Gina Keating is an editor at 1stOnlineNews and the author of “Netflixed: The Epic Battle for America’s Eyeballs.”
In its two-decade lifespan, Netflix has led three revolutions that have changed how people watch movies and television — from videotape to DVD, from DVD to streaming, and from televisions and movie theaters to video-enabled devices. As the company rolls out the second season of its hit series “House of Cards” and sees its stock price hit record highs, let’s look at some of the folklore surrounding what looks like the future of entertainment.
1. Netflix was started after one of its founders incurred a huge late fee from his local video store.
The story of the $40 late fee for a long-lost copy of “Apollo 13” that Reed Hastings was afraid to tell his wife about has gotten a lot of play over the years, including in Vanity Fair and Fortune profiles about the Netflix chief executive. The tale originated several years after the company’s launch as what Netflix co-founder Marc Randolph called “a convenient fiction” to describe to consumers how the service differed from its foe, Blockbuster: no due dates, no late fees.
In fact, Hastings, a computer programmer, and Randolph, a tech marketing executive, set out in 1997 in Santa Cruz, Calif., to ride the e-commerce wave. They decided to become “the Amazon.com of something” and focused on DVDs after researching products that were portable, durable and desirable enough to sell online and deliver through the mail.
They couldn’t get their hands on a DVD, then being tested in only a few markets, so they bought a compact disc from a music store in downtown Santa Cruz and mailed it to Hastings’s home a few blocks away. When it arrived unscathed, Netflix was born.
2. Netflix subscribers want first-run movies.
New movies have a relatively short shelf life at Netflix and don’t provide a decent return on the hefty investment needed to license them. In fact, about 75 percent of titles that subscribers request are recommended by the Web site’s algorithm, and as much as 80 percent of what people watch is from the back catalogue. In its early days, Netflix developed loyal followings in the anime, immigrant and cinephile communities by building the world’s largest DVD inventory.
When costs for streaming rights began rising, Netflix shifted its focus. Its content team drew on its rich trove of customer data and decided to take advantage of “binge watching” of television series, provide more children’s programming and produce shows. Netflix does not make viewership information public, but the broadband data company Procera reported this past week that 5 to 15 percent of Netflix subscribers active on several worldwide broadband networks had sampled “House of Cards” and that 2 percent of U.S. subscribers it monitored had finished the series the weekend it was released. “Binge watching is real,” Procera concluded.
3. Netflix planned to beat Blockbuster all along.
Randolph and Hastings conceived Netflix as an online DVD seller and added a rental service before its launch when they realized that they could not compete with big-volume sellers such as Amazon and Wal-Mart. At first, Netflix rented movies a la carte, with per-day late fees just like Blockbuster. As a rental proposition, it was terrible — discs took several days to reach the East Coast from its Santa Cruz warehouse.
In a desperate move to improve the rental business in 1999, Netflix tested a subscription plan with no due dates or late fees, and a queue where customers could create and store lists of movies they wanted to see. The program was an instant hit, but the company did not realize the importance of overnight delivery until data showed that subscriber growth began soaring in markets near Netflix distribution centers. Blockbuster noticed the trend in these same areas in 2002. The video store giant launched Blockbuster Online in 2004, and waged a grueling four-year price war to try — and ultimately fail — to catch Netflix.
4. “House of Cards” and “Orange Is the New Black” are Netflix’s first forays into producing content.
Netflix began buying movies — mainly documentaries and low-budget films — in 2004 with “Cowboy del Amor” and the award-winning “Born Into Brothels.” Content chief Ted Sarandos had a limited budget for his Red Envelope Entertainment, and he used it to ally Netflix with the burgeoning independent-film community. Although Red Envelope was shut down a few years later, Sarandos had established important relationships with the creative side of the film industry. Those ties served Netflix well years later when Sarandos, noticing that Hollywood production companies were making fewer television series, went shopping for the projects that became Netflix’s first original content.
The process that led to the decision to fund “House of Cards” at a hefty price tag of $100 million for two seasons was data-driven. Mining the data on Netflix customers’ preferences, Sarandos believed that he could find an audience for the series by aggregating the enthusiastic fan bases of actor Kevin Spacey, director David Fincher, “The West Wing” and the original British version of “House of Cards.”
“I didn’t use data to make the show, but I used data to determine the potential audience to a level of accuracy very few people can do,” he told the Guardian in 2013.
5. Netflix’s business model is easy to copy.
Blockbuster, Wal-Mart and the major Hollywood studios have all taken shots at replicating Netflix, yet their deep pockets and influence have made little difference. Netflix’s movie-matching algorithm and customer data are simply too difficult and expensive to replicate. The information allows the company to predict, with astonishing accuracy, quarterly subscriber growth, content usage patterns, operations costs and even postage for those who still rent DVDs. Netflix can see around the bend — quickly maneuvering to tweak its marketing campaigns, costs and library to take advantage of trends and changes in subscribers’ behavior.
Competition to deliver online videos is fierce, and Hastings sees Internet-based TV supplanting traditional “linear” ways of watching. Cable companies have had trouble peeling off Netflix subscribers, and download competitors have not made a dent, either. Cable subscriptions dropped by nearly 2 million last year — about the same number Netflix picked up in the fourth quarter alone. While one in four households has a Netflix subscription, just 5 percent of consumers used a download service like iTunes to watch a movie, according to a recent study by the NPD Group.
Netflix believes that, in the future, consumers will subscribe to individual “channels” such as Netflix, Hulu and HBO Go and access them online. “Over the coming decades and across the world, Internet TV will replace linear TV,” the company boasts on its Web site. “Apps will replace channels, remote controls will disappear, and screens will proliferate. As Internet TV grows from millions to billions, Netflix is leading the way.”