Apr 26, 2020

Today we’re going to cover what many of you do with your evenings: Netflix.

Now, the story of Netflix comes in a few stages that I like to call the founding and pivot, the Blockbuster killer,  the streaming evolution, and where we are today: the new era of content. Today Netflix sits at more than a 187 billion dollar market cap. And they have become one of the best known brands in the world. But this story has some pretty stellar layers to it. And one of the most important in an era of eroding (or straight up excavated) consumer confidence is this thought. The IPOs that the dot com buildup created made fast millionaires. But those from the Web 2.0 era made billionaires. And you can see that in the successes of Netflix CEO Reed Hastings.

Prelude

Hastings founded Pure Software in 1991. They made software that helped other people make… software. They went public in 1995 and merged with Atria, and were acquired the next year by Rational Software - making he and Netflix founder Marc Randolph, well, obsolete. Hastings made investors and himself a lot of money. Which at that point was millions and millions of dollars. So he went on to sit on the State Board of Education and get involved in education.

Act I: The Founding and Pivot

He and Marc Randolph had carpooled to worked while at Pure Atria and had tossed around a lot of ideas for startups. Randolph landed on renting DVDs by mail. Using the still somewhat new Internet. Randolph would become CEO and Hastings would invest the money to get started. Randolph brought in a talented team from Pure Atria and they got to work using an initial investment of two and a half million dollars in 1997. 

But taking the brick and mortar concept that video stores had been successfully using wasn’t working. They had figured out how to ship DVDs cheaply, how to sell them (until Amazon basically took that part of the business away), and even how to market the service by inking deals with DVD player manufacturers. The video stores had been slow to adopt DVDs after the disaster they found with laser disk and so the people who made the DVDs saw it as a way to get more people to buy the players. And it was mostly working. But the retention numbers sucked and they were losing money. 

So they tinkered with the business model, relentlessly testing every idea. And Hastings came back to take the role of CEO and Randolph stepped into the role of president. One of those tests had been to pivot from renting DVDs to a subscription model. And it worked. They gave customers a free month trial. The subscription and the trial are now all too common. But at the time it was a wildly innovative approach. And people loved it. Especially those who could get a DVD the next day. They also gave Netflix huge word of mouth. In 1999 they were at 110,000 subscribers. Which is how I first got introduced to them in 2000, when they were finally up to 300,000 subscribers. I had no clue, but they were already thinking about streaming all the way back then. 

But they had to survive this era. And as is often the case when there’s a free month that comes at a steep cost, Netflix was bleeding money. And running out of cash. They planned to go IPO. But because the dot com bubble had burst, cash was becoming hard to come by. They had been well funded, taking a hundred million dollars by the time they got to a series E. And they were poised for greatness. But there was that cash crunch. And a big company to contend with: Blockbuster. With 9,000 stores, $6b in revenue, tens of thousands of employees, and millions of rentals being processed a month, Blockbuster was the king of the video rental market. 

The story goes that Hastings got the Netflix idea from a late fee. So they would do subscriptions. But they had sold DVDs and done rentals first. And really, they found success because of the pivot, wherever that pivot came from. And in fact, Hastings and Randolph had flown to Texas to try and sell Netflix to Blockbuster. Pretty sure Blockbuster wishes they’d jumped on that. 

Which brings us to Act II: The Blockbuster Killer. 

Managing to keep enough cash to make it through the growth, they managed to go public in 2002 and finally got profitable in 2003. Soon they would be shipping over a million DVDs every single day. They quickly rose through word of mouth. That one day shipping was certainly a thing. They pumped money into advertising and marketing. And they continued a meteoric growth. 

They employed growth hacks and they researched a lot of options for the future, knowing that technology changes were afoot. Randolf investigated opening kiosks with Mitch Lowe. Netflix wouldn’t really be interested in doing so, and Randolph would leave the company in 2002 on good terms. Wealthy after the companies successful IPO. And Lowe took the Video Droid concept of a VHS rental vending machine to DVDs after Netflix abandoned it, and went to Redbox, which had been initially started by McDonalds in 2003. Many of the ideas he and Randolf tested in Vegas as a part of Netflix would be used and by 2005 Redbox would try to sell to Netflix and Blockbuster. 

But again, Blockbuster failed to modernize. They didn’t have just one shot at buying Netflix, Reed Hastings flew out there four times to try and sell the company to Blockbuster. Blockbuster launched their own subscription service in 2004 but it was flawed and there was bad press around late fees and other silly missteps. Meanwhile Netflix was growing fast. 

Netflix shipped the billionth DVD in 2007. And by 2007, there were more Reboxes than Blockbusters and by 2011 the kiosks accounted for half of the rental market. Blockbuster was finally forced to file for bankruptcy in 2010, after being a major name brand for 25 years. 

Netflix was modernizing though. Not with Kiosks but they were already beginning to plan for streaming. And a key to their success, as in the early days was relentless self improvement and testing every little thing, all the time. They took their time and did it right. 

Broadband was on the rise. People had more bandwidth and were experimenting with streaming music at work. Netflix posted earnings of over a hundred million dollars in 2009. But they were about to do something special. 

And so Act III: The Streaming Revolution

The streaming world came online in the early days of the Internet when Severe Tire Damage streamed the first song out of Xerox PARC in 1993. But it wasn’t really until YouTube came along in 2005 that streaming video was getting viable. By 2006 Google would acquire YouTube, which was struggling with over a million dollars a month in bandwidth fees and huge legal issues with copywritten content. This was a signal to the world that streaming was ready. I mean, Saturday Night Live was in, so it must be real! 

Netflix first experimented with making their own content in 2006 with a film production division they called Red Envelope Films. They made over a dozen movies but ultimately shut down, giving Netflix a little focus on another initiative before they came back to making their own content.

Netflix would finally launch streaming media in 2007, right around the time they shipped that billionth DVD. This was the same year Hulu launched out of AOL, Comcast, Facebook, MSN, and Yahoo. But Netflix had a card up it’s sleeve. Or a House of Cards, the first show they produced, which launched in 2013. Suddenly, Netflix was much, much more than a DVD service. They were streaming movies, and creating content. Wildly popular content. They’ve produced hundreds of shows now in well over a dozen languages. 2013 also brought us Orange is the New Black, another huge success. They started off with a whole Marvel universe in 2015 with Daredevil, followed by Jessica Jones, Luke Cage, Iron Fist, and tied that up with The Defenders. But along the way we got The Crown, Narcos and the almost iconic at this point Stranger Things. Not to mention Bojack Horseman, Voltron, and the list just goes on and on. 

That era of expansion would include more than just streaming. They would finally expand into Canada in 2010, finally going international. They would hit 20 million subscribers in 2011. By 2012 they would be over 25 million subscribers. By 2013 they would exceed 33 million. In 2014 they hit 50 million. By the end of 2015 they were at almost 70 million. 2016 was huge, as they announced an expansion into 130 new international territories at CES. And the growth continued. Explosively. At this point, despite competition popping up everywhere Netflix does over 20 billion a year in revenue and has been as instrumental in revolutionizing the world as anyone. 

That competition now includes Disney Plus, Apple, Hulu, Google, and thousands of thousands of podcasts and home spun streamers, even on Twitch. All battling to produce the most polarizing, touching, beautiful, terrifying, or mesmerizing content. 

Oh and there’s still regular tv I guess… 

Epilogue

So Y2K. The dot com bubble burst. And the overnight millionaires were about to give way to something new. Something different. Something on an entirely different scale. 

As with many of the pre-crash dot com companies, Netflix had initially begun with a pretty simple idea. Take the video store concept, where you payed per-rental. And take it out of brick and mortar and onto the internets. And if they had stuck with that, we probably wouldn’t know who they are today. We would probably be getting our content from a blue and yellow box called Blockbuster. But they went far beyond that, and in the process, they changed how we think of that model. And that subscription model is how you now pay for almost everything, including software like Microsoft Office. 

And Netflix continued to innovate. They made streaming media mainstream. They made producing content a natural adjacency to a streaming service. And they let millions cut the cord from cable and get into traditional media. They became a poster child for the fact that out of the dot com bubble and Great Recession, big tech companies would go from making fast millionaires to a different scale, fast billionaires!

As we move into a new post COVID-19 era, a new round of change is about to come. Nationalism is regrettably becoming more of a thing. Further automation and adoptions of new currencies may start to disrupt existing models even further. We have so much content we have to rethink how search works. And our interpersonal relationships will be forever changed from these months in isolation. Many companies are about to go the way of Blockbuster. Including plenty that have been around much, much longer than they were. But luckily, companies like Netflix are there for us to remind us that any company can innovate like in a multi-act play. 

And we owe them our thanks, for that. - and because what the heck else would we do stuck in quarantine, right?!?! So to the nearly 9,000 people that work at Netflix we 167 million plus subscribers thank you. For revolutionizing content distribution, revolutionizing business models, and for the machine learning and other technological advancements we didn’t even cover in this episode. You are lovely. 

And thank you listeners, for abandoning binge watching Tiger King long enough to listen to this episode of the History of Computing Podcast. We are so lucky to have you. Now get back to it!