Netflix’s 20-year history: A $100 billion company built on recommendations

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

When Reed Hastings and Marc Randolph founded Netflix (formerly Kibble) in 1997, the company seemed to be little more than a DVD rental startup whose only really worthwhile idea was a mail-order business. Fast forward 20 years, and Netflix is one of the world’s largest TV and movie producers, with more subscribers than all US cable channels combined. How did Netflix go from a small rental company to a movie maker in just 20 years?

By doing the most obvious thing.

But it’s not easy for Netflix to do the obvious. That means making tough and ambitious business decisions that few people can see, let alone understand. Netflix has innovated in several key ways. They made their money from internet-enabled DVD rentals, developed a whole new streaming business from scratch, and finally invested in original content creation. But many of the most critical moves Netflix has made in the past 20 years haven’t always been shocking. Now we all know that Netflix is definitely going to be a movie studio. But at first, most people didn’t think so.

Let’s take a look:

• Why is Netflix building its business around a single growth metric ignored by its competitors?

• How does Netflix build an online streaming service on top of its DVD rental business?

• How does Netflix make its own content a catalyst for customer acquisition and growth?

Next, we’ll look at how Netflix’s growth is being driven by how, when and where entertainment is consumed, what shipwrecking challenges Netflix may face, and the company’s path in the years ahead.

To the unconcerned outsider, Netflix might look like one of the luckiest companies in the world.

With every major change or development in the home entertainment market, Netflix always seems to be standing off-screen, waiting to cash in on the latest consumer trend. That Netflix seized those opportunities is part of the reason, but good luck had little to do with the company’s early victories.

Netflix’s secret weapon is not luck, but a keen nose for the market. Hastings and Randolph started out with DVDS, but they learned early on that DVDS weren’t a long-term solution.

“One of the biggest challenges we faced, and I think one of the things we did well, was that we recognized early on that if we were going to be successful, we had to look ahead. But if we had said in 1997 or 98, ‘This is the age of download or live streaming,’ it would have been disastrous. So we have to come up with a positioning that goes beyond the media. “

– Marc Randolph

Legend has it that Reed Hastings decided to start Netflix after returning a copy of Apollo 13 to his local Blockbuster. When the film was returned, he was told he owed $40 in late fees. Worried that his wife would be unhappy about the late fee, and convinced that there must be a better way to rent movies, Hastings began designing what would become Netflix.

Though Randolph later disputed Hastings’ origin story, Netflix did set out to change the way we rent movies. In 1997, Blockbuster became the undisputed king of the home-entertainment rental business, making Netflix’s mail-order DVD rental business unique. So when Netflix launched in 1997, most people thought it was just a more convenient way to rent movies.

While this was a key factor in 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 distribute entertainment products and break Big Cable’s monopoly to get high-quality TV programs, but no one understood their ideas at first. DVD rentals were never an end goal for Netflix — it was just a way for the new company to secure tentative investments in a fiercely competitive market.

1997: Netflix launches a library of about 900 videos for up to seven days. As of April 1999, Netflix’s library expanded to 3,100 videos. Initially, each video was rented for 50 cents. By January 2000, Netflix had 5,200 product catalogs.

1999: Netflix announces a new subscription model. Subscriptions start at $15.95 and allow Netflix members to rent up to four movies at a time with no return period.

2000: Netflix abandons late fees and return dates and replaces them with a $19.95 monthly subscription.

2002: Netflix goes public on May 22 with an initial stock price of $15.

2000-2003: Netflix continues to grow. But despite gains in revenue and subscribers, Netflix is still losing money.

2003-2006: Netflix continues to improve the user experience by offering recommendations for future viewing using the Cinematch ranking algorithm, which helps refine personalized recommendations for movies, which in turn allows subscribers to create “lists” of rental movies that might be of interest based on their rental history and ratings for movies.

“For the DVD business, our goal is to help people receive movie recommendations by email over the next few days and weeks. Users will choose carefully before watching, as switching to a DVD takes a day or more of an event, and we don’t receive any feedback during viewing.”

– Xavier Amatriin

Netflix had more than 6.3 million subscribers at the end of 2006 — a seven-year compound growth rate of 79 percent — and ended up profitable, generating more than $80 million in 2006. By challenging competitors with innovative models and focusing on a single Polaris metric: movies watched, the company has achieved impressive growth rates.

Cable channels usually calculate audience numbers based on ratings or the number of people watching a TV show. Netflix goes the other way, focusing on how many movies (or shows) viewers watch. Instead of optimizing individual shows to maximize the number of viewers, Netflix uses its vast media catalog to optimize the movies each user watches. This subtle but critical distinction allows Netflix to continue to focus on how to better engage viewers and improve engagement through key products like its CineMatch recommendation algorithm, improving the core metrics of “watching a movie.”

While many analysts were skeptical about the viability of the subscription-based model proposed by Netflix in 1999, it proved key to the company’s success by positioning Netflix as a service that users could watch as much as they wanted, rather than paying per rental. This was the real innovation behind Netflix’s early growth.

Even when monthly prices were relatively high, Netflix offered greater convenience and value in a (then) crowded space. It does this by eliminating the two pillars of all home entertainment business models, while restricting membership enough to drive further growth. This gave Netflix early access to not only consumers (rent if you want! No late fees! “Will also help the company further differentiate itself from Blockbuster and Hollywood movies and increase revenue.

“While there are many explanations for the growth in subscriptions, there is no denying that the crackdown on advertising is partly driving the growth. Advertising has always been our ‘tax’.

– Bob Gilbreath

Netflix’s financial challenges from 2000 to 2003 meant that a diversified offering of services was as much a business necessity as a response to outside forces. The company is still several years away from launching the streaming service we know today. Behind the scenes, however, the company has invested heavily in a more personalized Netflix experience recommended by the CineMatch algorithm.

By today’s standards, the CineMatch algorithm might look odd. But at the time, CineMatch was pretty accurate. The algorithm analyzes three factors and makes recommendations — Netflix’s movie catalog, the ratings of the movies a user has watched, and a combined rating of a specific benchmark movie based on the ratings of all Netflix users.

CineMatch does two things. The first is to address one of the most serious threats Netflix faces as a growing company — subscriber loss. When Netflix launched in 1999, only 20% of subscribers decided not to sign up after the free trial period ended. A decade later, in 2009, Netflix had a 90% subscription renewal rate. But that doesn’t mean Netflix can rest on its laurels. Hastings and his team knew they were at higher risk of unsubscribing if they didn’t have enough viewing resources.

CineMatch’s second feature is to make it easier and faster for Netflix users to find content they like — even now, the company is still focused on the user experience. The CineMatch algorithm isn’t just a strategy to increase customer retention, it also marks Netflix’s initial focus on user experience. Just as it did away with the well-established late fee in the home entertainment rental market, Netflix wants to eliminate another drawback to the movie rental experience — wasting time on a crap-movie.

Netflix knows that all innovation and goals boil down to one thing: users. In a letter to investors, Hastings outlined Netflix’s 2007 strategy, which centers on the expected shift in growth of the company’s DVD subscriber base from rentals to streaming. This was in Netflix’s plan all along.

“Our strategy for leadership in online movie rentals relies on continuing to aggressively grow our DVD subscription business and converting those subscribers to Internet video as part of the Netflix subscription service.”

Reed Hastings –

Netflix knows its growth strategy is working. The company has built a relatively small but growing user base by making it easier for people to find and rent their favorite movies. No one knows what they’re doing, but Netflix clearly understands its goal of further expanding its subscriber base with DVD rentals and then converting them to an online streaming service. And while its competitors focus on short-term gains, Netflix is busy developing and investing in the technology it needs to grow further.

But for all its success, Netflix faced unprecedented risks in 2007.

“We named the company Netflix in 1998 because we believed internet-based movie rentals represented the future, first as a way to improve service and choice, and second as a new method of movie delivery.”

Reed Hastings –

2007 was a different year for Netflix. While Netflix’s DVD business is growing fast, the company decided to overhaul its business model with its first streaming product, Watch Now.

At the time, streaming was a radical move. But Netflix’s decision to make streaming its core business isn’t that radical — it’s actually a logical extension of what the company is already doing. At its core, however, Netflix’s willingness to bet the entire company on streaming is radical.

Consumer demand for streaming video is almost non-existent. First, streaming technology was so bad in 2007 that even the fastest broadband connections couldn’t handle the bit rates of higher resolution video, which meant the overall quality of the video was worse than DVD. When Netflix launched its streaming product, Watch Now was only compatible with Windows-based computers and was only available in Internet Explorer if users downloaded an app to make the video player work.

“As Netflix moves from DVDS to streaming, there’s more competition in the business. For all the talk about the superiority of online video, Netflix’s available streaming content is pretty thin.”

– Michael Corty

While many people think Netflix’s move on Internet streaming is crazy, it’s the most logical move the company can make based on its business model. Netflix’s main goal has been to reduce resistance to access to entertainment. First, it refined and improved the DVD-by-mail service by providing faster delivery, building more distribution centers and eliminating fees. Before the shift to streaming, Netflix basically uploaded DVDS stacked in warehouses to the Internet and then delivered them to users. Through streaming, Netflix aggregates entertainment content onto its servers and then delivers it to customers on the fly.

Interest in DVDS plummeted in 2007, falling 4.5 percent for the first time in a decade after two years of declining sales. While Netflix’s DVD rental business is growing and generating revenue, Hastings and his team know that won’t last, so it’s betting all the money on streaming.

Netflix has its sights set a decade or more ahead, while cable companies cling to the traditional model.

But one small flaw in Hastings’ plan is that the technology he relies on to realize his vision of a new model for home entertainment doesn’t exist. As a result, Netflix spent $40 million in 2007 developing new streaming technology.

While the core business is growing and performing well, Hastings’ decision to invest time and money in streaming at a time when audience demand is not strong and expectations are not high is a real crisis for Netflix. But by the time they woke up, Netflix had left them far behind, with the best streaming technology, the largest video library and the largest subscriber base.

2007: Netflix launches its online streaming service, Watch Now. The service includes 1,000 movies and is included for free in Netflix’s $5.99 monthly physical DVD subscription price.

Netflix wasn’t technically the first service to stream video online. (the glory to iTV, which is in the late 90 s in Hong Kong launched an impossible grand plans https://tedium.co/2017/01/05/first-streaming-service-itv-hong-kong/). Netflix, however, became the first success story.

2008: Netflix stops DVD retail a week after announcing the launch of Watch Now on the Mac. The news comes less than a month after Netflix announced a partnership with U.S. cable network Starz, giving subscribers access to more than 2,500 movies and TV shows.

Retail has been a reliable source of revenue for the company, but the fact that it immediately pulled the plug on retail at the same time it announced the new product shows that retail was never part of Netflix’s medium – to long-term growth strategy.

2011: Netflix announces a rebranding of its DVD rental business, Qwikster. Netflix plans to split its streaming and DVD rental business into two different subscription packages: Netflix Streaming and Qwikster Rental.

The decision immediately upset users and investors and sparked debate about the company’s future, with some questioning Hastings’ leadership. The decision was seen by many users as a cash grab, since customers pay separate subscription fees if they want to rent physical DVDS and access Netflix’s streaming service.

After launching the service and experiencing price increases, about 800,000 users dropped the service. Analysts used Netflix’s gaffe as evidence that the company was on its way out. Less than a month after announcing Qwikster, Hastings scrapped the project entirely before it even officially launched.

2011: Despite the Qwikster missteps and surprises, Netflix had a spectacularly successful year. Between 2007 and the end of 2011, the number of Netflix subscribers increased from 6 million to 23 million, a 283 percent increase in just four years.

Part of the reason Netflix’s transition to streaming has been so brilliant is that few people recognize the value of streaming video. There is not enough consumer demand to justify the cost of developing new streaming technologies. Because fewer people see the value in streaming, Netflix is able to innovate with Watch Now with less competition.

The company has also struck licensing deals with networks like Starz at bargain prices. In 2008, Netflix signed a four-year, $30 million deal with Starz that gave Netflix access to 2,500 Starz movies. The quality of some of these films is not so good, but the quality of the films themselves is not as important as laying the foundation for their future low-cost streaming services with little competition.

“Due to content and technical barriers, it will take years for mainstream consumers to adopt online movie watching, but Netflix’s timing is perfect to make its first move. In the coming years, we will expand our selection of movies as we strive to occupy every screen on every Internet connection, from phones to PCS to plasma screens.”

Reed Hastings –

In the end, Hastings’ bet on streaming video proved to be right. The launch of Watch Now puts Netflix on the path to becoming the entertainment giant we know and love today. But the introduction of streaming has also exposed a key weakness of Watch Now as a platform — few people prefer to use a browser to Watch movies on a PC or laptop. While Watch Now’s film quality was awful when it launched, how it works is clearly more important. Demand for streaming is low, but not absent, and all Netflix has to do is create better streaming products that are more attractive.

Netflix’s investment in its streaming platform also allows the company to integrate its own vertical content into its own digital infrastructure when it starts producing its own content years from now, another major investment in Netflix’s growth and a clever reference to previous successes.

An incident like Qwikster could doom smaller companies, but Hastings and Netflix have avoided it almost perfectly. In a very candid blog post, Hastings took full responsibility for Qwikster’s failure. By listening to customers, responding quickly, and acknowledging poor executive decisions, Netflix not only shrugged off press questions, but also managed to turn events into aggressive PR and executive accountability.

“I screwed up. I owe everyone an explanation. It is clear from feedback over the past two months that many members feel there was a lack of respect in the way we announced the separation of DVD and streaming and the price changes. This was certainly not our intention, and I sincerely apologize. “

Reed Hastings –

By 2012, Netflix’s relationships with multiple studios and media publishers had become strained. In search of a larger Netflix pie, Starz canceled its licensing deal with Netflix, causing thousands of movies to disappear from Netflix’s streaming service overnight. Licensing content for other networks has become increasingly expensive and complicated for Netflix. So the company has had to reinvent itself again.

The period from 2007 to 2012 May have been the most turbulent in Netflix’s history, but since 2013 Netflix has continued to surprise and reshape the entertainment industry. Its first step was to establish itself as a producer of television and films.

Netflix was the first company to dominate the home-made content market in 2013 with its own political drama “House of Cards.” Acclaimed by critics and fans, the series became a pivotal turning point in Netflix’s development. Netflix is finally waking up to its ambitions as a distribution platform, a one-stop shop for original content. While the transition from content licensing to homemade movies and TV shows may seem counterintuitive for a technology company, it makes perfect sense for Netflix. The more content Netflix produces, the more users it attracts. That, in turn, leads to higher revenues, which means more funding for original content in an ever-growing virtuous circle.

Netflix grew dramatically before 2013, but the company recognized that its growth was largely limited to a single dimension: subscribers. Netflix had more than 44 million subscribers at the end of 2013, up 33 percent from 2012, and total revenue reached $430 million, up 21 percent from 2012. But all the technological innovation and original programming Netflix has invested in will ultimately come to nothing if the company can’t keep attracting new subscribers.

That prompted Netflix to expand into all major international entertainment markets almost overnight in 2016. That, in turn, will feed Netflix’s voracious appetite for original content while producing foreign shows and movies for the company’s newfound overseas audience.

From 2016 on, Netflix seemed unstoppable. The company’s shows have won numerous awards and honors, including 54 nominations for the 68th Emmy Awards. Netflix’s feature films are increasingly ambitious, attracting Hollywood’s most famous writers, directors and actors. In 2017, Netflix achieved what once seemed impossible: the number of Netflix subscribers surpassed the total number of cable subscribers in the United States.

Netflix has effectively become the world’s largest entertainment provider, and it shows no signs of slowing down.

2013: Netflix debuts its homemade political drama House of Cards. Although Netflix doesn’t release any ratings figures for the show, Nielsen estimates it won’t be outwatched by shows from major cable networks.

2013: Netflix makes user profiles part of a limited Apple TV deployment. The feature will roll out to all Netflix subscribers in August.

2015: Netflix releases its first feature film, Beasts of No Nation, with a budget of about $6 million. The film was released on Netflix’s streaming service and also shown in some theaters in the United States. This is another movie that premiered on Netflix. Beasts of No Nation was boycotted soon after its release by four major U.S. movie chains, claiming Netflix’s simultaneous streaming violated the 90-day exclusivity rules enjoyed by movie theaters.

The release of Beasts of No Nation has given Netflix another serious rival: mainstream movie theaters. Until beasts of No Nation was released, no other company dared to disrupt the assembly line of traditional entertainment production, especially when it came to theatrical release schedules. The film didn’t perform well at the box office ($50,699 nationwide, versus $1,635 at theaters), but Netflix was pleased with the film’s performance on its streaming service.

2016: Netflix launches simultaneously in 130 countries around the world. In one step, Netflix could transform itself from an American company into a global media company. Netflix gained more than 7 million new subscribers in the fourth quarter of 2016. Later that year, Netflix received a record 54 nominations for original programming at the 68th Primetime Emmy Awards. Amazon received only 16 nominations for home-made shows.

2017: The number of Netflix subscribers exceeds the total number of CABLE subscribers in the United States.

2017: Netflix plans to spend $8 billion on content in 2018, up $2 billion from 2017.

2017: Netflix added 8.3 million new subscribers in the fourth quarter of 2017, a record quarterly increase and 18% year-over-year increase. The surge in subscriptions comes as several shows gain popularity among users.

While the leap from licensed content to production may seem like a bit of a leap, it makes a lot of sense for Netflix’s model. The upfront costs of producing original TV and feature films are high. But once the content exists on Netflix’s platform, the shows and movies will become Netflix’s perennial content to attract new subscribers and retain existing ones around the world.

In addition to the large production cost, luxurious actors and production line-up, Netflix also maximizes the users’ following of TV series in the release mode of quarterly episodes, and even changes the way people watch TV.

Of course, Netflix wants to change the way we watch TV around the world, not just in the United States. If streaming video online is Netflix’s most forward-looking business decision, the company’s overnight worldwide expansion is the most ambitious sign of its ambitions. The scale of Netflix’s international expansion may have stalled others, but Netflix has been preparing for global dominance for two years.

To gain new subscribers in overseas markets, Netflix has struck deals with cellular and cable operators in various regional markets. While these agreements will take months or even years to finalize, they are mutually beneficial. Netflix gained millions of new subscribers in overseas markets almost immediately, without advertising or licensing deals, and by bundling Netflix, cellular providers also gained a competitive edge over domestic rivals. As more subscribers build up, revenue increases, which is then ploughed back into original content — a virtuous cycle of continued growth that Netflix had planned.

Netflix’s approach to international expansion is another great example of how it continues to innovate by building on its success.

Netflix has been doing deals with foreign media publishers for years, and its tie-up with foreign cellular and cable companies is just one new approach. Netflix’s overseas expansion has also laid the groundwork for many original foreign shows popular with English-speaking audiences, such as Dark, a German sci-fi series, and Terrace House, a Japanese live-action TV show.

Of all the milestones Netflix has reached, passing the total number of cable subscribers in the United States is one of the highest. In less than 20 years, Netflix has gone from being a DVD rental startup to one of the world’s largest entertainment companies, and managed to innovate in verticals in a way that many analysts and pundits would have thought impossible.

With its credibility as a TV and movie producer, Netflix seems poised for more success in 2018 and beyond. Predictably, Netflix remains firmly committed to producing original programming, reportedly planning to produce about 700 original shows in 2018, and its content budget has increased from $6 billion to $8 billion.

Competitors including Amazon and Hulu may lead to increased competition in coming years, but Netflix still has plenty of options:

It’s almost impossible to predict the future of the home entertainment market, but Augmented reality (AR) and virtual reality (VR) are sure to be part of Netflix’s future.

Netflix CEO Reed Hastings has been skeptical of AR and VR in the past. According to Hastings, VIRTUAL reality is particularly ill-suited to TV and movies because the physical sensations exposed to VR make viewing more difficult. (If you’ve ever used a VR headset, you know what he’s talking about). But with Amazon, Hulu and other content providers betting heavily on AR and VR, Netflix may have no choice but to embrace these emerging technologies to preserve its crown as the king of home entertainment.

“We are experimenting and seeing, but there are no concrete plans. The technology is still in its very early stages, so we want to learn things we don’t have experience with before, rather than blindly providing Netflix shows and movies on headset.”

Reed Hastings –

Currently, Netflix uses data to optimize what shows we show in our search lists. With so much data, Netflix is uniquely positioned to create better with the same data.

With all the data on subscribers and shows watched, Netflix can not only let people watch more shows, but also make better ones. Data-centric approaches to television production could be a growth area in the future.

Media consolidation is one of the most important trends in entertainment today. With several major mergers fundamentally reshaping the media landscape in North America and around the world, Netflix could make strategic acquisitions of mainstream media publishers, including existing intellectual property, broadcast rights and service providers. Disney’s acquisition of 21st Century Fox, for example, will give the company indirect ownership of Netflix rival Hulu, which could force Netflix to take a longer view so that it can effectively grab rival programming.

There are already signs that Netflix is becoming more open to the idea of strategic acquisitions. Netflix made its first acquisition in August 2017, buying British comic book publisher Millarworld.

Over the past two decades, Netflix has been on a wild ride. What can we learn from this?

It’s no secret that most start-ups fail. Some companies fail because they took on too much risk, but many fail because they didn’t aim high enough.

In the early stages of entrepreneurship, it is crucial to identify a large potential market to develop. Google may be one of the biggest tech companies in the world, but it still cares how many searches take place each month. Facebook may have 2bn users, but it is always concerned with how active those users are and how to maximise their engagement.

So how do you find your North Star indicator?

One of the best ways to identify core metrics that grow with your business is to examine the usage data that you already have. You need to find levers to increase product usage and retention. Early on, your North Star could be something like increasing your total active user base. After that, you need to identify specific actions related to user behavior and long-term retention.

It is critical that this metric be available to everyone in the company. Designing technical goals based on core metrics is virtually impossible if only a few people have access to the data. Once a core growth metric is identified, all the data on this metric (and related goals) can be made available to everyone from engineers to customer representatives.

Once the core growth indicator is identified, it is time to consider the goals associated with that indicator. In its early days, Dropbox measured its success by how many users put at least one file into storage. Similarly, Slack is focused on getting companies to send at least 2,000 messages, because that’s key to representing how Slack users really start to understand the platform’s strengths. How do you move the core metrics forward?

What everyone wants you to do isn’t necessarily wrong.

Not every idea has to be reinvented. The best decisions are the ones that help your business grow. Simple is best, sometimes the most obvious solution is what your business must do to survive.

This is not to say, however, that the best move is always obvious. In the case of Netflix, few could see the benefits of the decision to stream online, and Hastings’ decision made him doubt the leadership and the company’s future. Imagine if Hastings hadn’t insisted, would there be Netflix today?

If your company is in a critical period of growth, consider this:

• How to solve customers’ problems and make their lives easier.

• How to improve the product.

• How to solve the most difficult problems, not the most interesting ones. The most interesting challenges facing engineers may not necessarily be the most pressing problems facing users. Focus on the most difficult problems the product will solve, not the problems that are most interesting to engineers.

Netflix has always focused on doing it to the extreme, whether it’s getting DVDS to customers faster or streaming technology. The pursuit of quality has helped Netflix build not just a mass audience but a loyal fan base.

When it comes to product quality, ask yourself some tough questions:

• Do you cut corners on product quality for the sake of competition and speed? What would you do if you had enough time?

• Looking at vertically competitive products, does the competitor have the same or better features as yours? How can you improve your product to gain a competitive advantage?

• Assuming your product is of good quality, what about customer support? Because the success of a product is not only related to product quality, the most important thing is whether it is helpful to users.

Netflix has been lauded for being an innovator, but it has remained true to itself and its founders’ vision. Netflix has also managed to retain the flexibility that all growing companies need to respond effectively to a rapidly changing market, while focusing on the priorities needed to sustain this ambitious growth.

Whether it’s the $40 late fee for a copy of Apollo 13 or the creation of one of the world’s biggest entertainment companies, the rise and growth of Netflix is certainly an interesting story. How this story will end no one can guess, but from it since the childhood, broken cocoon into a butterfly will give us inspiration, the story of a company that has a market value of billions of dollars not as a day, in this process, the vision of the enterprise, the unique sense of smell, and policy makers of determination and persistence, etc., are essential to the success factors.

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How Netflix Became a $100 Billion Company in 20 Years

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