History of Computers - Netflix

Introduction

Netflix is the world’s leading video streaming and DVD rental company. Netflix revolutionized home entertainment providing low cost, easy access to TV shows and movies.

Overview

Netflix was created by Reed Hastings and Marc Randolph in 1997 in Scotts Valley, California. Hastings and Randolph believed that the DVD, created earlier that year, had the potential to replace the low resolution video tape. Netflix opened for business on April 14, 1998 as an internet based DVD rental company. Initially, Netflix offered a seven day DVD rental for $4, plus $2 shipping. Netflix used creative ways promote itself, including offering three free DVD rentals with the purchase of a new Toshiba DVD player. Netflix not only rented out DVDs but also sold DVDs. However by December of their first year, Netflix got out of the business of selling DVDs. Instead, they focused on DVD rental and advertising on Amazon’s highly trafficked site.^[2]

Initially, Netflix charged 50 cents per rental and the DVDs were shipped via US mail. Also, users had to pay late fees. By September 1999, Netflix introduced monthly subscriptions. In 2002, Netflix opened regional warehouses which allowed for overnight delivery.^[3] They signed up 239,000 customers in the first year of subscriptions. The early adapters liked the unlimited due dates and no late fees.

At the start of Netflix Hastings and Randolph knew that there was no way they would be able to stream movies and TV shows over a 56k connection. Therefore, they went down the DVD distribution road. They planned for a future of 14 megabits per second in home connections by 2012. So, the company started with one business model while preparing for the future with high speed internet.^[4] They launched the streaming service in 2007. In 2010, they began to expand internationally, starting first with Canada. In 2011, Netflix began acquiring original content.

By 2015, Netflix had over 75 million members in over 190 countries who could view more than 125 million hours of TV shows and movies every day. 2015 total revenue was $6.8 billion.^[5]

As of 2016, Netflix has a total assets value of $13.6 billion (US) and is now serving 190 countries around the world. Their headquarters have relocated to Los Gatos in California.

Netflix has driven all DVD rental companies out of business. Netflix not only defeated the DVD rental competition but also greatly surpassed the stock returns of many traditional media companies including Disney, CBS, Time-Warner, and FOX. Online viewing platforms like Netflix are threatening cable networks, traditional TV channels, and pay TV services. Cable TV is increasingly worried that Netflix and other streaming companies will take away all of their customers.^[6] Netflix is a key contributor to “cord-cutting” where customers cancel their cable service in favor of streaming.^[7]

^[8]

Netflix, with 36% market share in the US, has two big competitors, Amazon and Hulu Plus. Amazon, with 13% market share in the US, is Netflix’s closest competitor. The most significant threat to Netflix is programming costs. For example, Netflix spent two million dollars per episode on The Blacklist.^[9]

Streaming entertainment content requires high speed internet connection. Netflix recommends the following internet download speeds: • 0.5 Megabits per second - Required broadband connection speed • 1.5 Megabits per second - Recommended broadband connection speed • 3.0 Megabits per second - Recommended for SD quality • 5.0 Megabits per second - Recommended for HD quality • 25 Megabits per second - Recommended for Ultra HD quality.^[10]

As more households have access to higher speeds, users will be drawn the greater flexibility of streaming their entertainment.

Netflix's algorithm can already predict what its user want to watch, and the company has begun producing and streaming its own content. Netflix claims that by moving television online, customers will be watching shows they want to watch, whenever they want to watch them. Netflix is currently working on creating a better system that will suggest one or two options that will perfectly fit what each customer wants to watch. The system will become smarter and smarter with use finding better and better titles that fit each customer. Netflix wishes to give their viewers commercial free entertainment claiming that when TV goes to the internet that the commercial industry will have to find another way to advertise.^[11]

Significance

Netflix revolutionized the home entertainment business, providing quick and easy access to thousands of movie and TV show titles. Their entrance to the market eventually led to the end of traditional video rental stores. With the arrival of high speed internet, Netflix quickly transitioned to streaming content to their customers. Customers could watch what they wanted when they wanted. Netflix’s success led to traditional media companies having to rethink their strategies, especially with Netflix acquiring their own content.