The history of Netflix development: how to make a $100 billion company in 20 years?

2018-08-14

It’s hard to believe that Netflix is 20 years old.

Author: warp and weft venture

In 1997, when Reid Hastings (Reed Hastings) and Mark Randolph (Marc Randolph) created Netflix (original name Kibble), the company was just a start – up DVD leasing company, its only real value proposition was the mail order business. For 20 years, Netflix has become one of the world’s largest TV and film studios, with more users than the sum of all cable channels in the United States.

The history of Netflix development: how to make a $100 billion company in 20 years?

How did Netflix develop from renting films to making movies in just 20 years? A simple answer is to insist on doing something obvious.

However, for Netflix, doing something obvious means that there is basically no shortcut. This means that very difficult and ambitious business decisions are to be made, and almost no one can see this, let alone understand them. Netflix has made innovations in several key areas. With the help of the Internet, Netflix started with a more convenient DVD leasing business and started developing new streaming media business from scratch, and finally invested in original content creation. In the past 20 years, many of the key moves made by Netflix are natural and not so surprising. As we will see, Netflix has become a completely rational transition for film production companies. For most people, they did not see this at the beginning.

Let’s take a look at it.

Why Netflix’s business is around a single growth indicator that its competitors ignore? How does Netflix launch online streaming services on the basis of DVD rental business? How to make its own content and make it a flywheel for customers to gain and promote Netflix growth?

We will study how the changes in the way, time and place of consumer entertainment promote the growth of Netflix, as well as the problems that Netflix may face in the coming years and the direction of the company’s development.

1997-2006 years: from mail order leasing DVD to algorithm intelligent recommendation

In the eyes of the general observer, Netflix may be one of the most fortunate companies in the world.

For every major change or development in the home entertainment market, Netflix always seems to be able to get out of the way, waiting to use the latest consumer trends to improve its strength. In these opportunities, Netflix did occupy a large share, but luck had little to do with the early success of the company.

The secret weapon of Netflix is not luck, but a keen understanding of the market. The initial business of Hastings and Randolph was built around DVD, but they knew they wouldn’t stay in the DVD business forever – no one else came to compete with them.

“One of the challenges that we face (I think this is one of the things we do well) is that we realized early that if we were to succeed, we had to find a DVD – independent goal for the company. But if we stand out and say, ‘all this is about downloading or streaming’, if we say this in 1997 and 1998, it will have disastrous consequences. So we have to think of a position that transcends the media. – Mark Randolph

It is said that after returning the copy of Apollo 13 (Apollo 13) to the local Blockbuster, Reid Hastings decided to establish Netflix. When returned, Hastings was told that he owed $40 in late fees. Hastings was worried that his wife would say something to such an expensive late payment and was sure there would be a better way to rent a movie, so he began to design something that would become Netflix.

Although Randolph later refuted Hastings’s statement about the origin of their company, Netflix did start to change the way we rent films. In 1997, Blockbuster became the king of the family entertainment rental business unquestionably, which made Netflix’s mail order DVD leasing business unique. So, when Netflix launched in 97, many people think it’s only focused on distribution, which is understandable – most people think Netflix is just a more convenient way to rent movies.

Although this is a key factor in Netflix’s early business, Hastings and Randolph never intended to be the best entertainment distribution companies. They saw an opportunity to use the Internet to centralization of entertainment and stripped the high-end TV from the monopoly large cable TV, even if no one was aware of their initial performance. DVD leasing has never been the ultimate goal of Netflix – they are only a temporary way for the new company to compete in a highly competitive market.

1997: Netflix launched a video library of about 900 content, with a maximum lease period of 7 days. By April 1999, the video library of Netflix has been expanded to 3100 contents. The rent is only 50 cents at the beginning. By January 2000, the contents of the Netflix video library had reached 5200.

1999: Netflix announces its new subscription model. The initial price of the subscription scheme is $15.95, allowing Netflix members to rent 4 movies at a time, no return date.

In 2000: Netflix gave up the late payment and return date, instead of using a subscription plan of $19.95 a month.

2002: Netflix in May 22nd IPO. The company’s stock was initially valued at $15.

2000-2003 years: Netflix has achieved sustained growth. However, despite the increase in revenue and users, Netflix is still losing money. The company lost $4 million 500 thousand in the first quarter of 2002 alone. The main reason for this loss is that the cost of business is higher than that reported in 2001.

2003-2006 years: Netflix continues to improve the user experience, using the Cinematch sorting algorithm to provide advice for future viewing, which helps to provide personalized film advice. This, in turn, can create a “list” of what they might be interested in or what they want to lease, based on the lease history of subscribers and the rating of each content.

“For DVD, our goal is to help people fill their list with the contents of the mail in the next day; from the choice to the watch, there is a time difference and people will choose it carefully, because the exchange of DVD takes more than a day, and we won’t get feedback during the period of view.” Xavier Amateria Xavier (Amatriain)

By the end of 2006, Netflix had about 6300000 users (7 years’ compound growth rate of 79%), and finally realized profits, with a profit of over 80 million US dollars in 2006. The company has achieved such an impressive growth by challenging existing players in a truly innovative business model and focusing on its single Polaris target: the movies watched.

CATV channels usually calculate the number of viewers according to audience ratings or how many viewers of a TV program. Netflix looks at this problem from the opposite angle and focuses on how many movies (or programs) the audience has watched.

Instead of optimizing the individual programs to maximize the number of audiences, Netflix uses its huge media directory to optimize the movie that every user watches. This subtle and critical difference allows Netflix to continue to focus on how to better attract audiences and to iterate through its core “watched movie” targets through key product initiatives such as its CineMatch recommendation algorithm.

Although many analysts are skeptical about the feasibility of Netflix’s subscription based model in 1999, this is the key to the company’s success because it places Netflix as a service that allows you to watch it as you like, not by rent. This is the real innovation behind the early growth of Netflix.

Even at relatively high monthly prices, Netflix also provides greater convenience and value in the crowded fields at that time. It eliminated the two pillars of all family entertainment business models, and imposed enough restrictions on members to promote further business growth. This allows Netflix not only to win early victories among consumers, but also to help companies to separate themselves from Blockbusters and Hollywood Videos while increasing their income.

The financial challenges faced by Netflix over the past 2000-2003 years mean that diversification of its service products is both a response to external forces and a business need. The company is several years away from the introduction of streaming media services that we know today. However, behind the scenes, the company has invested heavily in the introduction of the CineMatch algorithm to make Netflix a more personalized and personalized experience.

Judging from today’s standards, the CineMatch algorithm may seem strange. At that time, however, the accuracy of CineMatch was amazing. The algorithm analyzes three factors to make recommendations – the Netflix movie catalog, the subscriber’s ratings of the movies they have watched, and the rating of a particular movie based on the ratings of all Netflix subscribers.

Cinematch has two functions. First of all, it is a pre emptive support for Netflix to overcome one of the serious threats faced by a growing company as user churn. When Netflix was launched in 1999, only 20% of users decided not to register Netflix’s subscription after free trial. 10 years later, in 2009, the renewal rate of Netflix reached 90%, but this does not mean that Netflix can be satisfied with the status quo. Hastings and his team knew that if people did not have enough to see and had higher risk, they would cancel the subscription.

The second function of Cinematch is to make Netflix subscribers more easily and faster to find what they like – one aspect of the Netflix experience that the company still focuses on to this day. Cinematch is not just a strategy to improve customer retention. This indicates that people begin to pay more attention to the experience of using Netflix. Just as the cancellation of late payment is a decisive practice in the cancellation of the home entertainment rental market (consumers are very dislike of this practice), Netflix hopes to eliminate another flaw in the typical movie rental experience – wasting time leasing a bad movie.

Netflix knows that despite its many innovations and ambitions, growth can only be attributed to one aspect: users. In a letter to investors, Hastings outlined the growth strategy of Netflix in 2007, which focuses on expanding the company’s DVD user base to cope with the trend to move from leasehold to streaming media business. This has been a plan for Netflix.

“Our strategy for the leading position of online movie leasing is to continue to develop our DVD ordering business and turn these subscribers into subscribers to Internet video delivery (as part of the Netflix order product).” – Reid Hastings

Netflix knows that its growth strategy is playing a role. By making it easier for people to find and rent movies they like, the company has built a relatively small but growing user base. Netflix knows that it wants to further expand the user group through the DVD rental business and then move the user group to online streaming services, even if no one sees what the company is doing. Although competitors are still focused on short-term business, Netflix is still busy developing and investing in the technological resources needed to further develop the company.

However, although Netflix has stood the test of many storms, the risk that Netflix faces in 2007 will be an unprecedented test for Hastings’s company.

2007-2012 years: streaming video has become mainstream, and DVD has been replaced by it.

“In 1998, we named our company Netflix because we believe that the Internet based film lease represents the future, first as a means to improve service and choice, and then as a means of film delivery.” – Reid Hastings

2007 was a big year for Netflix. Despite the rapid growth of Netflix’s DVD business, the company decided to permanently change its business by launching the first streaming media product, “Watch Now.”

At that time, streaming media was a radical practice. But the Netflix turn to streaming media is not so radical – as we will see, it is actually a logical extension of what the company has done. In fact, the fact that Netflix is willing to place the entire company in streaming media is absolutely radical.

Consumer demand for streaming video is virtually nonexistent. For example, streaming technology in 2007 was very bad. Even the fastest broadband connection lacks the ability to handle high resolution video bitrates, which means the overall video quality is worse than DVD. When Netflix launches its streaming media products, Watch Now is only compatible with the computer running Windows, and only after the user downloads a small program to work on the video player, it can run in Internet Explorer.

“As Netflix turns from DVD to streaming media, business will become more competitive. Many people are talking about how wonderful online video is, but the streaming media available to Netflix is very weak. ” Michael Koti (Michael Corty)

Many people think that, although Netflix is crazy to play movies through the Internet, it is the most logical move that the company can make, considering its business model. The main goal of Netflix has been to reduce people’s access to entertainment content. It first achieves this by improving and improving its DVD mail order service by introducing faster distribution, establishing more distribution centers and canceling late fees. Before converting to streaming media, Netflix basically converts entity DVD into repository, and then transmits them to users using the Internet. Through streaming media, Netflix convers entertainment content onto servers and distributes them to customers immediately.

By 2007, interest in DVD as a form of family entertainment began to diminish. After two years of unsalable sales, the DVD market in 2007 shrank by 4.5%, which is the first time since the introduction of this format 10 years ago, DVD sales declined year by year. Although Netflix’s DVD leasing business is growing and generating revenue, Hastings and his team know that this situation will not continue. They have to prepare for the future of their own business, so Netflix is committed to streaming video.

Netflix will no longer focus on improving the delivery of the entity DVD, but by providing users with thousands of instant access to the content, allowing them to watch them on any device, thereby changing the way of entertainment delivery. Cable Tv Co is busy with traditional business models and quarterly revenue targets, and Netflix is looking forward to the next ten years or even longer.

There is only one small flaw in Hastings’s plan: the technology needed to build his bold family entertainment new vision does not exist. In 2007, when Netflix launched the streaming media service Watch Now, his company invested $about 40000000 in developing new streaming media technology.

This is the real risk that Netflix faces. Although Hastings’s core business was strong and strong, he decided to invest in time, money and capital to create a streaming media product without consumer demand, and few people thought it would work. However, because few people think it will work, there are fewer companies actively pursuing it. As everyone else knows, Netflix already has the best streaming media technology, the largest movie library and the largest user base.

2007: Netflix launches online streaming service Watch Now. The service is launched with 1000 contents, free of charge in the physical DVD subscription plan of Netflix $5.99 per month.

Technically speaking, Netflix is not the first online streaming video service. (this honor belongs to iTV, which is an ambitious project that could not be realized in Hongkong in the late 90s. However, Netflix will be the first successful case of streaming media.

2008: Netflix announces that it will stop DVD retail sales within one week after the launch of Watch Now on the Mac platform. Less than a month later, Netflix announced a partnership with Cable Tv Co, the US Starz. Starz provides access to more than 2500 movies and TV programs for Netflix users.

For years, retail business has been a reliable and effective source of revenue for Netflix, but the decision to stop sales at the same time with new product releases has shown that retail business has never been part of the long-term growth strategy of Netflix.

2011: Netflix announced the renaming of its DVD leasing business to Qwikster. Netflix plans to split its streaming media business and DVD leasing business into two different subscription packages: Netflix for streaming media business and Qwikster for leasing business.

The decision was immediately opposed by customers and investors. The move once again sparked debate over the future of the company, and some began to question Hastings’s leadership. This decision is seen by many customers as a grab for cash, because if a client wants to rent an entity DVD and access Netflix’s streaming service, they will have to pay two separate subscription fees.

The news was released after a very unpopular price rise that began in the summer, causing about 800 thousand users to give up the service. Analysts seized the Netflix’s mistake and used it as evidence that the company was about to fall. Less than a month after the announcement of Qwikster, Hastings completely abandoned the plan before the service was officially launched.

2011: Despite the Netflix’s mistakes and the impact of the Qwikster incident, it performed very well at the end of 2011. From the launch of Watch Now in 2007 to the end of 2011, the number of Netflix users increased from 6 million to 23 million, and increased by 283% in only four years.

The introduction of Watch Now is a good example of Reid Hastings’s true vision of Netflix. When Watch Now was released in 2007, the company was in trouble. Analysts and investors expressed concern that the audience was not interested in Netflix’s new platform. Some of the founders may have flinched, but Hastings was desperate to push his streaming media plan, even though he seemed to be supporting a horse that was already losing.

The reason why Netflix’s transition to streaming media is so brilliant is partly due to the fact that few people see the value of streaming video. Consumer demand is not enough to prove that the cost of developing new media technology is reasonable. Because of its low perceived value, Netflix can develop and innovate Watch Now in less competitive situations.

The company is also able to negotiate with Starz and other networks to obtain a cheap license agreement. In 2008, Netflix and Starz reached a four – year agreement that allowed Netflix to access a movie library with 2500 Starz content, which was reported to be worth $30 million. The quality of some of these films may be deficient, but the quality of the film itself is not important – it is important to lay the foundation for its future streaming service, which is cheap and has hardly any meaningful competition.

“Despite the content and technical barriers, it will take years for mainstream consumers to watch online movies, but the time for Netflix to take the first step is ripe. In the next few years, we will expand the selection of movies, and we will work hard to get into every Internet connected screen, from cell phones to personal computers to plasma screens. ” – Reid Hastings

In the end, Hastings bet on streaming video. Netflix launched Watch Now to transform it into an entertainment giant we all know and love today. But the introduction of streaming media also reveals a key weakness now as a platform to watch movies – few people are willing to use Internet Explorer to watch movies on their PC or laptop computers. Although the quality of Watch Now is very poor, it is important that Watch Now work. The demand for streaming media is very low, but it does exist. What Netflix has to do is build a better and more attractive streaming media product.

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