BUSINESS MODELS

The History of Netflix and the Future of Television

Netflix, as we know it today, almost ceased to exist as a brand back in 2000. What's happened since offers plenty of lessons for other giants-in-the-making.
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I felt like 10 years had gone by in the blink of an eye. All because of the band Barenaked Ladies. 

It was way back in 2002. I was browsing CDs at Newbury Comics and came across Disc One: All Their Greatest Hits (1991-2001), a Barenaked Ladies compilation. I was shocked at the passage of time. It seemed like only yesterday that their first album had come out. Was this band already at the point where they were releasing greatest hits? Where had the time gone?

A similar feeling came over me reading Ken Auletta's fascinating Netflix article in the Feb. 3 New Yorker. Was Netflix (a company that still feels young) already at the point where its past merited recounting? The answer is yes. Here are highlights from the article, which provides terrific lessons about startup life, business model disruption, and heat-of-the-moment decision-making

Don't Discount the Role of Luck

The article opens with a description of a Dallas meeting in the spring of 2000 between Netflix and Blockbuster. At the time, Netflix was an unprofitable three-year-old company. CEO Reed Hastings was 39. Netflix had 300,000 subscribers, all of whom received DVDs through the mail. Blockbuster had 7,700 stores handling mostly VHS cassettes.

"We offered to sell a forty-nine-percent stake and take the name Blockbuster.com," Hastings tells Auletta. "We'd be their online service." The price of the offer is not reported. Nonetheless, with hindsight, the deal seems like one Blockbuster could've jumped on. Blockbuster did not offer its own online subscription service until 2004. "If they had launched two years earlier, they would have killed us," Hastings admits. 

What a Difference a Decade Makes

Fast forward to autumn, 2013. Blockbuster famously announced it was going out of business. Netflix, one month before Blockbuster's white flag, announced it had 31 million U.S. subscribers (3 million more than HBO).

Auletta reports another interesting indication of Netflix's current dominance: during peak hours, it accounts for more than 30 percent of down-streaming Internet traffic in North America. That's nearly twice of what YouTube accounts for.

The Goaliaths Are Down but Not Out

How is the conventional TV industry reacting to the rise of Netflix? Leslie Moonves, the CEO of CBS Corporation, is not worried. "For 25 years, I've been hearing that network television is dead," he tells Auletta. "We're thriving like never before." CBS's stock price backs up Moonves's claim. 

Explaining why CBS (and, ostensibly, the other networks) are still thriving, Moonves notes that advertisers (especially for consumer products) still crave the mass audiences that national networks are best at consistently providing. The networks are also earning revenues as content providers. For example, Auletta reports, "Netflix pays CBS and Fox about $250 million each to let it air programs from their archives." (I assume these are an annual fees, but that's not expressly mentioned in the article.)

Still, the threats to the traditional TV model remain. Netflix is but one of them. Others include Google Chromecast, Aereo, and, of course, the commonplace habit of "DVRing" programs and skipping the ads. Network and cable TV responses include Hulu, Comcast's XFinity streaming service, and Verizon's recent purchase of Intel's digital TV division.

None of this is groundbreaking news, but it's useful and informative to read about it all in one place, in the context of Netflix's rise. 

Speaking of Sports

For all the impact Netflix and new-age models have made, the one thing they still don't have compared to elder content providers is what you might call "appointment" programming. The Super Bowl. The Olympics. The Oscars. This is likely another reason whyMoonves isn't losing any sleep. 

Programs like these--where watching "live" and talking and tweeting about it in the moment are important to viewers--nullify the DVRing effect that viewers normally prefer. In most American cities, when the Super Bowl is on, people will be in front of a television, watching a network, and contentedly sitting through the ads. 

What the Future Holds

The article closes with a few forecasts. By 2016, half of all television will be delivered via the Internet, Hastings predicts. He also asserts that Netflix can grow to 90 million U.S. subscribers--roughly triple its current amount. 

Not everyone is optimistic about Netflix. Michael Pachter, an analyst at Wedbush Securities, tells Auletta Netflix is a "big ticking time bomb" because its cash flow, at the end of 2013, was negative $16 million. He believes Netflix has to slow its spending and/or raise its rates. 

Hastings dismisses Pachter as a longtime Netflix hater. But it's worth noting that Netflix is laying the groundwork for a forthcoming price increase. 

All told, the company still seems young, with its best days ahead of it. Yet 2014 will be its 18th year in existence. Maybe Netflix is all grown up. Amazing where the time goes. 

Auletta's fantastic article has more details. 

IMAGE: Justin Litton/Flickr
Last updated: Jan 30, 2014




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