How Netflix Revolutionized The TV Industry

The path to Netflix’s streaming empire wasn’t as straightforward as you might think.

17 Things About Netflix You Didn’t Know

"Stranger Things,” “House of Cards,” "The Crown”—Netflix isn’t just a streaming service, it’s a media empire worth $70 billion. But how did a slow-to-ship mail order DVD rental service with a limited movie inventory get to be the cord-cutting giant it is today?

The path to Netflix’s streaming empire wasn’t as straightforward as you might think—and at least one of those rumors you’ve heard really isn’t true. Here’s the scoop on Netflix’s long ride to 100 million subscribers.

The Myth

An early photo of Reed Hastings at Netflix.

You might have heard a myth about how an excessive late fee for a video rental triggered a lightbulb moment for a young entrepreneur, who then went out to build a movie rental business centered around no abusive late fees.

Yeah, that’s a load of crap, but don’t blame yourself for believing it. Netflix co-founder Reed Hastings peddled the myth as late as 2009, like when he told Fortune Magazine:

“The genesis of Netflix came in 1997 when I got this late fee, about $40, for Apollo 13. I remember the fee because I was embarrassed about it. That was back in the VHS days, and it got me thinking that there's a big market out there.”

In reality, Netflix’s other co-founder Marc Randolf called the tale “‘a convenient fiction.’” The story actually was just a marketing method to describe how Netflix didn’t have late fees when it rolled out its subscription model, not the “aha” moment of greatness that led to you binge watching “Scandal” in your underwear.

The Idea Actually Came From Another, Bigger Idea

The actual inspiration behind Netflix’s original DVDs-by-snail-mail was a far more common and run-of-the-mill business move: the founders saw and idea and a way to expand on it.

As “Netflixed: The Epic Battle for America’s Eyeballs” author Gina Keating further explains:

“In fact, Hastings, a computer programmer, and Randolph, a tech marketing executive, set out in 1997 in Santa Cruz, Calif., to ride the e-commerce wave. They decided to become ‘the Amazon.com of something’ and focused on DVDs after researching products that were portable, durable and desirable enough to sell online and deliver through the mail.”

It’s hard to blame Hastings for the tale—“the Amazon.com of something” doesn’t quite sound like entrepreneurial brilliance.

In the Beginning, the Movies Were Old and the Service Sucked

Netflix launched in August of 1997 with a sparse collection of only 500 titles, most of which were older movies. Originally the service offered an à la carte model of renting, much like Blockbuster. The cost of a DVD rental was $6 all-in: $4 for the rental and $2 to ship the disc. Keating points out that Hastings and Randolf didn’t really consider renting movies as an option—they saw Netflix as an online DVD seller—until they figured out they couldn’t compete with the likes of Wal-Mart and Amazon.

No Late Fees? Not Exactly

When the company first started, the ‘keep anything you want for as long as you want’ casual Netflix attitude didn’t exist. If you had held on to that copy of Apollo 13, late fees could still be imposed.

But just shipping the DVDs proved difficult: “As a rental proposition, it was terrible — discs took several days to reach the East Coast from its Santa Cruz warehouse,” writes Keating.

It Wasn’t a Hard-Won Tale of Overcoming Financial Struggle

For every Silicon Valley-adjacent company that wins the public’s hearts by starting in their parent’s garage and begging people for just any amount of money they can invest, there is a company that started on pretty solid financial ground. Netflix is the latter.

Randolph and Hastings met at Pure Software, a company Hastings founded in 1991 and sold in 1995 for $750 million. That $750 million helped fund Netflix. By 1999, Netflix launched its online subscription service and had 239,000 subscribers within its first year.

Bill Clinton, Monica Lewinsky, and Hardcore Chinese Porn

In 1998, President Bill Clinton appeared before a grand jury for a four-hour testimony about that whole Monica Lewinsky scandal. Turns out, demand for the entire testimony was pretty dang high, so Netflix doubled down and offered thousands of DVD recordings of the testimony available to be bought and shipped for just $2.02. It was a successful promotional stint as news media picked up the story.

Unfortunately, a few hundred people hoping to watch Slick Willy testify instead received DVDs full of hardcore Chinese pornography. Apparently there was some kind of mistake due to a back-up at a DVD duplication studio, and Netflix decided to ditch DVD labels to speed up the process. Oops.

And Then, There Was No More Porn

While Netflix never knowingly rented out hardcore porn, it did dabble in softcore pornography DVDs. However, it was short lived due to Hasting’s political aspirations. Between 1999 and 2000, California Governor Gray Davis appointed Hastings to the state’s education board. As a result, Hastings felt that Netflix should ditch softcore porn rentals, probably because it could make him look a little too sleazy for politics. Hastings became president of the board in 2001, but the Democratically-controlled board ousted him in 2005 because he advocated for more English language instruction hours in bilingual kindergartens.

And that’s why you can blame California for the absence of porn on Netflix.

You Couldn’t Always Get a Subscription

Even if you’ve been a Netflix member since the good old days of waiting by the mailbox for your DVDs you probably don’t remember the days of pay-as-you-go, but Netflix wasn’t always a subscription-only giant.

Netflix adopted a monthly subscription model in 1999 at the behest of Hastings, who believed the pay-per-video services that stores like Blockbuster sold were not going to survive.

Blockbuster Could Have Killed Netflix

If Blockbuster had kept up its “Total Access” platform—where customers could rent physical DVDs and steam online under a monthly subscription—Netflix would have gone under. Blockbuster launched the program around 2006, and spent $300 million on it in marketing by 2007. However, Blockbuster was deeply in debt (by 2011, they would owe $1.46 billion to the likes of Fox, Warner Bros, and Sony while only having listed assets of $1.02 billion), which caused them to falter and not go all-in on their service.

“I had an interview with him in 2009 where he [Hastings] explicitly stated that ‘If it hadn't been for their debt, they could have killed us,’” Keating told CNET.

And They Couldn’t Sell Netflix to Blockbuster

In 2000, just a few years after its launch, Hastings approached then-Blockbuster CEO John Antioch, hoping to sell Netflix to the movie-rental giant. The price? Just $50 million. Antioch declined.

It sounds ridiculous in retrospect, but at the time, Blockbuster was raking in cash and Netflix, then just a mail-order DVD rental company, was not profitable.

“‘We had the option to buy Netflix for $50 million and we didn’t do it. They were losing money. They came around a few times,’” an unnamed former Blockbuster executive told Variety.

Qwikster Happened

In 2011, Hastings believed that Netflix should be divided into two services for $7.99 each: one that streamed movies (Netflix), and one that delivered DVDs (Qwikster). Combined, the majority of customers would have had to pay 60% more than they did for the same service they had originally subscribed to— one physical DVD rental at a time and streaming for $9.99 a month—to be able to get both a DVD and streaming service.

Holding on to Subscribers (and Profits) Wasn’t Always Easy

While Blockbuster clearly missed the boat, Netflix only approached the video rental dinosaur because they were having trouble keeping their own boat afloat—and that isn’t the end of it.

Today, the basic Netflix streaming plan costs $8 a month and it doesn’t include any movies in your mailbox, but in 2011 when the company first proposed splitting into both a rental and a streaming service, people were not happy. After Hasting announced Qwiskter (which never launched), Netflix lost 800,000 subscribers and took a dip in the stock market.

Netflix Launched Its First Original Series in 2013

Prior to “House of Cards,” Netflix didn’t have anything unique to offer. The show’s creators shopped their script around and drew interest from big names like AMC and HBO, but Netflix, seeing a potentially successful opportunity into the industry of original programming, outbid the other networks in 2011.

OITNB Scores a Dozen Emmy Noms

"Orange is the New Black" premiered in July, 2013 and immediately became one of Netflix's most-watched originals. The show scored 12 Emmy nominations in it's first season alone.

And By 2016, Netflix Had Spent Billions on Original Content

By the end of 2016, Netflix had produced 30 original shows. In 2016 alone, it spent over $6 billion in original content and that number will increase.

Reed Hastings is Supposedly Very Non-Empathetic

Hastings might be an extraordinarily good businessman, but he reportedly has the emotional intelligence of a doorknob. As Keating told CNET in an interview:

“‘Many people told me that Reed just doesn't have that human...they called it an emotional IQ of zero. Several people told me that. No one has disputed that in the research that I did. He just doesn't have any kind of empathy toward people in terms of consumers. I think with a lot of great CEOs, there's a little bit of a blind spot there.’“

Piracy Helps Netflix. Sort Of.

While illegal downloads might not directly send cash Netflix’s way, the company keeps track of what shows pirates are plundering. According to Variety, Netflix keeps track of what shows are the most popular on piracy sites in order to determine which shows they should purchase. For example, the show “Prison Break” was heavily downloaded in the Dutch market, so Netflix purchased the series.

Netflix Has Been Steadily Gaining Subscribers for a Decade

In 2007, Netflix had 7.48 million subscribers. By 2010, it had 20.1 million. In 2014, just a few years after it entered the international market, Netflix had 57.39 million subscribers, with 32% coming from non-US markets.. In 2016 the streaming giant had 93.8 million subscribers worldwide—47% from foreign markets. As of April 2017, Netflix approached the 100 million subscriber mark.

For comparison, Hulu had about 12 million subscribers in mid-2016.