When Reed Hastings and Marc Randolph founded Netflix (formerly known as Kibble) in 1997, the company appeared to be little more than an upstart DVD rental business whose only real value proposition was the mail-order element of its operation. Fast forward two decades and Netflix has become one of the biggest TV and movie studios in the world, with more subscribers than all the cable TV channels in America combined. How did Netflix go from renting movies to making them in just 20 years?
By consistently doing the obvious.
For Netflix, however, doing the obvious rarely meant taking the easy way out. It meant making business decisions that were so difficult and so ambitious, few people could even see them, let alone understand them. Netflix has innovated in several key ways. They started with a frictionless DVD rental business facilitated by the internet, developed an entirely new streaming business from scratch, and finally invested in original content creation. But many of the most pivotal moves Netflix has made during the past 20 years haven’t been all that surprising. As we’ll see, it makes perfect sense that Netflix became a movie studio. It just didn’t look that way to most people in the beginning.
1997-2006: From Video Rentals by Mail to Smart Suggestions by Algorithm
To the casual observer, Netflix might look like one of the luckiest companies in the world.
For every major change or development in the home entertainment market, Netflix always seems to be just off-screen, waiting to capitalize on the latest consumer trend. Netflix has had its fair share of these kinds of opportunities, but good fortune had very little to do with the company’s early wins.
Netflix’s secret weapon wasn’t luck but rather a keen understanding of its market. Hastings and Randolph may have built their initial business around DVDs, but they knew they wouldn’t be in the DVD business forever—even if nobody else did.
Legend has it that Reed Hastings decided to start Netflix after returning a copy of Apollo 13 to his local Blockbuster. Upon returning to the movie, Hastings was told that he owed $40 in late fees. Fearing what his wife would say about such a steep late fee and convinced there must be a better way to rent movies, Hastings began to devise what would later become Netflix.
Although Randolph later disputed Hastings’ story about their company’s origins, Netflix did indeed set out to change the way we rented movies. In 1997, Blockbuster was the undisputed king of the home entertainment rental vertical, which made Netflix’s mail-order DVD rental business unique. As a result, when Netflix launched in ’97, many people understandably thought the business was focused exclusively on distribution—most people saw Netflix as nothing more than a more convenient way to rent movies.
Although this was a crucial element of Netflix’s early business, Hastings and Randolph never set out to be the best entertainment distribution company. They saw an opportunity to use the internet to decentralize entertainment and unbundle premium TV from the monopolistic grip of Big Cable, even if nobody else recognized their initial play for what it was. DVD rentals were never Netflix’s endgame – they were just a way for the new company to gain a tentative toehold in an intensely competitive market.
1997: Netflix launches with a video library of approximately 900 titles, with a 7-day maximum rental policy. By April 1999, Netflix’s video library expands to 3,100 titles. Rentals initially cost just 50 cents each. By January 2000, Netflix’s catalog reaches 5,200 titles.