How did Netflix beat Blockbuster and revolutionize the entertainment industry?
The protagonist of this story is Reed Hastings, an American businessman who was born on October 8, 1960, in the city of Boston, Massachusetts.
From a very young age, he awoke a great passion for social and economic issues. Earning a math degree from Bowdoin College and after training for summer to become a United States Marine, he chose to do his mandatory military service as a member of the Peace Corps. , a volunteer program that performs missions in developing countries. developmental.
There Reed taught for two years in schools in Africa, where he often only had a few dollars a day to get around and eat.
“Once you’ve had to hitchhike across Africa with $10 in your pockets, starting a business doesn’t seem so intimidating.”Reed said in an interview.
His teaching work was inspiring and allowed him to open his mind to endless possibilities. Returning to the United States, she studied for a master’s degree in computer science at Stanford University, graduating in 1988.
For two years he tried to find a job but was rejected due to his lack of experience. Finally, he managed to get a job as a programmer for a small software company; there he was in charge of writing the code of a tool to debug programs.
A year later he decided to quit and try his luck by opening his own software company, which he called “Pure Software”, and whose flagship product was an improved version of the program debugging tool he had developed.
For more than 6 years, Reed has been dedicated to creating different software solutions for companies.
In 1997, his company absorbed a small startup called Atria. There he would meet his future partner: Marc Randolph, who was one of the partners and workers of that small startup.
After another year of relentless work, the company was acquired by a large corporation in a $750 million transaction.
After the acquisition process, the company underwent several restructurings and Reed and Marc were relegated from their positions; however, due to their experience, the directors decided to keep them on a contract that gave them a juicy salary for six months, on the condition that they go to their offices every day and be prepared in case any questions arose, but they would not have to take any action within the business.
And, although the sale of the company had given them enough money not to worry about working for the rest of their lives, both entrepreneurs decided to join forces and start thinking about their next venture.
Marc Randolph and Reed Hastings, founders of Netflix
Looking for a business opportunity
Every day, Reed stopped by very early to pick up Marc, and on the way to work, they discussed lots of ideas. Initially, Randolph wanted to replicate the success that Amazon was having with the sale of digital books, but they had to find a new product.
On the way there, they talked about trends and thought of all possible ideas. Arriving at work, Marc researched those ideas to determine their feasibility. On the return trip, Marc shared with Reed everything he had learned throughout the day.
One of the first ideas they came up with was to create a movie rental website, but they dropped the idea because back then movies were distributed in VHS format, and mailing cassettes was too costly and complex.
Months later, and after analyzing more than 125 different ideas, Reed discovered the potential of DVD, a new video format that allowed movies to be viewed in higher quality. Being a compact disc, it was very light and could be easier to distribute than VHS.
The next morning, Mark and Reed decide to give it a try by mailing a CD and, in just 24 hours, they had the parcel in their mailbox at home in perfect condition. With this validated system, they went to work to program a prototype of the idea, which they called “Netflix”.
6 months later, the entrepreneurs launched their platform to rent DVDs. Every time a user rented a movie, it was sent by postal mail with postage paid for its return in 7 days. When the customer returned it, you would receive the next movie of interest to him.
Even though the DVD format was very recent and that by 1998 only 1% of Americans had a DVD player, in just 24 hours they had already reached their first 100 orders.
As a curious fact, it is popularly believed that the idea of Netflix was born after Reed Hastings was charged a fine of $40 in Blockbuster for the delay in the return of the VHS of the movie Apollo XIII that he had rented, but this is not more That a myth because, in fact, in its beginnings, Netflix also had a return deadline and late fees. However, Reed himself has been in charge of feeding this myth as a strategy to viralize the company’s history.
With their business up and running, Reed and Marc were constantly thinking of new options to serve their business customers, so they were constantly expanding their movie catalog.
By 1999, they decided to pivot their movie rental business model to a subscription service, in which users would pay a small amount per month and could order any number of movies, but without having more than 4 DVDs in their possession. . In addition, Reed decided to eliminate the return time limit and completely abolish late fees, which was a model widely used by the large video stores of the time.
The new model was a complete success. In the following weeks, thousands of new subscribers joined the platform.
Months later, Marc implemented an algorithm that was in charge of studying the user’s tastes to recommend the movies that might interest him, which motivated the user to maintain his subscription to be able to see all the movies on his wish list.
Little by little the company was growing and the entrepreneurs managed to close deals with companies like Toshiba and Sony to give subscriptions to those who bought DVD players. In a few months, they reached the figure of 300 thousand subscribers; however, despite the positive results, Reed and Marc had a deep fear that large companies such as Amazon, Walmart, or even Blockbuster itself, would start selling or renting movies on DVD, putting Netflix’s existence at risk.
Netflix vs Blockbuster: the end of an era and the beginning of a new
For months they tried to contact Blockbuster executives to negotiate a strategic alliance. By the year 2000, this company invoiced more than $6 billion a year and was the leading company in the video store market, with more than 9,000 stores around the world. Finally, in the fall of 2000, Reed and Marc managed to schedule a meeting with Blockbuster executives.
Netflix proposed to manage an online DVD rental platform for Blockbuster that respected all the ideas they had implemented up to that point. Executives at the big company found the idea unpromising and asked the pair of entrepreneurs how much they thought their company was worth, to which Reed Hastings nervously replied that Netflix was worth $50 million. The executives, led by John Antioco, the then CEO of Blockbuster, responded with a laugh and the two entrepreneurs left the offices with great frustration and uncertainty about the future of their company.
Despite this hard blow, they decided not to give up and continued to work hard on their online subscription movie platform. From time to time they added new movies to the catalog and the company would benefit greatly when, starting in 2001, the DVD player became more affordable and was adopted by thousands of people as the best technology to watch movies at home.
In 2002, Netflix goes public and sold more than $75 million worth of stock. This capital gives the company a tremendous boost and allows it to close deals with large movie production companies to add their titles to the catalog, increasing it to more than 15,000 available titles.
For the year 2003, the company manages to obtain its first million monthly subscribers and continues to close deals with large film production companies. At the time, the success of the platform was having attracted the interest of Blockbuster and Walmart, who were trying to get into the business, but it was too late. After an uphill battle over the three companies’ service subscription pricing rates, Reed focused his efforts on improving the quality of his service. This ended up defeating his two competitors, who soon gave up on the idea.
In 2004, seeing the extensive growth that the company was having, Marc Randolph decided to withdraw from the company, since he always preferred start-up companies, so he became a renowned angel investor in Silicon Valley.
By the year 2007, Netflix had already delivered 1,000 million DVDs to its users, thus ratifying the success of its business model; however, when the company seemed to be going through its best moment, it suddenly began to make millions in losses after hundreds of users cancel their subscription and investors panicked.
Reed Hastings, CEO of Netflix, and John Antioco, CEO of Blockbuster
Reinventing to survive
With the arrival of new technologies and the spread of the Internet, many people began to change the way they consume content. Reed Hastings had already thought about this possibility since 2001 and had been working with his team for several years on functionality to download the movies that Netflix owned the rights from the platform. However, guided by the success of platforms such as YouTube, they decided to migrate the platform’s business model to Streaming and developed the necessary technology so that users could watch movies connected to the Internet without the need to download them.
Reed envisioned that in the future people wouldn’t have to wait for DVDs to arrive on their doorsteps and could simply connect to the Internet and watch any movie immediately.
Investors thought Hastings was crazy since the rights to the films they had acquired were quite old and people had probably seen them hundreds of times. In addition to this, people normally watched movies on their televisions, not on their computers, and Netflix could only play content on them. So Reed, showing his great vision and determination, decided to give a free trial of the service to all of his subscribers; something that ended up convincing his investors that it was a bad idea and that he was crazy.
However, he had a long-term strategy. Over the next few years, he would be in charge of closing deals with Disney and Sony to expand his streaming catalog to more than 11,000 titles. This cost the company more than 20 million dollars. In addition, Netflix began to extend its streaming service to different platforms, such as video game consoles and mobile devices.
Said increase in catalog and accessibility paid off for the company, allowing it to massively attract new subscribers.
By 2011, a year after Blockbuster went bankrupt, Netflix hit 20 million subscribers, generating more than $2 billion a month in revenue.
Despite the success of his strategy, not all Hastings’ decisions were good ones. In 2011, Netflix announced that it would raise the price of its subscription by 60% and that it was going to dedicate itself entirely to the streaming service, migrating its DVD rental service to a new platform called Quickster. Said move had a high level of disapproval and cost the company the loss of 800 thousand subscribers; so it didn’t take long for Reed to realize the mistake and rectify it, publicly apologizing and dedicating himself to improving the quality of the streaming service.
Netflix continued to grow, but Reed did not sit idly by. He realized that competitors would eventually be born and that the big TV networks would choose to migrate to the streaming service in the future. This could leave Netflix without the rights to much of its catalog, so the best way to compete with this landscape was to create exclusive content for the platform.
Once again, in a risky move, Netflix begins production on a $60 million 13-episode series called “House of Cards. ” This series was launched exclusively on the platform in 2013. At the time of launching it, Reed thought that, unlike the television networks that released an episode every week to maintain the public’s expectation, Netflix would release all the episodes of the season on the same day; thus, users could see it from start to finish in a few hours if they wanted to.
For many, another crazy Hastings idea; is as this could decrease the retention of subscribers in the future. But this simple detail became the platform’s flagship and today has led fans of series produced by Netflix to go on marathons to watch the full season of their favorite series in just a couple of days.
In 2014, Netflix already had four exclusive productions and was developing several more. Its catalog was more than 8 thousand titles between series and movies. By that time, the platform had surpassed 40 million subscribers and was receiving nearly $1 billion in monthly revenue, making Reed a billionaire with a personal fortune of more than $4.7 billion.
The year 2015 was a great year for Netflix, but it was the endpoint for its main rival. That year, Blockbuster permanently ceased operations, leaving only one store open in Bend, Oregon, which to this day operates mainly attracting tourists. A clear sign of the lack of vision and innovation of the world giant of video stores. On the other hand, the successes for Netflix were just beginning. In the year 2020, a world-historical event would catapult the company to the next level.
A crisis that led Netflix to overtake Disney
The expansion of the outbreak of a virus that began in China called SARS-CoV-2 and also known as COVID-19 or Coronavirus, would cause all nations to take preventive measures against the spread of the virus that was being deadly in much of Europe. and Asia.
Faced with the need for preventive isolation, the platform’s subscribers increased considerably and the company’s shares soared. As of April 2020, the company was worth more than $187 billion, surpassing workout giant The Walt Disney Company, which was worth $186 billion at the time and whose market value fell due to the indefinite closure of the company. its parks. Thus, Netflix positioned itself as one of the largest and most lucrative companies in the entertainment industry.
Currently, Netflix has more than 180 million subscribers, works in almost every country around the world, has become one of the largest entertainment companies in history, and invests a large part of its profits in the production of series and films that have high-quality, excellent actors and memorable stories.
Reed, for his part, is 60 years old and continues to perform his duties as CEO of Netflix. In his spare time, he supports and invests large amounts of his fortune to improve education in the United States and various developing countries. In addition, he is part of the “The promise to give” program, founded by billionaires Bill Gates and Warren Buffet, in which Reed promises to donate a large part of his fortune to charity when the time of his death comes. the.
Thus we conclude the inspiring story of Reed Hastings, a visionary entrepreneur who, with determination, strategy, and innovation, managed to turn a bunch of “bad ideas” into a multi-million dollar business that revolutionized the entertainment industry globally and completely changed the way when people were used to consuming content. In his own words:
“Many entrepreneurial ideas that sound pretty crazy, stupid and financially unfeasible at first, will end up working… You learn more from failure than from success. Don’t be afraid to make mistakes.”
