Speaker 1: Get in touch with technology with tech Stuff from how
Speaker 1: stuff Works dot com. Hey there, and welcome to tech Stuff.
Speaker 1: I'm your host, Jonathan Strickland. I'm an executive producer with
Speaker 1: how Stuff Works in the love of all things tech,
Speaker 1: and we have made it. You and I together, we
Speaker 1: have crawled through the history of Netflix, and we are
Speaker 1: in the final for now at least chapter of that
Speaker 1: history where really I'm looking at the formative experiences and
Speaker 1: years of Netflix. Uh, when we get past a certain point,
Speaker 1: we'll be doing a lot of skipping forward because it
Speaker 1: ends up being sort of the story of they did
Speaker 1: more of what they just did, but with more money.
Speaker 1: That tends to be the theme of the last few years. However,
Speaker 1: in the last episode on the History of Netflix, I
Speaker 1: gave a rundown of how Blockbuster had a fighting chance
Speaker 1: to catch up to Netflix's model of online DVD rental
Speaker 1: after lagging behind, and they had introduced a feature called
Speaker 1: total Access, but the new CEO of Blockbuster, the incoming CEO,
Speaker 1: changed the direction of the company to focus back on
Speaker 1: traditional brick and mortar stores, and as a result, Total
Speaker 1: Access was discontinued. In that vacuum, Netflix was able to
Speaker 1: flourish in that online DVD rental space. They no longer
Speaker 1: had a major competitor. The closest was red Box, which
Speaker 1: was on the rise, but they had a totally different
Speaker 1: approach to DVD rentals, and they were at least initially
Speaker 1: targeting a different demographic, so that wasn't as big of
Speaker 1: a concern at least initially. So Netflix was really able
Speaker 1: to kind of grow without having to worry about an
Speaker 1: opponent taking them down. Now, to start this episode, we're
Speaker 1: actually going to backtrack just a little bit. In that
Speaker 1: last episode, I got up to two thousand eight, but
Speaker 1: for this part to talk about the streaming side of
Speaker 1: Netflix's business, because the last time it was mostly about
Speaker 1: the DVD side, we have to go back a little
Speaker 1: bit to two thousand six because it was September two
Speaker 1: thousand six when Amazon launched a service it originally called
Speaker 1: Amazon Unboxed. That was the name of a digital video
Speaker 1: download service. You could purchase movies and TV shows off
Speaker 1: Amazon and then download them to a device to watch.
Speaker 1: I would later evolve into Amazon Instant Video, and then
Speaker 1: Amazon would eventually transition away from offering video downloads and
Speaker 1: then focus instead on delivering streaming videos, so you would
Speaker 1: be able to watch that content. It would remain in
Speaker 1: your library if you if you actually purchased it as
Speaker 1: opposed to rent in it, and you could watch it
Speaker 1: whenever you wanted, as long as you were logged into
Speaker 1: your Amazon account. But the video would quote unquote live
Speaker 1: on Amazon servers, you wouldn't download it to your machine.
Speaker 1: Early on, this was not a direct competitor to Netflix's
Speaker 1: streaming video service, because again, this was more of a
Speaker 1: download a purchase process, and Netflix had already gotten out
Speaker 1: of that market in two thousand five. However, it would
Speaker 1: become a major competitor later on, and then on March twenty,
Speaker 1: two thousand seven, another competitor rose up. That's when NBC
Speaker 1: Universal and News Corps held a joint announcement for a
Speaker 1: new online service that they were going to call Hulu.
Speaker 1: The service would not go into beta testing until the
Speaker 1: fall of two thousand seven, so this was a preliminary announcement,
Speaker 1: and the official debut of the website to the general
Speaker 1: public happened almost a year later, actually, and in March
Speaker 1: of two thousand eight. This was a big deal for
Speaker 1: Netflix and it's streaming strategy. It was a real alternative
Speaker 1: to what Netflix was doing now. For one thing, the
Speaker 1: reason why this was a big deal and a potential
Speaker 1: threat is that Netflix is an independent company. It is
Speaker 1: not part of a larger conglomerate that owns content studios. Hulu, however,
Speaker 1: represented a joint venture between lots of different partners, including
Speaker 1: NBC Universal, which includes both NBC the broadcast company and
Speaker 1: Universal Studios, and also news Core, which includes the company's
Speaker 1: Fox Broadcasting and twentieth century Fox. Hulu would have a
Speaker 1: huge advantage in that the companies that were making the
Speaker 1: content we're also responsible for bringing to life this delivery system.
Speaker 1: So it was not a big stretch to guess that
Speaker 1: those companies would favor sending their content to Hulu rather
Speaker 1: than to Netflix, and that they would leverage this to
Speaker 1: make an advantage and take away some of Netflix's power. Well.
Speaker 1: Complicating matters was that Disney Studios, through its subsidiary ABC,
Speaker 1: would announce that it was going to take a steak
Speaker 1: in ownership of Hulu in two thousand nine, and while
Speaker 1: News Corporation would transfer its steak to twenty first Century Fox,
Speaker 1: the fact Disney then moved to acquire twenty first century
Speaker 1: meant that the major players were pretty much the same um.
Speaker 1: Some of the ownership was switching, but it wasn't like
Speaker 1: a lot of new players were coming in. Also, Comcast
Speaker 1: would announce an intention to acquire a majority stake in
Speaker 1: NBC Universal in December two thousand nine, which might have
Speaker 1: seemed like all these big major players in creating movies
Speaker 1: and television, we're starting to align against Netflix and Netflix's
Speaker 1: plan for streaming content. Other partners in the venture, at
Speaker 1: least initially, would include a O. L. Facebook, my Space,
Speaker 1: which was still a thing back in two thousand seven,
Speaker 1: and Yahoo, which you could argue was also still a
Speaker 1: thing in two thousand seven. Fun side fact, hulu dot
Speaker 1: com had actually existed since as a website, but it
Speaker 1: wasn't associated with streaming video, so what was going on. Originally,
Speaker 1: hulu dot com belonged to a woman named Amy Hung,
Speaker 1: who used it as a personal blog site. NBC would
Speaker 1: purchase this site sometime in two thousand seven, and it
Speaker 1: was Hung who had said that the name Hulu was
Speaker 1: her reference to a Chinese word for gourd, and that
Speaker 1: people in China would hollow out these kinds of gourds
Speaker 1: in order to store precious things inside them, so it
Speaker 1: was a container for precious things. When the Hulu dot
Speaker 1: com streaming site launched and allowed people to sign up
Speaker 1: in October two thousand seven, it included that definition. It
Speaker 1: was actually an expanded version of the definition, and it
Speaker 1: raids verbatim. Here we go. Quote in Mandarin Hulu has
Speaker 1: two interesting meanings, each highly relevant to our mission. The
Speaker 1: primary meaning interested us because it is used in an
Speaker 1: ancient Chinese proverb that describes the Hulu as the holder
Speaker 1: of precious things. It literally translates to gourd, and in
Speaker 1: ancient times the Hulu was hollowed out and used to
Speaker 1: hold precious things. The secondary meaning is interactive recording. We
Speaker 1: saw both definitions as appropriate bookends and highly relevant to
Speaker 1: the mission of Hulu. End quote. When Hulu launched, it
Speaker 1: worked in a fundamentally different way from Netflix. So Netflix
Speaker 1: would offer a digital distribution through a subscription service, and
Speaker 1: originally it was an add on to DVD rentals. It
Speaker 1: didn't exist as its own individual offering for at least
Speaker 1: not at first. Hulu did not offer up a subscription service. Initially,
Speaker 1: on Netflix, you could watch films and TV shows commercial free.
Speaker 1: On Hulu. The videos were ads supported so you would
Speaker 1: get one or two commercials either before, sometimes inserted into
Speaker 1: the middle of the content you were watching. Netflix would
Speaker 1: offer up entire seasons of shows for whatever available titles
Speaker 1: it had, although they tended to be older shows, or
Speaker 1: they were older seasons of shows, not the most recent ones.
Speaker 1: Sometimes it might be not be the most recent two
Speaker 1: or three seasons. Hulu offered up several recent episodes of
Speaker 1: currently airing shows, so usually it was five. You get
Speaker 1: the five most recent episodes, and then sporadically you might
Speaker 1: get access to earlier seasons of those shows. Uh As
Speaker 1: new shows would debut, new episodes would debut on television
Speaker 1: about a few days maybe a week later, they would
Speaker 1: find their way to Hulu and they would knock off
Speaker 1: the oldest of the most recent five episodes off the list.
Speaker 1: So once you got the episode six of a new
Speaker 1: show like It's just airing that year, then when episode
Speaker 1: six would move over to Hulu, it would knock off
Speaker 1: episode one, and then you would just have episodes two
Speaker 1: through six to view. So if you did not keep
Speaker 1: up with it, you would eventually lose the ability to
Speaker 1: watch those earlier episodes until maybe much later, when an
Speaker 1: entire completed season would join Hulu. So Hulu would later
Speaker 1: introduce a subscription service which was also ad supported, which
Speaker 1: got a lot of people upset. They thought, if I'm
Speaker 1: paying a subscription, why am I also forced to watch commercials?
Speaker 1: But that would increase the number of pieces of content
Speaker 1: viewers could access. The more recent episodes wouldn't drop off necessarily.
Speaker 1: You might be able to stick with a show all
Speaker 1: the way through a season and be able to watch
Speaker 1: those earlier episodes and later. Still, it would eliminate that
Speaker 1: free service entirely, and the only way to view Hulu
Speaker 1: content would be to become a subscriber. Now, all that
Speaker 1: is to say that Netflix is future, and digital delivery
Speaker 1: was not certain. The DVD rental business would eventually decline
Speaker 1: as the format itself would fall out of favor, with
Speaker 1: more customers shifting to digital alternatives. That writing was on
Speaker 1: the wall. Everyone could tell that sooner or later, this
Speaker 1: physical medium is going to reach a level where is
Speaker 1: no longer profitable to operate this rental business. There will
Speaker 1: still be devotees of the medium. There's still gonna be
Speaker 1: people who prefer DVDs and blue rays to streaming media.
Speaker 1: That makes sense, But there may not be enough of
Speaker 1: them to support a business. The debut of the Blu
Speaker 1: Ray and the HD DVD formats in the mid two
Speaker 1: thousand's shifted things a bit. It extended the life of
Speaker 1: physical media. Netflix actually would carry both Blu Ray and
Speaker 1: HD DVD until Netflix, like everybody else, realized that Blu
Speaker 1: ray was going to win out over h D DVD.
Speaker 1: The company would dump the h D DVD format in
Speaker 1: early two thousand eight, as did everybody else. So where
Speaker 1: did the company go from there? Well, first, it started
Speaker 1: a transition to the cloud. In two thousand and eight,
Speaker 1: Netflix's servers encountered a massive database corruption problem, and that
Speaker 1: messed up Netflix's ability to track and send out DVDs
Speaker 1: to customers. Operations had to be suspended for three days
Speaker 1: while Netflix engineers frantically tried to fix the problem. That
Speaker 1: whole mess decided or lad Netflix's executives to decide that
Speaker 1: the best thing to do is to shift away from
Speaker 1: operating their own data centers and instead moved to a
Speaker 1: really reliable cloud based service, and the one they picked
Speaker 1: was run by Amazon Amazon Web Services. That process of
Speaker 1: transitioning from their own data centers to Amazon Web Service
Speaker 1: would take several years to complete. It's starting in two
Speaker 1: thousand eight, it really didn't finish until about so this
Speaker 1: was not a quick process. It takes a while to
Speaker 1: migrate systems and do so away where you don't interrupt services.
Speaker 1: Netflix also signed content licensing deals with various studios, sometimes
Speaker 1: at a bargain price. Many executives were skeptical that online
Speaker 1: video would be able to survive, which might have contributed
Speaker 1: to some negotiations and Netflix's favor So Netflix landed a
Speaker 1: distribution deal with the premium channel Stars, for example, to
Speaker 1: carry a lot of the movie titles that Stars had
Speaker 1: the rights to, and the agreement was for twenty million
Speaker 1: dollars for two years, which is a lot of money,
Speaker 1: but it's actually not unreasonable for one of these licensing deals,
Speaker 1: especially if you compare it to something like the eight
Speaker 1: hundred million dollar deal Netflix signed with lions Gate MGM
Speaker 1: and Paramount for a five year licensing agreement. That deal
Speaker 1: prompted everyone from directors to actors to producers to also
Speaker 1: get involved in this process because they had a direct
Speaker 1: interest in this. They wanted to know, how are we
Speaker 1: going to get compensated for our work being displayed over
Speaker 1: this new medium. What what are the rules here? Because
Speaker 1: if I get residuals, how is that determined through this
Speaker 1: online service? It was a chaotic, messy time. Another thing
Speaker 1: that could have worked and may have worked in Netflix's favor,
Speaker 1: is that at that time, the big studios were looking
Speaker 1: at it as if it were a small cable distributor
Speaker 1: rather than a nationwide entity. They weren't. They're kind of
Speaker 1: underestimating Netflix in other words, But that changed as the
Speaker 1: subscriber base for Netflix would grow each year and by
Speaker 1: Netflix nearly had nearly as many subscribers as the cable
Speaker 1: company Comcast did, and by then Netflix had landed several
Speaker 1: multi year licensing agreements, and at that point the studio said, oh,
Speaker 1: we may have contributed to the growth of a real giant.
Speaker 1: And now they have clout, they have subscribers, and if
Speaker 1: we end up not coming to terms with them, and
Speaker 1: then the company turns to their customers and says says,
Speaker 1: we would love to bring you X movie, but because
Speaker 1: the studio refuses to license their work to us, you
Speaker 1: aren't going to get it. Then people might turn against
Speaker 1: that studio. And by this time, by the time they
Speaker 1: made the realization, it was kind of too late. Well,
Speaker 1: I've got a lot more to say about Netflix, but
Speaker 1: first let's take a quick break to thank our sponsor. Now,
Speaker 1: around this time, there was also a culture shift that
Speaker 1: was starting to happen and one we still talk about today,
Speaker 1: and this was the growth of the cord cutters and
Speaker 1: the emergence of the cord never's. These are populations that
Speaker 1: represent people who ended their television service, their pay TV service,
Speaker 1: whether it was cable or satellite, or they never bothered
Speaker 1: to sign up for one in the first place. Some
Speaker 1: of them would still watch television programming, but they did
Speaker 1: it through things like over the air antennas, so they're
Speaker 1: not paying for the content, They're just getting whatever is
Speaker 1: being broadcast over the air, or they were getting it
Speaker 1: through digital streaming on a computer or enabled set top box,
Speaker 1: so they were getting it delivered through the Internet, but
Speaker 1: not through the traditional satellite or cable systems. The growth
Speaker 1: in cable subscribers began to slack off, and occasionally they
Speaker 1: would actually decline in the number of subscribers, not just
Speaker 1: slow growth, but see reverse growth. They'd see people leaving
Speaker 1: these subscription services. The trend seemed to validate the Netflix
Speaker 1: corporate strategy Another battle Netflix had to wage was directly
Speaker 1: related to the popularity of the company's streaming service. As
Speaker 1: more customers began to use Netflix to not only rent
Speaker 1: DVDs but also stream movies online, the percentage of traffic
Speaker 1: on the Internet related to Netflix grew. Netflix was the
Speaker 1: source for sixty percent of all the streaming movies online.
Speaker 1: All the other services combined would make up the other
Speaker 1: four and according to several analysts, Netflix traffic accounted for
Speaker 1: twenty of all broadband traffic in the United States. Now,
Speaker 1: this was something companies like Comcast didn't care for very much.
Speaker 1: For the most part, companies that owned infrastructure on the Internet,
Speaker 1: as in like the actual series of tubes, if you prefer,
Speaker 1: they had an understanding the They would have these agreements
Speaker 1: in place, and the agreement said, all right, I will
Speaker 1: carry data that's coming from your side of the Internet,
Speaker 1: if you in turn carry data that's coming from my
Speaker 1: side of the Internet, and as long as it matches
Speaker 1: up with the amounts that we have agreed to, no
Speaker 1: one charges anyone any fees. And if it goes beyond that,
Speaker 1: then we start talking about metering that data because I'm
Speaker 1: going to be carrying more of your stuff. Then you're
Speaker 1: carrying a mine. I need to be compensated for that.
Speaker 1: So this is called peering agreements. It's a foundational part
Speaker 1: of the Internet, and it's also one of the basic
Speaker 1: concepts of net neutrality. This idea that these peering agreements
Speaker 1: are what allow massive amounts of data to pass across
Speaker 1: the Internet without getting throttled or having surcharges put on
Speaker 1: top of them. And in two thousand ten that concept
Speaker 1: was put to the test and continues to be to
Speaker 1: this day. The major players in this matter at the
Speaker 1: time were Netflix, Comcast, and a company called Level three Communications.
Speaker 1: Now Netflix, I know you guys know because I've been
Speaker 1: talking about them for three episodes before this, and if
Speaker 1: you have not listened to those, it's odd that you
Speaker 1: would listen to a part four. First go back and
Speaker 1: listen to parts one through three. Comcast is a cable
Speaker 1: company and internet service provider in the United States. But
Speaker 1: you may not know what Level three Communications is. A
Speaker 1: lot of you probably do know because you're really tech savvy,
Speaker 1: but some of you might not. You might be like me,
Speaker 1: and it might be one of those things that you
Speaker 1: understood later. Well. Level three Communications is one of the
Speaker 1: companies that owns and operates the infrastructure that we call
Speaker 1: the backbone of the Internet. They own parts of the
Speaker 1: Internet connections that other traffic will travel across as it
Speaker 1: goes from one network to a network. Because remember the
Speaker 1: Internet is a network of networks, so comcasts network which
Speaker 1: connects customers to the rest of the Internet. This backbone
Speaker 1: we're talking about will send traffic across the backbone and
Speaker 1: receives traffic coming from the backbone and then sends that
Speaker 1: onto its customers. One way content companies are able to
Speaker 1: deliver content to users, no matter where those users might
Speaker 1: be within the service area is to build out what
Speaker 1: is called a content delivery network. This is a system
Speaker 1: of servers that a company distributes in various regions, and
Speaker 1: when customers access the online service, they connect to the
Speaker 1: server best suited to give them the fastest response. So,
Speaker 1: if you've played online video games, you're probably familiar with
Speaker 1: logging into a specific server. Those servers are typically organized
Speaker 1: via region, and generally speaking, if you log into a
Speaker 1: server that's closest to you to wherever you happen to
Speaker 1: be geographically, you tend to have things like the fastest
Speaker 1: response time, less lag, things that are really important. If
Speaker 1: you're playing a game, those same things are really important.
Speaker 1: If you want to watch high quality streaming video, you
Speaker 1: want there to be as little delay as possible. Customers
Speaker 1: hate it when they have to sit there and watch
Speaker 1: a buffering logo show up and they wait to see
Speaker 1: their video content. That that's not a good experience. So
Speaker 1: Netflix would do this. They would use these content delivery
Speaker 1: networks in order to make sure that customers would get
Speaker 1: a good experience when viewing films and TV shows online.
Speaker 1: Before Netflix reached an agreement with Level three Communications to
Speaker 1: have Level three take on this task for them, a
Speaker 1: different CDN company called a com I did that job
Speaker 1: a k A m AI. So in this agreement, Comcast
Speaker 1: would actually charge a COMMA to deliver traffic to Comcast network,
Speaker 1: and a com I did not own Internet infrastructure. It
Speaker 1: was able to set up these content delivery networks, but
Speaker 1: it was not appear in the traditional sense of the
Speaker 1: peering agreements. So that's why Comcast could charge a coma
Speaker 1: I for this. It wasn't like it was this mutual
Speaker 1: relationship where Comcast would send data across servers belonging to
Speaker 1: a COMMA and vice versa. It was a one way relationship,
Speaker 1: which meant that Comcast was metering it it was charging
Speaker 1: a comma I. Well, then Netflix, which is over to
Speaker 1: Level three Communications, they take over Netflix's delivery, and things
Speaker 1: changed because Level three is a peer and had an
Speaker 1: existing peering agreement in place with Comcast. Now, the agreement
Speaker 1: would actually allow Level three to send twice as much
Speaker 1: data to Comcast as Comcast could send to Level three,
Speaker 1: So it's a two to one relationship. So if Comcast
Speaker 1: can send one units, then Level three could send two
Speaker 1: hundred units back and it was considered to be even
Speaker 1: in the eyes of the agreement. That means that twice
Speaker 1: as much traffic end up being equal traffic. But Comcast
Speaker 1: argued that this Netflix deal would mean that Level three
Speaker 1: would start sending five times as much traffic to Comcast
Speaker 1: and that would exceed this period agreement. So Comcast also
Speaker 1: wanted to charge Level three the same way it had
Speaker 1: been charging a comma I for sending this Netflix content
Speaker 1: to comcasts network, because otherwise it was going to get
Speaker 1: cut out of that revenue that was part of the
Speaker 1: you know, Comcast revenue plan. Level three argued that Comcast
Speaker 1: was trying to wriggle out of net neutrality, and Comcast
Speaker 1: argued that Level three was inappropriately claiming that this was
Speaker 1: a net neutrality issue when in reality it was appearing issue.
Speaker 1: And I'm not a big support of Comcast, but i
Speaker 1: do feel like the company had a bit of a
Speaker 1: leg to stand on in this particular argument. If the
Speaker 1: peering agreement was for a certain amount of traffic and
Speaker 1: Level three was going to exceed that, then by my estimation,
Speaker 1: Level three should have been expected to pay a meter rate,
Speaker 1: and it didn't matter where the data came from. It
Speaker 1: wasn't that specifically came from Netflix. It was that the
Speaker 1: amount of data was exceeding the agreement. Whether that came
Speaker 1: from Netflix or from a spreadsheet doesn't really matter. But
Speaker 1: that would also mean Level three would likely have to
Speaker 1: pass those expenses onto Netflix, which would then of course
Speaker 1: pass those expenses on to customers, and that would have
Speaker 1: been a pretty negative experience all around. The fight would
Speaker 1: stretch for years with worries that Comcast would end up
Speaker 1: throttling Netflix traffic, not because it was Netflix necessarily, though
Speaker 1: that service did compete with comcasts own Internet video delivery
Speaker 1: services that it provided to its customers, but rather because
Speaker 1: as level three would be in violation of that agreement.
Speaker 1: Netflix ended up extricating itself out of this problem in
Speaker 1: and that's when it was announced that it was going
Speaker 1: to pay Comcast for a direct connection from Netflix servers
Speaker 1: to Comcasts network, So they were no longer employing anyone
Speaker 1: else to become a content delivery network. They were essentially
Speaker 1: doing it themselves and paying Comcast for the privilege. But
Speaker 1: the bigger dispute reached something of a resolution in two
Speaker 1: thousand fifteen, just a short time before the FCC was
Speaker 1: to start hearing complaints under some new net neutrality rules,
Speaker 1: rules which I should add have since been overturned by
Speaker 1: the most recent FCC leadership, So the mess keeps on going. Meanwhile,
Speaker 1: on the executive side over at Netflix, read Hastings was
Speaker 1: apparently becoming less approachable. According to the book Netflix, which
Speaker 1: I have cited several times in these episodes, it was
Speaker 1: getting harder to change hastings mind about things. He would
Speaker 1: make up his mind on something, and challenging his ideas
Speaker 1: was becoming more and more difficult to do. Some of
Speaker 1: his top executives would leave around this time. They saw
Speaker 1: a very little opportunity to grow at Netflix. They saw
Speaker 1: a little indication that they would have a shot at
Speaker 1: leading the company themselves, and figured that they pretty much
Speaker 1: achieved their goals that they set out to do when
Speaker 1: they joined Netflix. Things like fighting off Blockbuster or launching
Speaker 1: a digital videos uh you know service. Those things had
Speaker 1: happened already, so rather than just sit around, they decided
Speaker 1: to leave and take on new challenges or even retire.
Speaker 1: On November twenty ten, Netflix really showed off how it
Speaker 1: believed the streaming service was going to be the future,
Speaker 1: because for the first time, they would offer customers the
Speaker 1: option to subscribe to just the streaming part of Netflix's
Speaker 1: service without the requirement of having a DVD rental service
Speaker 1: on top of it. Because up to that point it
Speaker 1: was an add on. There was no just streaming option
Speaker 1: for the subscription, but in suddenly there was. This new
Speaker 1: service would cost seven dollars nine cents per month when
Speaker 1: it launched, and the combined plan of unlimited DVDs and
Speaker 1: streaming went from eight dollars and nine nine cents a
Speaker 1: month to nine dollars a month at that point. Hastings
Speaker 1: even said that the press release that Netflix was now
Speaker 1: quote primarily a streaming video company delivering a wide selection
Speaker 1: of TV shows and films over the Internet end quote.
Speaker 1: Netflix finally began to expand its streaming services internationally. First
Speaker 1: they began to offer service in Canada and then later
Speaker 1: in Latin America and the Caribbean in late two thousand eleven,
Speaker 1: and that was also when Netflix announced what would be
Speaker 1: the beginning of its next serious move and changing the
Speaker 1: landscape of entertainment. The company announced it would be the
Speaker 1: exclusive distributor in the United States of a television series
Speaker 1: called Lily Hammer, which originated out of Norway, and perhaps
Speaker 1: more import lee, they also announced that they were developing
Speaker 1: their own original program. Netflix was playing the part of
Speaker 1: a TV studio. They were actually producing a show, not
Speaker 1: just streaming a show, and the first original program was
Speaker 1: an adaptation of a TV series that had been on
Speaker 1: UK television in the nineteen nineties. That adaptation would change
Speaker 1: the time and place of the story, switching from the
Speaker 1: the days of the nineties over in the UK to
Speaker 1: modern day United States, and this series was called House
Speaker 1: of Cards. But while new original content from Netflix was exciting,
Speaker 1: that wasn't the two thousand eleven story that got customers
Speaker 1: talking and shouting and leaving nasty comments and canceling their subscriptions. Nope,
Speaker 1: that honor would go to a little scandal or kerfuffle.
Speaker 1: I guess is a better word called quick ster. I'll
Speaker 1: explain after we take a quick rake to thank our sponsors.
Speaker 1: So quick stir well, here's the down in dirty details.
Speaker 1: Netflix's business was in two really big categories, and one
Speaker 1: was the DVD rental business that was getting more expensive
Speaker 1: to operate. Postage fees had gone up, blue rays were
Speaker 1: more expensive than DVDs, and so it was getting harder
Speaker 1: to make that a cost efficient, profitable business. Meanwhile, there
Speaker 1: was the streaming services side of the business, and that
Speaker 1: was clearly the future for Netflix. That was where things
Speaker 1: were going to ultimately end up. But the DVD format
Speaker 1: and blue rays hadn't died. There were still a lot
Speaker 1: of people who preferred the experience of watching movies on
Speaker 1: that physical media. And there were titles in Netflix's DVD
Speaker 1: library that you could not find in the streaming library
Speaker 1: due to licensing issues. So Netflix could go out and
Speaker 1: buy copies of a movie and then offer them up
Speaker 1: for rent, but they couldn't take necessarily those exact same
Speaker 1: titles and put them up for streaming because it went
Speaker 1: it was the difference between renting a physical format and
Speaker 1: broadcasting content. Because of that, you would always find a
Speaker 1: much more broad and deep selection of television shows and
Speaker 1: films in the DVD side than you would in the
Speaker 1: streaming side. So it didn't seem feasible to just kill
Speaker 1: the DVD side of the business entirely, but it was
Speaker 1: getting more challenging to operate both sides of the business simultaneously.
Speaker 1: Netflix had also raised the prices of its joint DVD
Speaker 1: and streaming plans to sixteen dollars a month at that point,
Speaker 1: and that was a heck of a jump, and this
Speaker 1: was in a recession. The decision would affect half of
Speaker 1: Netflix's subscribers in the United States who are under this
Speaker 1: joint plan, so about of all Netflix customers had both
Speaker 1: DVD and streaming subscriptions tied together, But people who subscribed
Speaker 1: only to DVDs or only subscribe to the streaming service,
Speaker 1: they would have actually seen a price cut in this approach. However,
Speaker 1: the focus of this announcement was almost exclusively on the
Speaker 1: price jump for the people who had a joint account
Speaker 1: like the joint DVD and streaming services and Because of that,
Speaker 1: Netflix was getting a lot of bad press and customer complaints.
Speaker 1: So there was a new idea, one that a lot
Speaker 1: of people inside Netflix did not like, but read Hastings
Speaker 1: was very gung ho on going forward with this idea,
Speaker 1: and that idea was to split the two businesses apart
Speaker 1: and make the DVD side of Netflix its own company
Speaker 1: and calling it quick Ster. It would have its own
Speaker 1: internal corporate structure, it would have its own CEO, it
Speaker 1: would be free from the streaming business of Netflix. But
Speaker 1: that also meant it would be a huge change to customers.
Speaker 1: It meant that the combined plan of DVDs and streaming
Speaker 1: would become more complicated. Each company would have to maintain
Speaker 1: its own cues and customer profiles. So if you wanted
Speaker 1: to have that that joint service of DVDs and streaming video,
Speaker 1: now you were going to have to have two accounts.
Speaker 1: You're gonna have a Netflix account and a quick Stot account.
Speaker 1: You have two subscriptions to payments, two different cueues. Uh.
Speaker 1: If you were let's say that you had a queue
Speaker 1: in your streaming service and you had a queue in
Speaker 1: the DVD service, and it turns out one of the
Speaker 1: movies that's on your DVD list becomes available on streaming,
Speaker 1: and you watch it and streaming, and then your next
Speaker 1: DVD shows up and it happens to be the same movie.
Speaker 1: That would be a really frustrating experience, especially since it
Speaker 1: had originally both come from the same company. People were
Speaker 1: not happy. Netflix also was not very good at communicating
Speaker 1: why it was doing this in the first place, and
Speaker 1: the main reason was to allow the DVD side to
Speaker 1: focus on delivering rentals with a deep library and do
Speaker 1: it efficiently and with a profit in mind, while the
Speaker 1: streaming side could dedicate more resources like time, energy, and
Speaker 1: effort to building out its library and making new content.
Speaker 1: Most coverage at the time criticized how Hastings communicated these changes.
Speaker 1: He actually did it by shooting a short video that
Speaker 1: the company had produced independently. UH. Against the wishes of
Speaker 1: a lot of the folks in his executive team, he
Speaker 1: did this, and it became another notch in the argument
Speaker 1: that read Hastings was just not very good at communicating
Speaker 1: with his customers or understanding where his customers were coming from.
Speaker 1: He would eventually reverse this decision, and he would bring
Speaker 1: the DVD business back under Netflix and UH and just
Speaker 1: abandoned the idea of Quixter, and that took about a month.
Speaker 1: They had not yet really spun out Quixter. They had
Speaker 1: announced the intention to do this, but they ultimately decided
Speaker 1: that that wasn't going to work after they got a
Speaker 1: massive negative reaction from customers and a lot of people
Speaker 1: lost their jobs in the process because in the preparations
Speaker 1: for making this move, there were people who were brought
Speaker 1: on or transitioned over to new roles. They were going
Speaker 1: to fill new positions under Quickster, but now Quixter was gone,
Speaker 1: those positions were gone, and so people found themselves out
Speaker 1: of a job they had they had switched over, and
Speaker 1: they didn't have a job to go back to over
Speaker 1: at Netflix. So it was a really big misstep for
Speaker 1: Netflix and for Hastings, but the company was able to recover.
Speaker 1: It expanded in two thousand twelve by launching services in Europe,
Speaker 1: and in April two thousand twelve, Hastings and Netflix would
Speaker 1: fund a political action committee or pack called flix Pack,
Speaker 1: and this is a lobbying group. It contributes money to
Speaker 1: the campaigns of politicians who would support legislation that was
Speaker 1: in favor of net neutrality. For example, or that they
Speaker 1: would vote against any legislation that would pose a threat
Speaker 1: to Netflix's business. So Netflix became a real political entity
Speaker 1: at this point. On December two thousand twelve, Netflix went
Speaker 1: dark in North America, and not on purpose, so this
Speaker 1: is Christmas Eve, two thousand twelve. The streaming service went
Speaker 1: offline for several hours and the root of the problem
Speaker 1: was with the elastic load balancer service on Amazon's cloud platform,
Speaker 1: so there was really nothing Netflix could do at this point.
Speaker 1: There was an error on the Amazon cloud service, and
Speaker 1: this was when Netflix was still in the process of
Speaker 1: transitioning over to Amazon's platform. In August, Netflix introduced a
Speaker 1: concept it had previously implemented in its DVD rental business,
Speaker 1: which was profiles. With profiles, a household could have multiple
Speaker 1: cues to represent the preferences of each member of the family,
Speaker 1: so Dad could have one queue of content, Mom could
Speaker 1: have another, you know, etcetera, etcetera. One two fifteen, the
Speaker 1: company announced an incredible seven to one stock split that
Speaker 1: meant that for every share of stock in Netflix you owned,
Speaker 1: you would get six additional shares. The share price would
Speaker 1: reduce down to one seventh of their former value. And
Speaker 1: I talked about this in an earlier episode, but really quickly.
Speaker 1: This approach increases the number of shares, but it decreases
Speaker 1: the price per share that maintains the same company value
Speaker 1: throughout the process. But it's also a way to encourage
Speaker 1: small investors to get on board because the price for
Speaker 1: an individual share of stock is lower than it was before.
Speaker 1: Netflix also would launch streaming services in Japan, and in
Speaker 1: ten at CS Netflix announced it would enter one thirty
Speaker 1: new markets across the world, so it was really growing
Speaker 1: quickly last year that being seen. At the time of
Speaker 1: this recording, the research firm p WC sent out a
Speaker 1: survey to learn more about how people were getting their entertainment,
Speaker 1: and according to their survey results, seventy three percent of
Speaker 1: responded said that they were pay TV customers, so cable
Speaker 1: or satellite or something like that responded said they subscribed
Speaker 1: to Netflix. So the same number of people not necessarily
Speaker 1: exactly the same people, but the same number of people
Speaker 1: were now Netflix customers as they were for any sort
Speaker 1: of pay TV customers. So this survey suggests that the
Speaker 1: US means that streaming is really the direction that we're
Speaker 1: moving in. If we've gotten to a point where there's
Speaker 1: an equal number of people subscribed to Netflix as there
Speaker 1: are for any given pay TV service, or all of
Speaker 1: them collected together. That's pretty big news. Meanwhile, there are
Speaker 1: these other competing services out there. You've got Hulu, Amazon Video,
Speaker 1: You've got the upcoming Disney streaming service. Those are all
Speaker 1: muddying the waters and making things more complicated. No service
Speaker 1: can boast having all of another services offerings plus more.
Speaker 1: So in other words, you're not going to go to
Speaker 1: Hulu and see, oh, you have everything Netflix has plus
Speaker 1: this other stuff. Where you go to Netflix and say, oh,
Speaker 1: you've got everything, Amazon Video has plus this other stuff.
Speaker 1: No one has everything. So it's quite possible that if
Speaker 1: you want to see certain programming, you're going to have
Speaker 1: to subscribe to multiple services that you know, you might say, oh,
Speaker 1: I really want that show and I really want this
Speaker 1: other show, and unfortunately they're both exclusive to different services. Well,
Speaker 1: you have a little option but to subscribe to both
Speaker 1: of those services. And this is getting pretty messy as
Speaker 1: we're seeing more of these services pop up. It requires
Speaker 1: more decisions on the part of the customer, and a
Speaker 1: lot of people aren't really thrilled about the idea of
Speaker 1: having to sign up to multiple services, so that is
Speaker 1: becoming a bit of a complication. And then you also
Speaker 1: have premium channels like HBO having their own competing services.
Speaker 1: So while there may be a desire to cut the chord,
Speaker 1: the alternative seems to be that you're gonna have to
Speaker 1: subscribe to two or more services to get what you want,
Speaker 1: unless you just happen to except that the limited options
Speaker 1: of any one service are exactly what you need. Netflix
Speaker 1: is also really big on original programming. There's no surprise there.
Speaker 1: They don't have to pay licensing fees and it gives
Speaker 1: them an advantage over competing services. So according to indie Wire,
Speaker 1: which cited an unnamed source, Netflix is releasing around eighty
Speaker 1: two original movies in ten and seven hundred new or
Speaker 1: exclusively licensed programs. The content budget for Netflix is an
Speaker 1: estimated thirteen billion dollars in and some of that original
Speaker 1: programming gets both critical acclaim as well as an eager
Speaker 1: reception from Netflix customers. In seventeen, the company garnered nine
Speaker 1: one Emmy nominations from its original programming, as well as
Speaker 1: eight Academy Award nominations for their original films and even
Speaker 1: one an Oscar for Best documentary feature with Icarus, so
Speaker 1: not everything on Netflix is fuller house, thank goodness. And
Speaker 1: it looks like in the near future, Netflix is going
Speaker 1: to focus on sports docuseries as another area to expand in.
Speaker 1: So the company continues to pour money into original programming
Speaker 1: and to add more to its features. It grows in
Speaker 1: more regions, so it's it's opening up more streaming services
Speaker 1: across the world, and I expect it will continue to
Speaker 1: be a pretty major player in entertainment for at least
Speaker 1: the near future. When will we see DVD rentals go away?
Speaker 1: Who's to say? I think it's gonna be a while.
Speaker 1: Read Hastings actually joked that he would make sure he
Speaker 1: would personally deliver the very last DVD that they ever
Speaker 1: rent and that would probably be sometime in Whether or
Speaker 1: not that prediction remains accurate, that's we got to wait
Speaker 1: around see. But that wraps up the story of Netflix
Speaker 1: so far. Obviously, the company continues to exist, so I'll
Speaker 1: probably have to do more episodes either specifically about Netflix
Speaker 1: or related to it in the future. But I think
Speaker 1: we've talked about it enough with four episodes back to back, right,
Speaker 1: So we're gonna come back in our next episode about
Speaker 1: a totally different topic, and I look forward to chatting
Speaker 1: with you guys. Then, if you have any suggestions for
Speaker 1: future episodes, maybe it's a company or a technology or
Speaker 1: a person in tech. Maybe there's someone I should interview,
Speaker 1: send me a message, let me know. The email address
Speaker 1: for the show is tech stuff at how stuff works
Speaker 1: dot com, or drop me a line on Facebook or Twitter,
Speaker 1: or the handle of both of those is tech stuff
Speaker 1: h s W go check out our merchandise or at
Speaker 1: t public dot com slash tech stuff that's t e
Speaker 1: public dot com slash tech stuff. Every purchase goes to
Speaker 1: help the show, and we greatly appreciate it. And don't
Speaker 1: forget pollow us on Instagram and I'll talk to you
Speaker 1: again really soon for more on this and thousands of
Speaker 1: other topics. Is it how stuff works dot com m