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Netflix And The Tenth Anniversary Of Video Streaming

Photo of Tim Mulligan
by Tim Mulligan

Today marks the tenth anniversary since Netflix launched its pivot into video streaming. Up until 2006, Netflix was a troubled company with repeated predictions for the inevitable demise of its DVD-rental business dating back to 2002. It may seem difficult to visualize this now, but the general consensus was   against Netflix surviving, yet alone thriving, as a video focused business. Everyone knew that although Netflix had 12.5% of the $8 billion DVD rental market, it was not a barometer of success –Netflix CEO Reed Hastings was quoted as saying “Because DVD is not a hundred-year format, people wonder what will Netflix’s second act be.”

The one big plus Netflix had on its side was its continuing growth in memberships. This, coupled with the abject failure of incumbent video competitors to make digital video downloads work gave Netflix both the confidence and the need to pivot towards a video streaming service. Netflix knew the future was digital and it knew it had a digitally engaged audience with which to mold the future shape of digital video consumption. So, a decade ago, Netflix launched its video streaming service free to its existing customer base and since, Netflix’s history and that of the digital economy was irrevocably transformed.

Why Netflix Succeeded And Blockbuster Failed

Up until January 2007 the video industry had been trying to learn from the recent transformation of the music industry, replicating a command and control distribution model in the digital ecosystem. The rise of P2P led by CD ripper disruptor Napster had brought peak CD sales crashing down at the turn of the millennium and it had taken the launch of the iTunes store in 2003 to bring a viable digital monetization model to the mainstream music consumption. The film and TV industry took note and saw that their physical product market was ripe for disruption and they decided to back the digital download model which Apple had succeeded in pushing into mainstream consumer consciousness. However, the DVD market proved remarkably resilient (even in the first 9 months of 2016 DVD rental by Netflix members accounted for $416 million, 6.5% of total revenues) and EST’s (Electronic Sell Throughs) had failed to entice the DVD consuming public.

Netflix’s competitors were either focused solely on ESTs, or they were fighting yesterday’s battles (Wall Mart Online DVD rental anyone?). For Netflix, unlike for DVD rental business Blockbuster (which tried to buy Netflix for $50 million in 2000 -less a fifth of current DVD rental net income), digital engagement was in its DNA. Netflix’s core subscription business was digitally based, which allowed it a real time understanding of the consumption patterns of its membership. It knew the core demographics, price points and content requirements of its steadily growing membership, enabling it to successfully launch its streaming service in January 2007 and succeed where others had failed.

To Survive You Have To Be Prepared To Kill Your Sacred Cows

With an estimated 49% profit margin on its DVD rental business versus the 10% margin on its streaming business, the decision to pivot to digital was always a difficult one for Netflix. It could easily have kept to what it knew made good money and gone the way of Blockbuster. Instead it decided to disrupt itself and focus on becoming a global digital streaming superpower. Netflix destroyed the old, so that the new could be set free to transform the business of film distribution and shape how consumers now engage with video content.

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