How Netflix Transitioned From DVDs to Video Streaming

Imagine if your favorite streaming service platform name was Kibble, yes, like food. Dog food.

That would be hilarious yeah? That was exactly Netflix's name when it first started on August 29, 1997.

According to Marc Randolph, a co-founder of Netflix, the streaming service was previously known as Kibble. Even though the name was only a placeholder, it alluded to the notion that a product isn't successful unless, in his words, "the dogs eat the dog food." And boy, did the dog eat the dog food? I bet it did!

The story of Netflix as a company is the story of a business that knows how to innovate, takes chances, and takes risks that even compromise its business model for longer-term success.

“That Will Never Work' is the untold story of Netflix. It's how a handful of people, with no experience in the video business, went from mailing a used Patsy Cline CD and ended up with a publicly traded company.” - Marc Randolph

It's surprising to imagine that the streaming giant once relied on direct mail as its business model.

Let’s take a look at where Netflix has been, and where it is now.

In August 1997, Netflix was founded as a DVD-by-mail business. The original Netflix business model allowed customers to rent movies by selecting them online and having them delivered to their homes. This service was revolutionary at the time and a significant development for the industry and it was Netflix that was powering the DVD by Mail Era.

Video rental stores dominated the home entertainment market when co-founders Reed Hastings and Marc Rudolph launched Netflix. But Hastings was dissatisfied with the market because it was unfriendly to customers, and he blamed charging customers high fees for late returns.

At a time when VHS dominated the market and less than 7% of American households had DVD players, they spotted an opportunity to conduct rentals differently and started renting out DVDs by mail in April 1998. This was a game-changer in the video-rental industry as well as a major gamble at the time.

The company's co-founders were confident their venture would succeed if it attracted 20% of all households. They had the audacity to take the risk, and their prediction was correct, later on, they had 95% of the quickly expanding online DVD rental sector. Subsequently, over 80% of American households had DVD players.

After a year, Netflix introduced a subscription model in which customers could rent DVDs online for a fixed monthly fee. In 1999, the company launched its Internet-based membership service and had about 300,000 subscribers and movie buffs join its platform.

Blockbuster was initially Netflix's main competitor; however, it took Blockbuster years to begin offering a similar service to what Netflix was already doing. When they finally switched to a subscription service, Netflix had already begun the process of transitioning their customers to streaming subscribers and was exiting the DVD rental business.

Putting them ahead of the competition, and riding Blockbuster down a dead end.

Reed Hastings, a co-founder of Netflix, once asked former Blockbuster CEO John Antioco in 2000 about purchasing the business for $50 million. According to Antioco, the mail-based DVD rental business sounded too specialized, and he declined the offer.

That could have probably been a blunder by the co-founders I guess.

Fast forward to today, the now-defunct chain of video stores, which now has one site left suffered severe losses. While Netflix made a staggering $30 billion as its total revenue in 2021. With approximately 221 million users in 190 nations, billions of hours of hit series like "Stranger Things," and 226 accolades under its belt, the company has achieved great success.

“I founded Netflix. I've built it steadily over 12 years now, first with DVD becoming profitable in 2002, a head-to-head ferocious battle with Blockbuster and evolving the company toward streaming.” Reed Hastings

Over the past 25 years, Netflix has changed how movies and television are produced.

Unfortunately, those who grow big get attention, and traditional media companies have started to take notice and are now supporting more of their own programs and withdrawing their content from Netflix. The problem for Netflix is that it has expanded tremendously (while being a mark of success too), and as it approaches greater popularity, competition has grown significantly.

With the emergence of new competitors like Amazon Prime Video, HBO Max, Peacock, and Disney+, things for the illustrious streamer are different now, 20 years later. Disney+, one of Netflix’s most significant competitors has gained 152.2 million users since its 2019 launch (That was quite fast), catching up to Netflix, which still has, regardless, the largest subscriber base of all the streaming services with approximately 221.6 million subscribers.

Netflix reported its second-quarter profits on July 19, 2022. Although the corporation exceeded forecasts, it lost an estimated 970,000 members in the crucial area of subscriber growth. Even while it outperformed the predicted loss of 2 million, Disney+ garnered 14.4 million more subscribers in its most recent quarter.

In less than a year, Netflix's market capitalization has also already decreased from $300 billion to under $90 billion. At the time of this story, it was at $142.59B, still lower than the end-of-year market cap of $267.46 B in 2021.

This shows that Netflix, though still the world’s major streaming service, is struggling with both its financials and keeping its subscribers.

What does this mean for the media giant?

To maintain its place as an industry leader the movie darling will have to do what it knows how best to do.

Innovate. Innovate. Innovate.

In a blog post by Netflix, the company stated that it is seeking to create cash by altering its long-standing business model and incorporating adverts, and cracking down on password sharing as it experiences losses in its enormous user base.

According to the chief creative officer co-CEO of Netflix, Ted Sarandos, the company has previously survived downturns.

“They don’t feel great at the moment, but man it feels great to come out on the other side of it, and we know we will come out on the other side,” Ted Sarandos

Netflix competes fiercely in a market where there are a variety of entertainment options for consumers, from traditional TV to streaming, TikTok to YouTube, and video games to social media.

However, the media giant (with the highest number of paid subscribers) still maintains its place as one of the world's most popular movie streaming platforms.