Netflix, the top video streaming service in the world, started out by shipping DVDs to customers by mail. Now it consumes more than 15 percent of the world's internet bandwidth and has subscribers in more than 190 countries.
How did it achieve such staggering success? It has been a long road of trial and error, luck, and incredibly good timing.
The Early Days of Netflix
Netflix was founded in 1997 by Reed Hastings and Marc Randolph in a small California city called Scotts Valley, in Santa Cruz county. Reed Hastings has said the idea was sparked by a $40 fine he got for renting the movie Apollo 13 from long-dead Blockbuster and returning it six weeks late. While working out at the gym one day, the sting from the fine inspired him to think up a service that allowed one to order a movie online and get it by mail.
According to Marc Randolph, however, this story is not true and was just a marketing gag. Instead, at the time in early 1997, Reed was the CEO of the company they worked for (Pure Atria) and Marc was its VP of Corporate Marketing. Because a looming merger with another firm would leave them both out of a job, Marc says Reed had told him, "Let’s come up with an idea and you can run it and I’ll fund it."
As they carpooled to work every day from their homes in Santa Cruz to Silicon Valley, Marc, who wanted to start something like Amazon.com, pitched all sorts of e-commerce ideas to Reed: surfboards, custom-built baseball bats, personalized dog food, and home-delivery shampoo. To all of them, Reed's reply was simply "that will never work."
Then, Marc heard of a hot new product that had been invented in Japan called the DVD. He realized DVDs would soon replace VHS Cassettes as the home viewing standard. After a bit of brainstorming in the car on Highway 17, Reed was sold on the idea.
On a hot summer day in 1997, Marc and Reed walked into Logos Books & Records in Santa Cruz, bought a CD of Patsy Cline's greatest hits, and mailed it to Reed's house a few blocks across the town. When the CD arrived intact, they knew they had found their ticket to e-commerce glory.
On August 29, 1997, Netflix was registered and set up using at least $1.9 million from Reed Hastings. This capital was later supplemented by other investors. Reed Hastings, 37, became Chairman with 70% ownership, and Marc Randolph, 39, the CEO and a minority owner.
After a few iterations in its first few years, Netflix eventually crafted a successful business model: a subscription-based service with no due dates or late fees and unlimited access to content at $19.95, a “Queue” that subscribers use to specify the order in which DVDs should be mailed to them, and a delivery system that automatically mails out a DVD as soon as the previous DVD is returned.
At first, Netflix would pack the DVDs in white envelopes, and it wasn't until 2000 that Netflix changed them to yellow envelopes. But it only took the company a year to switch to the iconic red envelopes we're more familiar with. The DVDs arrived in a thin package with a postage-paid return sleeve inside, and Netflix covered all postage costs.
This formula proved a hit and Netflix steadily added subscribers. Within five years of launch, Netflix was shipping millions of DVDs per day.
Key Netflix Milestones
August 29, 1997: Netflix is registered in Scotts Valley, California. The service is called Kibble in beta testing, which is a kind of dog food, to remind the team of the old advertising adage that “It doesn’t matter how good your dog food advertising campaign is, if the dogs won’t eat the dog food.”
April 14, 1998: The website launches as Netflix at 9 am. The video library is approximately 900 titles. Marc orders the movie Casino as a test. It works. Within 15 minutes, the website crashes as other orders start coming in, forcing them to run to the store to buy more servers. At the end of the first day, they book 137 orders.
1999: 239,000 subscribers sign up. Netflix’s video library expands to 3,100 titles. After a meeting between Marc and Sony goes bad, and growth becomes sluggish, Reed demotes Marc to President and takes over as CEO.
2000: Reed Hastings approaches former Blockbuster CEO John Antioco and asks him to buy Netflix for $50 million. John turns him down and laughs at Reed and the Netflix team during the meeting.
2001: Netflix hits one million subscribers and continues to grow.
2002: Netflix goes public in May. The IPO raises $82.1 million and values Netflix at $309.7 million. Reed has 500,000 shares and Marc has 166,000 shares.
Netflix opens regional warehouses, bringing overnight delivery in response to subscriber complaints that it took too long to get their DVDs.
2003: Marc Randolph leaves Netflix and sells his shares.
2006: Netflix finally becomes profitable, generating more than $80 million in profits. Subscribers rise to 6.3 million.
2007: Netflix begins streaming content, delivering directly to TVs, computers, and tablets through its Watch Now service. The first trial is in Canada. The service launches with 1,000 titles and is included free in Netflix’s $5.99 per month physical DVD subscription tier.
2010: Netflix changes focus to streaming and introduces it to the United States. Reed tells investors, “Three years ago we were a DVD by-mail company that offered some streaming. We are now a streaming company which also offers DVD-by mail.”
Blockbuster files for bankruptcy.
2011: Netflix splits its streaming business and its DVD rental business into two distinct subscription packages: Netflix for streaming and Qwikster for DVD rentals. Reed reverses the unpopular decision in less than a month after 800,000 subscribers abandon Netflix.
2012: Netflix starts making original shows. Its first show is Lilyhammer followed by House of Cards in 2013. Since then, it has produced over 1900 originals, many of which, like Squid Game and The Crown, have gone on to be tremendously popular and won many awards.
2013: Netflix introduces user profiles and rolls it out to all Netflix subscribers in August.
2015: Netflix is present in 50 countries.
2016: Netflix goes live in 130 countries simultaneously and adds local languages to its user interface, subtitles, and dubbing.
2017: Netflix officially hits 100 million subscribers worldwide.
2021: Netflix hits 209 million subscribers in over 190 countries. Notable exceptions are North Korea, Syria, China, and Iran. It has more than 15,000 titles across all its international libraries and earns annual revenues of over $25 billion.
The Future of Netflix
Netflix is aggressively creating original content for local audiences. According to Dorothy Ghettuba, the head of African Programming, it is no longer necessary to go to Hollywood. With Netflix, one can be a superstar in their backyard and export their content to the world.
Over the years, Netflix has been joined by competitors. These include Disney+, Hulu, ESPN+, Prime Video, HBO Max, and YouTube TV. These competitors are investing heavily in augmented reality and virtual reality content. Netflix will also have to embrace these emerging technologies and move its content into headsets to stay ahead of the pack.
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