"That Will Never Work":
How Netflix Outdid Cable TV

"Oops. I really screwed up that time" — that's what former Blockbuster CEO John Antioco probably thinks every time he switches TV channels. His business went bankrupt long ago, but he will never forget his refusal to purchase Netflix 20 years ago. Today, Netflix has over 150 million users all over the world, partnership with the largest movie studios, the acknowledgement of the American Motion Picture Academy, and almost seven thousand employees. All of this almost didn't happen — at the beginning, Netflix creators were thinking about opening a shampoo production company. Adsider explains how an American online shop turned into a multi-billion business in 12 years.
Market cap: over $150 billion.

Created: August 29, 1997

HQ: Los Gatos, California

Founders: Reed Hastings, Marc Randolph (left in 2003)

Stock: S&P 500, NASDAQ 100 etc.

Support: main browsers; Android, iOS and Windows Phone; Google Chromecast and Apple TV consoles, Nintendo, PlayStation, Xbox game consoles, and Smart TV.

Industry: entertainment and mass media
Those Were the 90s
In August 1997, in the town of Scotts Valley, California, computer scientist Reed Hastings and his business partner, market researcher Marc Randolph, opened the first online DVD rental in the world. For four dollars a week, any American could receive the latest videos by post.

Reed invested $2.5 million into his startup. In addition to a Master's in Computer Science, he had years of entrepreneurship experience behind him. In 1997, his small tech company was acquired by the industry's giant, Rational Software. Hastings lost quite a lot of money and left the business. After that, he decided that he was not going to make any more mistakes.

Hastings is often attributed the story that the idea of Netflix was born when he was fined for $40 in Blockbuster for returning an Apollo 13 DVD late. He and Randolph actually made that story up to promote their business model.

Branded baseball bats, dog food, shampoo, and renting DVDs by mail — out of the several options, Hastings chose the craziest. Randolph thought that the name 'Netflix' was too pornlike, but it was definitely winning in comparison to the others — old-fashioned E-Flix.com, CinemaCenter, Netpix, and NowShowing. There was no fairytale-type story: Randolph and Hastings just wanted to create "the Amazon.com of something".
Netflix online shop officially launched in 1998. It had only 30 employees and 925 movies in the catalogue, which at the time was almost the full collection of all films released in DVD format. Back then, Netflix prices competed with the largest rental service, Blockbuster (the company finally went bankrupt in 2014), but that was not enough to start.
Marc Randolph and Reed Hastings on a jet after Netflix debuted on the Nasdaq on May 29, 2002. Credit: Marc Randolph
Jeff Bezos tried to buy Netflix in 1998. A year later, Hastings started looking for buyers himself — his business wasn't spreading fast enough. The dot-com crash was also quite worrying. Acquisition by a large company seemed like the best solution.

Hastings sought a meeting with Blockbuster for months. Finally, it was appointed, but at the most awkward moment for Netflix. Randolph showed up for negotiations in Dallas in shorts, a colorful T-shirt and flip-flops — Netflix team flew into the meeting on a private jet after a party. In response to an offer to buy the service for $50 million, Blockbuster CEO John Antioco laughed in Hasting's face. Both will remember this failed deal for the whole life.

To survive the crisis, in 1999, Netflix introduced paid membership, and in the early 2000s introduced a system of recommendations and ratings, and stopped one-time rentals entirely. Since then, the user received full access to all movie collection for a fixed price.
"Randolph showed up for negotiations in Dallas in shorts, a colorful T-shirt and flip-flops."
In 2002, the company went public, selling 5.5 million shares for $15 each (as of January 23, 2020, prices for Netflix shares are at about $326). Despite the losses during the first years of operation, with the income of $272 million in 2003, Netflix had $6 million of profit.
Netflix, Inc. stock growth chart since 2018. NasdaqGS
By 2005, Netflix had 35,000 movies and shows in its library. Every day, a million DVDs were sent all over the US. In February 2007, the company delivered its billionth DVD by mail and started gradually moving to screening films online.

Netflix's business expanded and the popularity of DVD decreased. After YouTube appeared, the competition for the attention of viewers became more intense. In 2007, Netflix started to offer subscribers streaming licensed movies and TV series. Many people prefered watching series one by one, and sometimes, even several shows at once. Suddenly, Hastings realized: new format will beat the DVD.

In 2010, the company opened the international market and started delivering services in Canada. Gradually, Netflix appeared in distant corners of the planet, such as Australia, New Zealand, India and South Korea. Today, streaming is available in 190 countries.

There was more and more free content online, so uniqueness was the only way for Hastings.

In recent years, Netflix involves celebrities. For instance, in August 2018, Hastings signed a five-year contract with the author of international best sellers Harlan Coben. At the same time, Netflix signed an agreement with the creator of a popular animated series Gravity Falls Alex Hirsch. In November, Paramount Pictures became the first large movie studio to have agreed on a long-term partnership with the streaming service.

Hastings is eager to hit the big screens. When the Cannes Festival prohibited Netflix from taking part in the competition, the American Motion Picture Academy decided to give it a chance to fight for the statue, although it didn't cancel the rule of obligatory theatrical run. This resulted in the movie Roma by Alfonso Cuaron taking three Oscars right away. Before that, American film director Steven Spielberg spoke against admitting streaming services and television films to movie festivals.
Paris Theater in New York.
On January 22, 2019, Netflix entered the Motion Picture Association of America, and in late November saved New York City's oldest cinema from being closed by renting it for ten years, and now plans to screen its movies there.
The Main Loser
Those were the headlines of many features in the US about the Golden Globe 2020 award ceremony. The streaming giant received the record 34 nominations, but took only two awards home.

The company had unsuccessful products before — from Netflix TV player in 2007 to the scandalous erotic thriller called Desire that was premiered on the streaming service in 2017.
You vs. Wild on Netflix
In 2019, Netflix decided to continue the experiments with the interactive shows and in spring brought back to the screens the tough Bear Grylls, offering the viewers to save the traveler in extreme conditions. The show You vs. Wild got mixed reviews of the critics: each episode had a single ending, which left the users less excited when choosing options for actions. The project was presented as a family show.

The company has been making its own Netflix-branded products since 2013. One of the first of them is the political drama House of Cards. The show lasted for six seasons, but the events of 2017 noticeably impacted ratings of Netflix. Kevin Spacey who played the protagonist was fired after being accused of sexual misconduct.
"The End of the F***ing World" is Reed Hastings' favorite show from the past few months.
Other famous projects include co-production with Marvel Television, adapted video games, its own Late Night Show, BoJack Horseman, and dozens of popular series (Stranger Things, The Crown, The End of the F***ing World, Narcos, Orange Is the New Black etc.)
Despite the previous failures, Netflix continues to surprise with its approach to entertainment industry — not only in terms of content, but also in terms of quality integration of brands into it.

While rapidly losing stock value and subscribers in summer 2019, Netflix released the third season of Stranger Things. In the first four days, the series was watched by about 40 million viewers — more than any other Originals project.
International brands decided to have a piece of this pie. For instance, Coca-Cola company brought back to American supermarkets the old recipe from 1985, New Coke, that is featured in the series. In 60 days, Coca-Cola received 33 billion views and mentions all over the world.

Mongoose released a limited edition BMX created based on the bicycle of one of the female characters in the series. Baskin-Robbins recreated the fictional ice cream shop Scoops Ahoy in Burbank, CA. Among the companies also featured on Stranger Things 3 — Adidas, Burger King, Casio, Chevrolet, Nike, 7-Eleven, and about a hundred others.

Now, Netflix works with brands for free and receives additional income from licensing content. To start to compensate the expenses, in 2020 Reed Hastings will have to consider the alternative options for monetization — otherwise, Netflix risks losing even more clients.

"There's not easy money there," Hastings blurted out at the presentation of a quarterly report on January 21, hoping that this phrase will forever cover the issue of advertising on Netflix. "We want to [...] have none of the controversy around exploiting users with advertising." And nonetheless, the question remains.
"We want to [...] have none of the controversy around exploiting users with advertising."
Today, Netflix is more popular than the television. Sport remains the only ace of the American cable business. Traditional networks still have rights to broadcast large sports events in the US, and things will hardly change in the nearest future. Most of the sports leagues are afraid to give away their most precious asset to the streaming services. Netflix proved that it can produce popular content, but it has never yet had to hold the attention of 100 million viewers who are simultaneously watching the Super Bowl.
Another Bubble
With Disney+ and Apple TV, AT&T, Comcast, and other rockets of 2020, there remains less and less space for maneuvers in the market. This means that some services will be rapidly losing clients.

Taking into account that about 40% of the main audience of the streaming services is in the US, losing subscribers may impact the stock value. Netflix will have to consider basic package offers to maintain competition with Disney and Apple, whose membership is much cheaper ($7 and $5). Instead, Netflix prices are increasing.
"It's a funny thing. Disney is on the board of Hulu. Disney then bought Hulu. But when they go to launch with Disney Plus — no ads… We're very comfortable doing no ads, like Disney Plus, and we're going to compete on that basis."
According to the representatives of Netflix, streaming takes up about 10% of all screen time of the Americans. However, much less is known about what exactly the viewers are watching and how it impacts the business of Netflix.

Now, the most viewed shows on Netflix are not its original products. The ratings of the service may be increased either by the immortal TV series classics or by purchasing rights to screening popular movies but such deals are very pricey.

Membership fees remains the main source of income for Netflix, that's why the streaming service directs all effort at attracting and retaining audience. However, its competitors Hulu and Amazon Prime also have other income sources. To remain irreplaceable, Netflix needs to continuously produce content.
Investments in Netflix Originals
Because of the decrease in growth of the American audience, Netflix will have to face a new international expansion. The company got seriously interested in the Indian market: this year, Reed Hastings intends to invest another $420 million into promotion of original content for India.

The plans are ambitious — 100 million of new subscribers (now, Netflix has an audience of about four million in India). It is expected that the subscription is cheaper in Southeast Asia.
Subscribers Growth
The audience helps Netflix stay afloat, but constant production does not pay off fast enough. According to the LA Times, investing into expensive projects led Netflix to have $20 billion debt.

Hastings is convinced that linear television will remain a real loser in this streaming war, but he is not in a hurry to launch advertising on his service and even jokes that he will subscribe to the competitors: "It's a funny thing. Disney is on the board of Hulu. Disney then bought Hulu. But when they go to launch with Disney Plus — no ads… We're very comfortable doing no ads, like Disney Plus, and we're going to compete on that basis."
"If you have an idea, it doesn't make a difference if it's a good idea or a bad idea — the whole point is starting. Once you start, that is when you begin to figure out."
Finally, many fail to notice one thing. Netflix's main business model in the nearest future may become not distribution or paid content, but sale of personal data.

Every time you pause a video, look through the library or search the website, Netflix documents this information.

For instance, by connecting the web trackers, Netflix can collect data with the help of your accounts on social networks, consumer habits, search history and thus be of great interest to market researchers and election headquarters.

As far as it is known, Netflix has not been selling personal data so far (despite the fact that Facebook gave it access to its information a year ago). However, in this harsh competitive environment any scenario is possible.
Will Netflix be Able to Get Rid of the Multi-Billion Debt While Aspiring for Unique Content and Manage the Growing Competition?
Looking back, Randolph says that many businessmen are agonizing over the small details when they launch a new project. But the only real way to check everything is to start.

"That will never work, everyone told us. If you have an idea, it doesn't make a difference if it's a good idea or a bad idea — the whole point is starting. Once you start, that is when you begin to figure out if it's a good idea or a bad one. It informs you."
Author: Olena Pavlidi
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