Netflix: a case study

By Samarth Singh

In 2024, when you first think about Netflix, a popular video streaming service comes to mind. However, the company never started that way. Initially, the company rented physical DVDs to consumers. That’s right. What started as a DVD rental company is now a multi-billion dollar streaming giant. But change doesn’t happen overnight, and this is more than two decades of the company’s history.

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Netflix started out much different from what it is today. Before the 2000s, video streaming wasn’t as popular, and people used other mediums to watch videos. Amidst this, in 1997, Marc Randolph and Reed Hastings got the idea to rent DVDs by mail (previously people had to physically rent or own them). They even tested the idea by sending a mail to themselves, and seeing that the DVD came intact and in a usable condition, they decided to enter the $16 billion market. The rise of Netflix coincided with the rise of Amazon, which at that time was an online store for books. Randolph, inspired by Amazon, wanted to create an online marketplace for movies, called Netflix.

Netflix was started in 1998 as a DVD rental company, with 30 employees and 925 titles available. The co-founders had risked quite a lot. In 1998, people preferred to use Vide Home Systems instead of DVDs. Playing such DVDs was expensive as well. A typical DVD player would cost anywhere between $480 - $1600, and a $20 - $25 charge per DVD. Amazon proposed to acquire Netflix at between $14 - $16 million.  Hastings had invested $2.5 million in the business - the stakes were high, but despite the risks in the market, he declined the offer.

The next year, Netflix shifted to a subscription model. With this model, users had to pay only a monthly subscription and were allowed to rent a maximum of 3 DVDs at a time. It was just the subscription fee, no late fees or any extra fees. This was great for the consumers since many dreaded the late fees or any hidden charges.

And then came the dot-com bubble. In September 2000, Netflix was facing losses. The co-founders offered to sell Netflix for $50 million to Blockbuster (Blockbuster worked in a similar space). However, the then-CEO of Blockbuster declined the deal. The company wasn’t even able to go IPO during that time and had to lay off 40 of its 120 employees.

But eventually, Netflix would have it their way. In 2001, DVDs became much more popular, especially as gifts. Eventually, 95% of households had a DVD player, which was much better than Netflix’s estimate of 20% of households. In May 2002, the company went public. In the following year, 2003, they received a patent and booked their first profits of $6.5 million and a revenue of a whopping $272 million. By 2004, profit had increased by over seven times to $49 million and revenue doubled to $500 million.

But the competition wasn’t over yet. Blockbuster, to whom Netflix had previously tried to sell its company, entered the market of DVD rentals. Blockbuster even allowed users to return DVDs at physical stores. By 2006, Blockbuster reached 2 million subscribers, a third of Netflix’s 6.15 million. Eventually, Netflix lowered its fees. They eventually filed a lawsuit against Blockbuster on grounds of patent infringement, claiming that the method of communication of delivery and the “dynamic queue” was very similar to Netflix’s. The companies eventually settled the lawsuits, the terms of which weren’t disclosed.

Netflix didn’t stop there. To improve its algorithm of movie suggestions, it announced a $1 million prize to the first person who could make a video suggestion algorithm better than the one used at the time. The award was given in 2009, roughly three years after the prize was announced. The algorithm improved rating predictions by over 10%.

By the mid-2000s, internet speeds and costs had improved, and using it to enhance user experience seemed possible. Netflix initially considered a Netflix box which would download movies overnight and allow watchers to watch the movie the next day. By 2005, the Netflix Box was designed and the movie rights were acquired. However, seeing the traction YouTube had gained despite not having that high definition videos (back then), they shifted to a streaming concept.

In January 2007, the streaming service was launched. However, the DVD rental service wasn’t discontinued immediately. They encouraged hardware manufacturers to make built-in software that would support Netflix. A year after the streaming service launched, in January 2008, all disc subscribers were allowed to stream movies on the internet for no extra charge. This was because other streaming services, such as Apple and Hulu were entering the market. DVD shipments were later changed to Blu-ray Discs. In 2009, Netflix’s streaming service was more popular than its physical shipments.

The next set of developments was about making Netflix the better option for consumers, with a large content library and low subscription fees. 2010 was a big year for Netflix. That year, Netflix signed a deal worth $1 billion to stream films from Paramount, Lionsgate and Metro-Glodwyn Mayer. They roughly quadrupled their spending on streaming. By November of that year, they offered their streaming services separately as well. They expanded to their first market outside the US, in Canada.

Netflix even increased viewership for shows and movies, and this was called the “Netflix Effect”. Netflix acquired the rights to Breaking Bad, a Sony Television production. Sony encouraged Netflix to stream the show’s fourth season and many viewers binge-watched previous episodes, doubling the viewership by the fifth season.

By 2011, 30% of internet streaming traffic (in peak hours) consisted of Netflix users.

Netflix continued to acquire rights to stream films and shows, but on the other hand, they were also developing a content library of their own. By 2016, Netflix had released 126 originals, more than any other network. In 2021, Netflix earned more Academy Award nominations than any other, with 36 nominations.

The company, however, did not hastily expand its territorial expansion, and in 2013, it said that it would expand slowly, citing cost reasons.

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In 2023, it discontinued its DVD-by-mail service, after delivering over 5 billion DVDs. Netflix, today, is present in over 190 countries. They have over 17,000 titles on their services, available in multiple languages. Their revenue is over $9 billion, with roughly a fourth of profits. It employs 13,000 people. Their effort has resulted in capturing 44% of the market share in the streaming service industry.

Netflix is a great example from a business perspective. Unlike most startups with immense funding, it wasn’t relentless on expansion. It was always open to innovation, which let it change from physical DVDs to cloud streaming. It knew exactly what the consumer wanted. After having an immensely huge database of what most people like to watch, they chose to make their own productions, which would suit their consumers rather than relying on other sources.

All that started just from one DVD in a mail twenty-seven years ago.