History of Netflix

Netflix came to life in 1997, created by Reed Hastings and Marc Randolph in California. It originally operated as an online movie rental business, structured much the same as bricks and mortar movie rental businesses, but based on the Internet rather than in a physical retail outlet. Netflix offered customers the opportunity to hire DVDs, with due dates for their return and late fees where these were breached. It is interesting to note that Netflix began in the same year that DVDs came into public attention – a new technology to replace VHS tapes. One of the selling points for Netflix at this stage was that not many video rental shops were stocking this new technology; Netflix began with 925 titles, which was the full DVD catalogue of the time.

While Netflix was established as an online business, Flew (2008) would consider this initial model to be unrepresentative of a true e-commerce model. The transaction occurred online, but the product was a physical tangible object and was mailed via traditional postal channels to the customer. Rappa (2009) would define this setup as a Catalogue Merchant model, with Netflix operating as a retailer of a product. Netflix offered a range of options to customers other than renting DVDs, such as the sale of DVDs outright and the opportunity to purchase a DVD after renting it. Not only did Netflix begin publishing movie reviews on their website, they also began building profiles of customers based on their rental history, which was used to provide suggestions for future rentals.

Netflix ceased DVD sales in late 1998, due to low sales and increased competition from other organisations, and instead focused on evolving its core business of renting movies. In 1999 Netflix began to offer a subscription service which allowed customers to select four movies in advance which had no due date for return and would not attract late fees. By 2001 the subscription service had evolved further to become unlimited DVDs for a fixed monthly cost; alongside this Netflix phased out single movie rentals and focused on building its subscriber base (which accounted for 97 percent of it’s business). This stage of Netflix’s operations is starting to move towards a subscription business model based on Rappa’s categories of business models, but the organisation was still not operating as a true e-commerce business yet.

Netflix was becoming popular, processing ten thousand orders per day. Despite this, the company recorded losses of 29 million dollars in 1999, and failed to secure a listing on the stock exchange due to uncertainty from investors over the lack of profits being demonstrated. It is worth considering how Netflix was operating to understand why such losses would be expected in a young company. Netflix was built on offering a range of movie titles for hire, and guaranteed that these would be in stock when requested by customers; in some cases, Netflix purchased ten thousand copies of a title to ensure it was available for hire. Furthermore, Netflix offered titles for hire that were not stocked in other mainstream retail outlets such as foreign films. Chris Anderson talks of the concept of the ‘long tail’. Rather than focusing on making a profit from a few best-selling titles, Anderson suggests that the future profits of entertainment based retail is in the niche markets that will continue to attract an audience over a longer period of time as opposed to a huge spike upon release (2009). Netflix understood this concept and began talking as far back as the year 2000 about video-on-demand, with co-founder Hastings quoted as saying “What Netflix is about is owning a transition stage as rental converts to video-on-demand” (fundinguniverse.com, n.d.). Netflix also worked on improving its recommendation system, and found that customers were more willing to hire an obscure or lesser known movie that was suggested as they were not paying for each individual hire.

In 2007 Netflix began to focus on streaming video in addition to DVD rentals, and as streaming became more and more the core business of Netflix, the company can be seen more and more as the true representation of an e-commerce model. With all transactions taking place online and subscribers receiving access to video-on-demand online the business is fully operating on the Internet. In the case of Netflix, what we witness is a transition from an online business with offline operations that sits neatly in the Catalogue Merchant model, to a fully online video-streaming business that sits in the Content Services Subscription model.

Next page: Netflix – The Business Model

References

Allen, G., Feils, D., & Disbrow, H. (2014). THE RISE AND FALL OF NETFLIX: WHAT HAPPENED AND WHERE WILL IT GO FROM HERE? (). Arden: Jordan Whitney Enterprises, Inc. Retrieved from http://search.proquest.com.dbgw.lis.curtin.edu.au/docview/1647822304?accountid=10382

Anderson, C. (2009). The Long Tail. Wired, 12(10). October. http://www.wired.com/wired/archive/12.10/tail.html

eyeh8nbc (2014, October 7). 1998 Netflix Ad [Video file]. Retrieved from https://www.youtube.com/watch?v=akWxRqObbEM

Flew, T. (2008). The Global Knowledge Economy. In New Media: An Introduction (3rd ed., pp.193-217). New York: Oxford Http://edocs.library.curtin.edu.au/eres_display.cgi?url=dc60264108.pdf&copyright=1

Funding Universe website – http://www.fundinguniverse.com/company-histories/netflix-inc-history/

Rappa, M. (2009). Managing the Digital Enterprise: Business Models on the Web http://digitalenterprise.org/models/models.html

Header image copyright Netflix. Source: netflix.com

Advertisements