How Netflix Went from DVD Rental Company to Global Streaming Power
Rhea Srivastava -
The lockdown has made almost all cultural events, all communication, and all entertainment go virtual. While it is a point of unsurity of whether all will go back to the way it was once the pandemic is over, one thing is for certain - it has become next to impossible to imagine a life where entertainment wasn’t available at the click of a button. To a certain extent, the streaming giant, Netflix, has been instrumental in changing the syntax of the media world, of how we consume entertainment, so much so the name of the company itself isn’t as much a trademark as much it’s a natural semantic connection to watching movies or other original content online. How did Netflix become synonymous with the way we watch movies? How did its changing business model help in the way it grew? And what obstacles stood and still stand in its way?
Netflix has humble beginnings as a neighbourhood video rental service which was founded way back in 1997. At the time, physical video rental stores dominated the market in the United States, some of the prime examples being Blockbuster (which would be its biggest competitor as well). ‘90s nostalgia laps up on the Blockbuster phenomenon (the Captain Marvel movie as a recent example) and it wasn’t without reason. Blockbuster was founded more than a decade earlier and grew into the video-on-demand market via multiple channels including kiosks and mail across a long period of time. Eventually, it expanded into fourteen more countries. While the company filed for bankruptcy in 2010, there is still one store functioning in Oregon, colloquially known as ‘the last Blockbuster.’
It took Netflix a shorter time to make its presence known in the video-on-demand market. This may be owing to the exclusive by-mail strategy adopted by founders Reed Hastings and Marc Rudolph. Many-a-joke has been cracked at the expense of the late returns on DVDs at the Blockbuster store, but this was a point of real contention for the customer who called it out for bad service. While not without its risks, Netflix’s claim to send all DVDs by mail in 1998 worked in their favour as they were able to foresee the popularity of portable players and how the sales of such devices would pick up in the United States over the next few years. The fact that people could simply select the movie of their choice online and have it delivered to their doorstep was a blessing. A subscription model was introduced where a DVD could be rented for a fixed fee per month, or you could choose the ‘all you can watch’ model, making the application of a late fee highly unlikely, especially if all you had to do to return the DVD was make a call to Netflix!
By 2003, Netflix had over a million customers. A lot of this is owing to the same foresight that Hastings and Rudolph had that the company’s later CEOs adopted - creating an ever-changing model on the basis of changing technology. With the internet and portable players, Netflix was one of the first companies which allowed people to select a film online and watch a DVD in the comfort of their homes. Over time, they seamlessly transitioned their interface into working on different devices, enough that people never had to think about where and when they could access the content. Multiple subscription options were provided to make the service more affordable for families, groups of friends, people with more than one device, those with high-definition TVs etc, and finally, Netflix’s greatest strength (even before it produced original content) was its recommendation algorithm which is, to this day, used proactively by customers because it picks up personal preferences and generates options most suited to their tastes. Of course, the production house has also picked up on these trends in commissioning original content across languages and cultures.
In 2003, the company’s first CEO, Marc Randolph left the company with the hope that he could mentor more young entrepreneurs to dream big and create similar business models which were attuned to their company’s needs. In a memoir titled ‘That Will Never Work’ which was published in 2019, Randolph wrote in a diary entry dating back to 1998 - "It won't be long before Amazon expands into selling DVDs. And after Amazon, there will be Borders. Then Walmart. And then virtually every other store - online or brick-and-mortar - in America... once everyone is selling the exact same thing ... it will only be a matter of time before our margins shrink to nothing." The DVD rental business was core till 2001, post which Netflix was completely focused on streaming services which were finally unveiled six years later (even though their DVD service continued as a separate entity - ‘Qwikster’ for only a month). The company’s team used their IT-background to leverage the way digital entertainment was changing. By 2007-08, you could ‘use Netflix’ on not just your personal computer or laptop, but also on gaming devices, wifi-enabled disc players, and normal set-top-boxes.
Of course, there are multiple competitors now - Amazon’s Prime Video series, Hulu co-owned by NBC Universal and News Corporation, and the eponymous Disney+, along with many other smaller services which crop up every month. Local competitors also give Netflix tight competition in the attempt to generate more rooted content, but Netflix still leads the pack at the moment in terms of its customer base and annual revenue. While this wasn’t possible initially, Netflix was one of the first services to rid itself completely of ads. From a growth perspective, this was possible by using their existing subscriptions to create more subsidised rates for new customers, where everyone gets to enjoy unlimited content without advertisements, which has, in turn, created more value and goodwill from the customer side.
Meanwhile, in spite of local competition, the growth of the business has also been exponential geographically. Starting with Canada (due to its shared language and culture), Netflix began global dominance in 2010. By 2016, the service was possible ‘worldwide,’ shy of just a few countries. To give credit where it's due, this is not an easy task. Each country, especially when it comes to providing existing content for streaming comes with its own sets of currencies and laws. Netflix has used its resources strategically to set up smaller divisions wherever applicable (and many markets still run under its global/American service) to ensure that the company’s focus is not diluted. In over 190 countries now, Netflix had over 182 million customers by the last quarter of 2019.
The final leap towards global domination, however, takes us back to the first step taken decades ago with creating an algorithm that has constantly evolved to provide customers with specific recommendations. Initially just a rating system, this slowly became an open-source initiative to ensure that more data made their service better. In 2013, they commissioned their first in-house production based on the analysis of this data - ‘House of Cards,’ an intriguing political drama that went on to garner critical acclaim and huge commercial success for the platform. What differentiates the success of House of Cards on Netflix from if it was made by a studio and then picked up by a network was that Netflix relied on its algorithm to pre-empt that the show would do well for at least two seasons. Had House of Cards been commissioned for TV, it would have, perhaps, only produced a pilot which may or may not have been picked up depending on the executive decision and initial focus group reactions.
Between House of Cards premiered in 2013 and today, Netflix is now a leading player in the production house business, especially as a content sponsor as much as a content creator. Studios and production companies are now frequently collaborating with the streaming giant to not just create content but to skip the traditional theatrical release for movies and go for global Netflix premieres instead. This is not bereft of criticism (as the debate of whether these movies qualify for the world’s major awards continues) but who is to debate as Netflix original shows remain the frontrunners at TV award season, at least. More than 80 original movies and 700 original TV shows were produced within the span of five years with a whopping content budget on over $13 billion. The service shows no compromise on production value either. Additionally, multiple shows that have been taken off-air by cable and networks, have found a new lease on life by being picked up by Netflix keeping in mind their loyal fanbase. These include shows like Lucifer and Arrested Development.
Netflix taps into exactly what its demographic wants and how it wants to consume it. In this day and age, when people are short on time and attention, ‘bingeing’ has become yet another norm which is more a sociological repercussion on technological advancement. As traditional ‘TV watching’ used to be watching one episode a week, Netflix encourages bingeing not just by releasing whole seasons of shows in one go (a trend which has been adopted by other streaming services as well), but by creating shows which are most suited to the bingeing trend. In addition, users have the option to use features like auto-play and skip ‘intro’ for a seamless experience. A ‘successful benchmark’ for a show, for instance, is how quickly it was watched by the audience in its entirety, enabling more seasons to be commissioned easily.
In 2017, Netflix rolled out a new recommendation algorithm that uses certain unique images from a movie or show to attract the viewer, just one of the examples of the intelligent and evolving technology that the company has used to its advantage. This and all previous and future algorithms have been made possible due to a large number of open source technologies within Netflix’s Open Source Software Centre, all of which are part of its latest business models. Why is it so important to keep the recommendation system updated? Studies show that an average Netflix user spends up to two minutes simply browsing for a new title to watch. Even before the most high-technology was used for this purpose, Netflix executives would physically observe compliant users at their homes using the website for improvement purposes. A system which knows exactly what you want and saves you time while at it, is precisely what the viewers need for a complete experience at a time where consuming entertainment is anyway not bound by remote controls, predetermined schedules and locations.
Since going public in 2002 with about $15 per share, and with some criticism and dips (on broadband and energy consumptions, lack of accessibility, circumvention of geoblocking, amongst others) on the way, Netflix still made a massive jump to about $250 per share in 2018. It is a prime example of a great success story due to its game-changing movement with the times.