netflix: From Carpooling, to The Streaming Service We All Keep Coming Back To
Netflix is the king of entertainment streaming services, and that's not lightly said - it has over 190 million registered subscribers in more than 190 countries in the world! It also has more than 1500 hours of TV-shows and movies, so millions use Netflix as their go-to place for watching movies and TV shows.
Nowadays, we even have a Netflix button on our TV remotes, but when you consider that Netflix started off as a DVD 'snail mail' service, it's pretty obvious they went through several rough patches before becoming the universally-known name they are today.
Two serial Silicon Valley entrepreneurs: Reed Hastings and Marc Randolph are the stars of this show.
Back in 1997, they made their ride to their homes pay up by sending DVDs to people by mail while commuting! But, they weren't satisfied, and decided to transform into something we all enjoy.
Read the story of their journey here:
Trials and Tribulations
Reed Hastings was born in 1960, in Boston, Massachusetts. He attended the Officer Candidate School at the Quantico Marine Corps Base in 1981, but instead of commissioning into the Marine Corps, he chose to pursue a service in the Peace Corps.
From 1983 to 1985, during his time at the Peace Corps, he taught high school math in Swaziland. He often credits his entrepreneurial spirit to his time there, and once during an interview, he even said that "once you have hitchhiked across Africa with ten bucks in your pocket, starting a business doesn't seem too intimidating" - a fact that proves his risky nature!
After returning from the Peace Corps, Reed graduated from Stanford University with a master's degree in computer science. He landed his first job at a tech firm named Adaptive Technology, but it wasn't too long until he decided to create his first company - Pure Software!
On the other hand, Marc Randolph, his future partner, was busy tracking customers' buying behavior using computer software. While working in tech companies in the '80s, he discovered the connection between overnight delivery and improved customer retention - a discovery that later proved crucial to Netflix's growth. He had a few start-up trials in the early '90s before he started working at the software company Pure Atria.
That's because Pure Atria is a combined company from Pure Software and Atria Software, a merger that happened in 1996. The CEO of Pure Atria was, you guessed it, Reed Hastings. That's how the two of them met, and the stage was set.
Reed made the right decision when he kept Marc as a vice president of corporate marketing. However, in late 1996, Pure Atria was acquired by Rational Software in an $850 million stock swap, which was at that time, the biggest merger in Silicon Valley's history.
The merger didn't happen immediately though, taking 4 months to complete the process. During this time, Randolph and Hastings were commuting together, and the idea for Netflix was born on one of these rides.
Six Weeks Late Fee For 'Apollo 13' Birthed The Idea For A Great Business Model
Reed got the idea of creating Netflix after he left Pure Software. In an interview, he said that he had a big late fee for 'Apollo 13', and he owed the video store $40. It was all his fault, as he had misplaced the cassette, and he didn't want to tell his wife about it, as he didn't want to compromise the integrity of his marriage over a late fee.
So, on his way to the gym, he realized that people pay $30 or $40 for a monthly gym membership and work out as little or as much as they want - why can't he do the same with the movies he rents?
Boom - the idea for a great business was born!
While discussing the idea during their commute rides, Marc suggested that digital-versatile-discs (DVD) were being tested in several US markets, and he wanted to try out selling the compact new digital format online. The technology was rather new, so he and Hastings had to test the idea using a compact disc, as they couldn't even find a DVD. They went to a store, bought a music CD, put it in an envelope, and mailed it to Reed's house.
The 'aha' moment was when the DVD arrived the next day - safe and sound.
Marc named the company Netflix because it's a combination of the words 'Net', - the Internet, and 'flix' - a slang name for a movie. The idea was that people would order the DVDs online and receive them by mail by the next day. Marc designed the online catalog of movies and it had thousands of movie titles on display!
Officially, Netflix was founded in 1997 and the initial investment of $2.5 million came from Reed, Marc's mother and Steve Kahn - the founder of Integrity QA.
A Transformation From Pay-Per-Rental To Subscription-Based Model
Reed's idea for a subscription-based model is the big reason why Netflix is where it is today. Although the service used the classic pay-per-rental model in the beginning, after a while it switched to a subscription model - the users could keep the DVDs for as long as they want, but could only rent a new DVD once they returned their existing one.
Amazon was already big at the time, so it's rumored that Amazon founder Jeff Bezos had a meeting with Reed in 1999 and offered the founders $12 million, which they publicly declined.
Despite having grown a subscriber base of over 300,000 by the year 2000, Netflix was operating with a financial loss, so Reed offered to sell the company to its biggest competitor - Blockbuster.
Blockbuster was the movie rental giant at the time and was unmatched when it came to profits. Reed approached Blockbuster's CEO John Antioco and offered him a partnership, but John just laughed at him. The Netflix founders even gave the chance for Blockbuster to buy out Netflix for $50 million, but they declined.
This decision resulted in creating adversity that Blockbuster couldn't overcome - the company filed for bankruptcy in 2010.
Talk about 'smart' business decision making, right?
Even though Netflix was founded in 1997, the company operated at a loss until 2003 - the year it finally hit 1 million subscribers!
From this point on, it was an easy ride.
The First Billion
After helping Netflix through its initial public offering, Marc decided that his time in the company was over, and stepped down in 2003. In later interviews, he credited Reed for successfully running the company to millions of subscribers worldwide. However, he said that he preferred the start-up stage - it was more challenging for him and he had all the skills to solve potential problems.
On the other hand, things were looking up for Netflix - the number of subscribers doubled in 2004 and hit 5.2 million in 2005!
As Reed puts it himself, they were in some kind of a 'very scary, fun, epic battle' with Blockbuster from 2004 through 2007. With the growth of the Internet, bringing in new ideas that could use this expansion was only welcomed. In an attempt to win this battle, Reed announced that Netflix would be offering a digital video-on-demand service for its subscribers.
The company's goal was to start the new way of movie distribution by 2005, but the Internet video service eventually launched in 2007, when Netflix's subscriber base was at 7.5 million. That year alone, the company had made $1.2 billion in profit.
Innovative Model Means Full Bank Account
Netflix had the market advantage - it was the first company in the untapped world of Internet video streaming and Reed was aware of it. He used the opportunity to secure several lucrative and exclusive contracts with big media outlets, the first of which was the most profitable one was the big partnership with premium cable outlet Starz. Starting from October 2008, Starz gave Netflix a wide range of current Hollywood hit films from the Sony and Disney libraries.
In the following years, Reed signed exclusive deals with various electronics companies. Netflix came to Microsoft's Xbox 360, Sony's PlayStation 3, and most Smart TVs - a technology that was pioneering at the time.
By 2010, Reed made sure that Netflix was available to almost every Internet-connected device, including the ever-so-popular Apple iPhone, iPad, and iPod Touch. This deal skyrocketed Netflix's subscriptions to more than 20 million by the end of 2010, and for the first time in history, the number of customers who were renting was outpaced by the number of customers who were streaming shows.
In October, Reed announced that they had become primarily a streaming company - a statement that marked the following decade.
Going Worldwide And Competing With Amazon Prime And Hulu
Boosted by the success of the streaming service, Reed decided to split the streaming and DVD rental service in 2011. Customers were forced to open separate accounts to rent DVDs and stream movies, which resulted in the loss of 600,000 subscribers and half of the company's value.
Despite this, Reed pursued the idea and announced a DVD service called Qwikster. The plans for Qwikster were short-lived, and after facing an enormous customer and shareholder revolt, Reed gave up on the idea.
This debacle occurred at a time when Amazon was launching its own video streaming service, called Amazon Prime. The service offered 5,000 movies and TV shows at the time, and it was a move taken to directly compete with Netflix.
Hulu and its own service Hulu Plus also wanted a piece of the cake. Hulu's service became a serious threat as it offered a wide array of TV programs and shows more up-to-date than Netflix's catalog.
Despite all this, Netflix remained untouchable, and further crushed the competition when it took the UK and the Nordic countries by storm in 2012. The same year, the platform finally became available in Europe, boosting it to 25 million subscribers.
Becoming An Emmy-Award Winning Service
Reed was aware that the licenses of the exclusive deals had an expiration date, so he began thinking about producing original content.
The company announced its first major production political drama 'House of Cards', starring Kevin Spacey. The show was a huge success, and Netflix received 31 Primetime Emmy nominations in 2013. This move proved to be the turning point in the entertainment industry, which started to shift towards a primarily digital platform.
Although content producing partners were not happy and started delaying their content to Netflix, Reed was all-in for aggressive content expansion and signed a five-show deal with Marvel, as well as multiple new franchises.
The following years were smooth sailing for the streaming service, both financially and in the award section, winning numerous Primetime and Emmy Awards. Even Kevin Spacey's removal from House of Cards didn't hurt the service much, with the audience simply choosing to watch other shows.
Looking from this perspective, we can say that Reed hit the jackpot with Netflix, but it wouldn't have been possible without Marc's determination and creative mind!