1 00:00:04,120 --> 00:00:07,160 Speaker 1: Get in touch with technology with tech Stuff from how 2 00:00:07,200 --> 00:00:13,600 Speaker 1: stuff Works dot com. Hey there, and welcome to tech Stuff. 3 00:00:13,640 --> 00:00:16,239 Speaker 1: I'm your host, Jonathan Strickland. I'm an executive producer with 4 00:00:16,239 --> 00:00:19,080 Speaker 1: How Stuff Works and I love all things tech. And 5 00:00:19,120 --> 00:00:24,640 Speaker 1: we are now entering part three of our series about Netflix. 6 00:00:25,239 --> 00:00:28,760 Speaker 1: The next episode, we'll kind of combine all the stuff 7 00:00:28,800 --> 00:00:32,879 Speaker 1: that's been going on in ten years with uh, you 8 00:00:32,920 --> 00:00:35,559 Speaker 1: know that kind of thing. That'll be the next episode. 9 00:00:35,600 --> 00:00:37,960 Speaker 1: They'll be sort of where we are today. But this 10 00:00:38,000 --> 00:00:42,680 Speaker 1: episode is all about Netflix is fight for survival when 11 00:00:43,080 --> 00:00:47,440 Speaker 1: it was going up against some pretty big opponents in 12 00:00:47,479 --> 00:00:51,159 Speaker 1: the world of video rental. So in our last two episodes, 13 00:00:51,200 --> 00:00:53,320 Speaker 1: I looked at the founding of Netflix up to the 14 00:00:53,400 --> 00:00:57,080 Speaker 1: departure of one of the co founders, Mark Randolph, the 15 00:00:57,080 --> 00:01:00,560 Speaker 1: guy who actually wanted to build a web site that 16 00:01:00,640 --> 00:01:04,640 Speaker 1: would be the Amazon dot Com of video rental. In 17 00:01:04,640 --> 00:01:07,039 Speaker 1: this episode, I'll look at how the company began to 18 00:01:07,240 --> 00:01:12,959 Speaker 1: usher in the era of digital delivery and fight off competitors. 19 00:01:13,160 --> 00:01:15,520 Speaker 1: So to be fair, first of all, Netflix did not 20 00:01:15,880 --> 00:01:20,520 Speaker 1: invent digital delivery of video. Video on demand experiments had 21 00:01:20,560 --> 00:01:23,640 Speaker 1: begun in the mid nineties a few years before read 22 00:01:23,680 --> 00:01:27,840 Speaker 1: Hastings and Mark Randolph co founded Netflix, so they did 23 00:01:27,880 --> 00:01:31,800 Speaker 1: not invent this technology. Cable television had led the way, 24 00:01:31,959 --> 00:01:36,160 Speaker 1: largely because cable could deliver the bandwidth required to uh 25 00:01:36,200 --> 00:01:39,960 Speaker 1: to send video in the first place. During the nineties, 26 00:01:40,280 --> 00:01:44,320 Speaker 1: many people access the Internet using dial up services, and 27 00:01:44,440 --> 00:01:47,720 Speaker 1: that lacked the bandwidth to deliver real time video, so 28 00:01:47,760 --> 00:01:50,160 Speaker 1: it wasn't the right time to use the Internet to 29 00:01:50,240 --> 00:01:54,760 Speaker 1: deliver video services. Yet. It really wasn't until broadband internet 30 00:01:54,800 --> 00:01:57,440 Speaker 1: slowly began to become a real thing in the early 31 00:01:57,480 --> 00:02:00,280 Speaker 1: two thousands here in the United States that it was 32 00:02:00,280 --> 00:02:03,680 Speaker 1: seen as a viable delivery mechanism for video content at all. 33 00:02:03,720 --> 00:02:06,200 Speaker 1: But more about that in a little bit. In the 34 00:02:06,280 --> 00:02:10,840 Speaker 1: spring of two thousand three, Netflix was a totally different 35 00:02:10,880 --> 00:02:16,720 Speaker 1: company from a talent perspective than what the initial Netflix 36 00:02:16,800 --> 00:02:20,480 Speaker 1: was all about. None of the original team members were 37 00:02:20,480 --> 00:02:24,040 Speaker 1: still at the company. Read Hastings, who had provided the 38 00:02:24,120 --> 00:02:28,240 Speaker 1: seed money for Netflix but who was not initially involved 39 00:02:28,240 --> 00:02:30,679 Speaker 1: in the day to day operations of the company, was 40 00:02:30,760 --> 00:02:33,680 Speaker 1: now running the show, and in March two thousand three, 41 00:02:34,080 --> 00:02:39,440 Speaker 1: the company hit the landmark of one million subscribers that 42 00:02:39,520 --> 00:02:42,920 Speaker 1: had long been seen as the turning point that this 43 00:02:42,960 --> 00:02:46,040 Speaker 1: would be the moment when Netflix would turn into a 44 00:02:46,080 --> 00:02:49,880 Speaker 1: profitable company. Blockbuster, meanwhile, I was trying to get into 45 00:02:49,880 --> 00:02:53,600 Speaker 1: the game late and the end of two thousand three, 46 00:02:54,040 --> 00:02:57,600 Speaker 1: they were looking to launch their own online the DVD 47 00:02:57,680 --> 00:03:02,200 Speaker 1: rental service called Blockbuster on Line. Now. Originally the vision 48 00:03:02,240 --> 00:03:05,720 Speaker 1: for Blockbuster Online was to be an online and in 49 00:03:05,880 --> 00:03:12,799 Speaker 1: store hybrid service, but delays and changes and political shifts 50 00:03:12,960 --> 00:03:17,400 Speaker 1: within Blockbuster ment that when the service finally debuted, it 51 00:03:17,440 --> 00:03:21,320 Speaker 1: was an online rental subscription model, not that different from 52 00:03:21,400 --> 00:03:25,280 Speaker 1: what Netflix was doing, but the nature of Blockbusters business 53 00:03:25,639 --> 00:03:30,560 Speaker 1: with franchise owners opposing the very idea of online options. 54 00:03:30,760 --> 00:03:35,040 Speaker 1: They were afraid that the online stores would cannibalize their 55 00:03:35,080 --> 00:03:40,760 Speaker 1: own stores traffic. They argued to the CEO, John Antiocho, 56 00:03:40,920 --> 00:03:44,120 Speaker 1: that this is a terrible, terrible choice. Don't do this. 57 00:03:44,560 --> 00:03:47,920 Speaker 1: You're going to ruin our businesses. And so Antiocho in 58 00:03:47,920 --> 00:03:51,640 Speaker 1: a way kind of capitulated a bit. He denied the 59 00:03:51,760 --> 00:03:58,680 Speaker 1: online team any chance to leverage blockbusters established assets and relationships. 60 00:03:58,760 --> 00:04:03,200 Speaker 1: So Blockbuster had relationships with movie studios. They were able 61 00:04:03,240 --> 00:04:07,920 Speaker 1: to get really good deals on VHS titles for rental 62 00:04:08,160 --> 00:04:12,400 Speaker 1: through these movie studios. None of that was available to 63 00:04:12,480 --> 00:04:16,080 Speaker 1: the online team. They were not allowed to leverage any 64 00:04:16,080 --> 00:04:19,080 Speaker 1: of the customer data that Blockbuster had gathered over the 65 00:04:19,160 --> 00:04:21,599 Speaker 1: years of being in business, and it really put this 66 00:04:21,680 --> 00:04:24,680 Speaker 1: initiative at a disadvantage. And if you listen to my 67 00:04:24,800 --> 00:04:28,680 Speaker 1: episodes about Blockbuster, you know that this eventually doesn't work 68 00:04:28,680 --> 00:04:31,599 Speaker 1: out so well for the company. But they were Despite 69 00:04:31,640 --> 00:04:36,040 Speaker 1: these disadvantages, the team behind Blockbuster Online was still able 70 00:04:36,040 --> 00:04:40,479 Speaker 1: to create a credible threat to Netflix. As for Netflix, 71 00:04:40,960 --> 00:04:43,840 Speaker 1: it was going through a serious growth phase. By two 72 00:04:43,880 --> 00:04:47,440 Speaker 1: thousand four of the company's share price had risen dramatically, 73 00:04:48,120 --> 00:04:51,760 Speaker 1: quadrupling at one point and going beyond that to to 74 00:04:52,480 --> 00:04:57,040 Speaker 1: quite high from its original opening amount. About three thousand 75 00:04:57,120 --> 00:05:01,240 Speaker 1: new customers were signing up every day, a revenue growth 76 00:05:01,360 --> 00:05:05,480 Speaker 1: was more than one year over year, and Hastings announced 77 00:05:05,480 --> 00:05:08,360 Speaker 1: to investors than the company planned to introduce a movie 78 00:05:08,400 --> 00:05:11,920 Speaker 1: download service at some point in two thousand five, which 79 00:05:11,960 --> 00:05:14,360 Speaker 1: would then mean the company was dipping its toe into 80 00:05:14,440 --> 00:05:17,840 Speaker 1: digital delivery, though in this case we're talking about digital 81 00:05:17,839 --> 00:05:21,479 Speaker 1: delivery and that you would purchase a movie and download 82 00:05:21,520 --> 00:05:24,640 Speaker 1: it to a device, uh, not digital delivery in the 83 00:05:24,680 --> 00:05:27,599 Speaker 1: sense of streaming movies that still was in the future. 84 00:05:28,080 --> 00:05:31,279 Speaker 1: Netflix began to advertise on television in two thousand four, 85 00:05:31,720 --> 00:05:36,680 Speaker 1: and they saw subscription numbers skyrocket. That sounds great, except 86 00:05:36,760 --> 00:05:41,920 Speaker 1: there was one tiny problem, which was that to entice customers, 87 00:05:42,680 --> 00:05:46,200 Speaker 1: new subscriptions would include a free trial for a month, 88 00:05:46,480 --> 00:05:49,720 Speaker 1: so for the first month of a customer would have 89 00:05:49,839 --> 00:05:54,839 Speaker 1: free rentals. And that meant that while you saw customer 90 00:05:54,920 --> 00:05:59,599 Speaker 1: numbers increasing dramatically, the revenues weren't because people were taking 91 00:05:59,600 --> 00:06:03,440 Speaker 1: advantage of that one month of free service. So the 92 00:06:03,440 --> 00:06:06,839 Speaker 1: company actually posted a dramatic quarterly loss in two thousand 93 00:06:06,920 --> 00:06:09,200 Speaker 1: four because so many people had signed up and we're 94 00:06:09,320 --> 00:06:13,200 Speaker 1: using that free month and uh, it's kind of funny 95 00:06:13,200 --> 00:06:16,560 Speaker 1: to think about, but in a way, Netflix was suffering 96 00:06:16,680 --> 00:06:20,599 Speaker 1: such a big loss because they were so successful because 97 00:06:20,680 --> 00:06:23,680 Speaker 1: they had so many new customers signing up. But the 98 00:06:23,720 --> 00:06:27,520 Speaker 1: adoption of the service was helping Netflix more than it 99 00:06:27,560 --> 00:06:30,479 Speaker 1: was hurting it. In the long run, the stock price 100 00:06:30,560 --> 00:06:34,080 Speaker 1: had grown significantly. It led Netflix to split the stock 101 00:06:34,160 --> 00:06:37,120 Speaker 1: in February two thousand four. I've talked about stock splits 102 00:06:37,120 --> 00:06:41,160 Speaker 1: in the past. Typically it's when a company uh decides 103 00:06:41,279 --> 00:06:46,360 Speaker 1: to create new shares, awarding those new shares to people 104 00:06:46,400 --> 00:06:50,000 Speaker 1: who already hold shares in the company, and by increasing 105 00:06:50,000 --> 00:06:52,760 Speaker 1: the number of shares, they reduced the cost per share, 106 00:06:53,040 --> 00:06:57,839 Speaker 1: because you can't magically make a company more valuable this way, right, 107 00:06:58,200 --> 00:07:00,760 Speaker 1: So if you have a hundred thousand shares and they're 108 00:07:00,800 --> 00:07:03,440 Speaker 1: ten dollars a share, and then you decide to double 109 00:07:03,480 --> 00:07:06,440 Speaker 1: the number of shares, you have to half the price 110 00:07:06,600 --> 00:07:09,080 Speaker 1: per share. So you have two hundred thousand shares now, 111 00:07:09,320 --> 00:07:12,080 Speaker 1: but now they're five dollars per share because overall the 112 00:07:12,160 --> 00:07:15,280 Speaker 1: value of the company has to remain the same. The 113 00:07:15,360 --> 00:07:18,240 Speaker 1: value of the company can increase as the market values 114 00:07:18,280 --> 00:07:20,840 Speaker 1: it more, but you can't make it increased just by 115 00:07:20,840 --> 00:07:24,280 Speaker 1: splitting the stock. And the whole point behind splitting stocks 116 00:07:24,400 --> 00:07:29,080 Speaker 1: tends to be the philosophy that by having a lower 117 00:07:29,120 --> 00:07:34,600 Speaker 1: per share price, you increase the liquidity within the market. 118 00:07:34,640 --> 00:07:40,040 Speaker 1: People trade more readily, which is seen as or it 119 00:07:40,080 --> 00:07:43,600 Speaker 1: can be seen as a way of measuring company health. 120 00:07:44,280 --> 00:07:49,160 Speaker 1: Uh And you can you can encourage smaller investors to 121 00:07:49,240 --> 00:07:52,000 Speaker 1: invest in your company this way because on a per 122 00:07:52,080 --> 00:07:56,720 Speaker 1: share basis, the price isn't prohibitive. Right If if every 123 00:07:56,760 --> 00:07:59,320 Speaker 1: share costs a hundred and fifty dollars, you're not going 124 00:07:59,360 --> 00:08:03,120 Speaker 1: to get a love small investors, So they split the 125 00:08:03,160 --> 00:08:07,480 Speaker 1: stock into thousand four. Later that same year, Netflix raised 126 00:08:07,520 --> 00:08:10,119 Speaker 1: the fee for having three films out at a time. 127 00:08:10,560 --> 00:08:13,760 Speaker 1: The fee had been nineteen dollars ninety nine cents per month, 128 00:08:14,080 --> 00:08:17,040 Speaker 1: and they raised it to twenty one dollars nine cents 129 00:08:17,080 --> 00:08:20,880 Speaker 1: per month. This initially gave Blockbuster a boost of confidence 130 00:08:21,320 --> 00:08:24,760 Speaker 1: because they had their online service planned which had not 131 00:08:24,840 --> 00:08:28,040 Speaker 1: yet launched, and they had already priced it to be 132 00:08:28,120 --> 00:08:32,360 Speaker 1: the same as Netflix. So now when Netflix new prices, 133 00:08:32,440 --> 00:08:36,360 Speaker 1: the Blockbuster offering would actually be cheaper. This would give 134 00:08:36,400 --> 00:08:39,440 Speaker 1: Blockbuster the chance to undercut Netflix, which was seen as 135 00:08:39,440 --> 00:08:43,400 Speaker 1: a very valuable tool. So the Blockbuster service entered into 136 00:08:43,520 --> 00:08:47,600 Speaker 1: a test phase on July two thousand four, which happened 137 00:08:47,600 --> 00:08:49,760 Speaker 1: to be the same day that Netflix was holding an 138 00:08:49,760 --> 00:08:54,520 Speaker 1: earnings call, and this timing was not coincidental. Blockbuster was 139 00:08:54,600 --> 00:08:58,840 Speaker 1: targeting the earnings call specifically in order to essentially send 140 00:08:58,880 --> 00:09:03,280 Speaker 1: Netflix a message essentially saying watch your back. Netflix stock 141 00:09:03,480 --> 00:09:06,520 Speaker 1: took a sharp dive in price as investors started to 142 00:09:06,559 --> 00:09:09,839 Speaker 1: get nervous because Blockbuster had already proven to be a 143 00:09:09,880 --> 00:09:13,079 Speaker 1: giant in video rentals, and if the company was really 144 00:09:13,160 --> 00:09:17,440 Speaker 1: behind this this service, it could mean that they would 145 00:09:17,840 --> 00:09:21,080 Speaker 1: price Netflix out. Of business. Even if Blockbuster were to 146 00:09:21,120 --> 00:09:24,600 Speaker 1: take a loss in the short term, if they could 147 00:09:24,679 --> 00:09:29,480 Speaker 1: outlast Netflix, if they could sap away enough customers so 148 00:09:29,559 --> 00:09:33,520 Speaker 1: the Netflix isn't making enough money, then they could stand triumphant. 149 00:09:33,600 --> 00:09:36,800 Speaker 1: And then once Netflix is gone, they could increase prices 150 00:09:36,920 --> 00:09:38,920 Speaker 1: or even get rid of the service entirely if they 151 00:09:38,920 --> 00:09:43,200 Speaker 1: wanted to. So this was not a great move, and 152 00:09:43,559 --> 00:09:47,480 Speaker 1: the dive in price meant Netflix lost about sixty percent 153 00:09:47,679 --> 00:09:50,920 Speaker 1: of its market value in a week. Market value is 154 00:09:50,960 --> 00:09:54,280 Speaker 1: that measurement we use when we we take the number 155 00:09:54,360 --> 00:09:57,080 Speaker 1: of outstanding shares in the company and we multiply it 156 00:09:57,120 --> 00:09:59,640 Speaker 1: by the price per share, then you get the market 157 00:09:59,720 --> 00:10:03,439 Speaker 1: value of a company. If it hadn't been for Blockbusters 158 00:10:03,559 --> 00:10:08,280 Speaker 1: other problems which were largely driven by the investor, Carl 159 00:10:08,480 --> 00:10:10,959 Speaker 1: Icon and his attempts to steer the company in a 160 00:10:11,000 --> 00:10:15,000 Speaker 1: particular direction. Specifically, he wanted a Blockbuster to buy up 161 00:10:15,040 --> 00:10:21,160 Speaker 1: a rival, major UH competitor, Hollywood Video. All of those 162 00:10:21,320 --> 00:10:24,120 Speaker 1: machinations going on in the background, we're really taking up 163 00:10:24,120 --> 00:10:30,320 Speaker 1: a lot of of corporate focus, and the senior staff 164 00:10:30,400 --> 00:10:33,280 Speaker 1: over at Blockbuster we're trying to fight off Icon. If 165 00:10:33,320 --> 00:10:36,240 Speaker 1: that had not happened, Blockbuster Online might have posed a 166 00:10:36,360 --> 00:10:39,240 Speaker 1: much larger threat to Netflix, but at the time it 167 00:10:39,280 --> 00:10:43,319 Speaker 1: was probably a scary competitor, but it was small potatoes 168 00:10:43,360 --> 00:10:46,320 Speaker 1: compared to another potential threat that appeared to be on 169 00:10:46,360 --> 00:10:50,680 Speaker 1: the horizon, which was Amazon dot Com, which was rumored 170 00:10:50,880 --> 00:10:54,200 Speaker 1: to be getting ready to launch its own DVD online 171 00:10:54,200 --> 00:10:57,920 Speaker 1: rental service, and that seemed to be the real threat 172 00:10:58,320 --> 00:11:01,360 Speaker 1: because again, Netflix originally was supposed to be the Amazon 173 00:11:01,440 --> 00:11:05,920 Speaker 1: dot Com of renting videos online. If Amazon got into it, 174 00:11:05,920 --> 00:11:08,360 Speaker 1: it would by definition be the Amazon dot Com of 175 00:11:08,440 --> 00:11:11,600 Speaker 1: doing that. So to ward off Amazon, Hastings made the 176 00:11:11,640 --> 00:11:14,800 Speaker 1: decision to cut the subscription price. They had raised it 177 00:11:14,840 --> 00:11:18,959 Speaker 1: not that long ago. They decided, let's cut it too 178 00:11:19,000 --> 00:11:23,080 Speaker 1: as low as we can possibly go without taking too 179 00:11:23,080 --> 00:11:26,440 Speaker 1: big of a hit, and ultimately they cut the price 180 00:11:26,480 --> 00:11:30,160 Speaker 1: by eight percent, down to seventeen dollars cents per month. 181 00:11:31,080 --> 00:11:34,840 Speaker 1: Netflix had been buying properties in the United Kingdom. They 182 00:11:34,920 --> 00:11:39,640 Speaker 1: were anticipating expanding internationally and launching the service over in 183 00:11:39,640 --> 00:11:42,319 Speaker 1: the UK, but Hastings decided that they were going to 184 00:11:42,440 --> 00:11:44,360 Speaker 1: have to put that on hold for a short while 185 00:11:45,160 --> 00:11:47,880 Speaker 1: until late two thousand five at the earliest, because he 186 00:11:47,920 --> 00:11:51,880 Speaker 1: wanted the company's full focus on competing against Amazon. Now, 187 00:11:51,920 --> 00:11:54,400 Speaker 1: that was complicated by the fact that Amazon had already 188 00:11:54,559 --> 00:11:57,960 Speaker 1: launched a net based DVD rental service in the UK. 189 00:11:58,720 --> 00:12:01,880 Speaker 1: They had not launched one US, but they used the 190 00:12:02,000 --> 00:12:05,439 Speaker 1: UK as sort of a testing ground. So Hastings told 191 00:12:05,480 --> 00:12:09,680 Speaker 1: investors that Blockbuster wasn't something to worry about. He said 192 00:12:09,880 --> 00:12:14,200 Speaker 1: that company has doomed itself. They said, if online rental 193 00:12:14,800 --> 00:12:18,480 Speaker 1: is going to continue in its trajectory, it's going to 194 00:12:20,240 --> 00:12:24,080 Speaker 1: increasingly pull business out of brick and mortar stores. That 195 00:12:24,120 --> 00:12:26,880 Speaker 1: you're gonna see fewer and fewer people going to the 196 00:12:26,960 --> 00:12:31,480 Speaker 1: stores to rent movies, and that if Blockbuster is putting 197 00:12:32,120 --> 00:12:36,280 Speaker 1: effort behind this, then they're going to cannibalize their own business. 198 00:12:36,320 --> 00:12:39,480 Speaker 1: They're going to take customers away from those brick and 199 00:12:39,480 --> 00:12:43,520 Speaker 1: mortar stores, and so they're not ultimately going to come 200 00:12:43,520 --> 00:12:47,240 Speaker 1: out ahead. They're gonna shift customers from one model to another. 201 00:12:47,840 --> 00:12:51,880 Speaker 1: But ultimately, since the company itself was built upon the 202 00:12:51,920 --> 00:12:56,480 Speaker 1: foundation of video rental stores, they would be marking themselves 203 00:12:56,480 --> 00:12:59,520 Speaker 1: for their own destruction. And they said that Netflix would 204 00:12:59,559 --> 00:13:03,120 Speaker 1: actually be in a really good position too to weather 205 00:13:03,240 --> 00:13:06,040 Speaker 1: all of that, that it would be strong on the 206 00:13:06,040 --> 00:13:09,680 Speaker 1: other side, whereas Blockbuster would end up taking the ground 207 00:13:09,720 --> 00:13:15,200 Speaker 1: out from underneath itself, but waiting for this to happen 208 00:13:15,559 --> 00:13:19,040 Speaker 1: was really hard. Blockbuster ran an ad during the two 209 00:13:19,080 --> 00:13:22,400 Speaker 1: thousand five Super Bowl, and during that ad they dropped 210 00:13:22,440 --> 00:13:26,360 Speaker 1: the price for their online service for video rental to 211 00:13:26,520 --> 00:13:30,480 Speaker 1: fourteen dollars nine cents per month for a service that 212 00:13:30,559 --> 00:13:33,559 Speaker 1: was very similar and essentially the same thing as Netflix's 213 00:13:33,960 --> 00:13:38,040 Speaker 1: three out subscription base, which was three dollars more expensive 214 00:13:38,080 --> 00:13:43,240 Speaker 1: per month. The CFO of Netflix argued they should hold firm. 215 00:13:43,400 --> 00:13:46,600 Speaker 1: They should not drop their price again, and the reason was, 216 00:13:46,920 --> 00:13:51,960 Speaker 1: he said, Blockbusters bleeding itself out. It is purposefully losing 217 00:13:52,040 --> 00:13:56,200 Speaker 1: money per subscriber on this deal in the hopes that 218 00:13:56,240 --> 00:14:00,440 Speaker 1: they will be able to put us under siege. Not 219 00:14:00,640 --> 00:14:04,120 Speaker 1: the Steven Seagal film, and wait until we're out of money, 220 00:14:04,440 --> 00:14:06,640 Speaker 1: and we should not try and get into a price war. 221 00:14:06,760 --> 00:14:09,319 Speaker 1: That's just going to make it harder for us if 222 00:14:09,360 --> 00:14:11,760 Speaker 1: we do that. By the end of two thousand five, 223 00:14:12,160 --> 00:14:15,720 Speaker 1: Netflix posted a profit in three of the four quarters, 224 00:14:15,760 --> 00:14:19,240 Speaker 1: which was good news. The company launched a download service 225 00:14:19,320 --> 00:14:22,280 Speaker 1: in which customers could purchase a digital copy of a movie. 226 00:14:22,640 --> 00:14:25,800 Speaker 1: At least they had that in a limited rollout, and 227 00:14:25,840 --> 00:14:28,280 Speaker 1: in April two thousand five, Hastings set on a conference 228 00:14:28,280 --> 00:14:32,960 Speaker 1: call that Blockbuster had thrown everything they had at him 229 00:14:33,000 --> 00:14:37,040 Speaker 1: except the kitchen sink, and the very next day he 230 00:14:37,080 --> 00:14:40,360 Speaker 1: found an enormous package waiting for him. It was from 231 00:14:40,400 --> 00:14:46,360 Speaker 1: Blockbuster and inside was, of course, a kitchen sink. So 232 00:14:46,400 --> 00:14:49,400 Speaker 1: what would come next? Well, I'll tell you, but first 233 00:14:49,480 --> 00:14:59,760 Speaker 1: let's take a quick break to thank our sponsor. Now, 234 00:15:00,000 --> 00:15:03,400 Speaker 1: on all of Netflix's woes were coming from outside the company, 235 00:15:03,480 --> 00:15:07,800 Speaker 1: They weren't all external threats. One policy that landed Netflix 236 00:15:07,840 --> 00:15:10,840 Speaker 1: into some trouble had to do with its algorithms that 237 00:15:11,000 --> 00:15:14,440 Speaker 1: decided who would get the next available copy of a 238 00:15:14,480 --> 00:15:18,040 Speaker 1: particular DVD. Not. On a previous episode, you heard how 239 00:15:18,080 --> 00:15:20,480 Speaker 1: the algorithm was supposed to work, which is that you 240 00:15:20,480 --> 00:15:24,200 Speaker 1: would create a queue, and you would put the movies 241 00:15:24,280 --> 00:15:26,520 Speaker 1: in order in your queue, in the order you wanted 242 00:15:26,520 --> 00:15:30,880 Speaker 1: to get them, and at least the idea was you 243 00:15:30,920 --> 00:15:36,800 Speaker 1: would get the next available version of that title as 244 00:15:36,800 --> 00:15:39,640 Speaker 1: soon as possible. That the higher ranked the movies were, 245 00:15:39,640 --> 00:15:41,080 Speaker 1: the more likely you were going to get one of 246 00:15:41,120 --> 00:15:46,080 Speaker 1: those titles, assuming there was any availability, And obviously new 247 00:15:46,120 --> 00:15:50,600 Speaker 1: releases would be the hardest to get initially because everybody 248 00:15:50,640 --> 00:15:53,880 Speaker 1: wants to see them. Now, you would think this would 249 00:15:53,920 --> 00:15:56,360 Speaker 1: all be by the order in which users had placed 250 00:15:56,400 --> 00:16:01,120 Speaker 1: a title into their cues, adjusted by the ranking within 251 00:16:01,160 --> 00:16:04,160 Speaker 1: the queues themselves. So in other words, let's say that 252 00:16:04,320 --> 00:16:06,320 Speaker 1: you and I both want to see Big Trouble in 253 00:16:06,320 --> 00:16:08,720 Speaker 1: Little China, because, as we know, it's one of the 254 00:16:08,760 --> 00:16:11,680 Speaker 1: greatest movies ever made. I put it in my queue. 255 00:16:12,040 --> 00:16:16,280 Speaker 1: But in my queue, I put it in the fifteen spot. Uh, 256 00:16:16,920 --> 00:16:19,280 Speaker 1: because I've seen the movie before. I love it, but 257 00:16:19,520 --> 00:16:21,720 Speaker 1: there are other movies I want to see more at 258 00:16:21,840 --> 00:16:25,000 Speaker 1: the at the time, so it's number fifteen in my queue. 259 00:16:25,360 --> 00:16:28,600 Speaker 1: The following day, you add Big Trouble in Little China 260 00:16:28,640 --> 00:16:30,880 Speaker 1: to your queue, but you put it at the number 261 00:16:30,880 --> 00:16:34,400 Speaker 1: one spot. You know, I really want to see this movie. Well, 262 00:16:34,480 --> 00:16:37,320 Speaker 1: based upon what we understood the algorithm to do at 263 00:16:37,320 --> 00:16:40,720 Speaker 1: the time, we would have thought the algorithm would essentially say, well, 264 00:16:40,800 --> 00:16:43,800 Speaker 1: Jonathan added it first, but he's also marked it at 265 00:16:43,840 --> 00:16:46,720 Speaker 1: a lower priority by its place on the queue, So 266 00:16:46,720 --> 00:16:49,480 Speaker 1: I'm gonna send it to the other person. This other 267 00:16:49,520 --> 00:16:52,520 Speaker 1: person who has impeccable taste in movies, They're going to 268 00:16:52,520 --> 00:16:55,480 Speaker 1: get the movie first because they ranked it higher. That's 269 00:16:55,480 --> 00:16:58,440 Speaker 1: how we all understood the algorithm to work. But that's 270 00:16:58,440 --> 00:17:04,359 Speaker 1: not how it actually worked, and Netflix admitted as much. 271 00:17:04,359 --> 00:17:06,399 Speaker 1: They were forced to in the face of a class 272 00:17:06,440 --> 00:17:11,080 Speaker 1: action lawsuit. The company revealed that it would give preferential 273 00:17:11,080 --> 00:17:15,520 Speaker 1: treatment to people who had rented fewer DVDs when there 274 00:17:15,600 --> 00:17:19,600 Speaker 1: was a high demand for certain titles. So why would 275 00:17:19,600 --> 00:17:23,439 Speaker 1: people who aren't renting as many DVDs get their choice 276 00:17:23,560 --> 00:17:27,160 Speaker 1: earlier than people who were loyal customers. Well, the corporate 277 00:17:27,160 --> 00:17:30,159 Speaker 1: logic was that the people who were renting just a 278 00:17:30,200 --> 00:17:33,680 Speaker 1: few DVDs were the most likely to leave the service. 279 00:17:33,760 --> 00:17:37,560 Speaker 1: They were the least anchored to it, and Netflix would 280 00:17:37,600 --> 00:17:41,440 Speaker 1: call those customers birds, and to prevent the birds from 281 00:17:41,440 --> 00:17:44,320 Speaker 1: flying off, they would make sure the birds got what 282 00:17:44,400 --> 00:17:48,600 Speaker 1: they wanted as quickly as possible. But on the flip side, 283 00:17:49,040 --> 00:17:51,880 Speaker 1: that meant the loyal customers, the ones who would rent 284 00:17:51,960 --> 00:17:55,000 Speaker 1: frequently and who were more likely to stick with Netflix, 285 00:17:55,600 --> 00:17:59,040 Speaker 1: they got passed over more frequently. It didn't matter if 286 00:17:59,119 --> 00:18:01,399 Speaker 1: they had assigned the title to a higher spot on 287 00:18:01,440 --> 00:18:04,720 Speaker 1: their queue, or if they had added the title months 288 00:18:04,760 --> 00:18:09,560 Speaker 1: before the birds had done so, and that seemed inherently unfair. 289 00:18:10,359 --> 00:18:13,560 Speaker 1: Netflix would settle that lawsuit and a lot of claimants 290 00:18:13,600 --> 00:18:17,840 Speaker 1: ended up getting free rentals as compensation, so that was something, 291 00:18:17,880 --> 00:18:21,920 Speaker 1: but it was a message that a lot of people 292 00:18:22,160 --> 00:18:29,280 Speaker 1: mark down as saying read Hastings doesn't necessarily take customer 293 00:18:30,200 --> 00:18:35,520 Speaker 1: uh desires into account when he makes decisions, and that 294 00:18:35,560 --> 00:18:40,040 Speaker 1: would be a feeling that would get reinforced multiple times 295 00:18:40,040 --> 00:18:44,000 Speaker 1: over the next several years. Hastings incorporated a feature called 296 00:18:44,160 --> 00:18:48,159 Speaker 1: Friends in the Netflix website experience. This would allow users 297 00:18:48,200 --> 00:18:51,480 Speaker 1: to share their movie que selections with each other if 298 00:18:51,520 --> 00:18:54,320 Speaker 1: they chose to. It's kind of like a social platform. 299 00:18:54,359 --> 00:18:56,960 Speaker 1: They could say, all right, well, my friend Susie is 300 00:18:57,000 --> 00:18:59,240 Speaker 1: also using Netflix, so I'm going to share my cue 301 00:18:59,240 --> 00:19:02,240 Speaker 1: with Susie. Not not to share it across where Susie 302 00:19:02,280 --> 00:19:04,320 Speaker 1: is going to get my movies, but that Susie can 303 00:19:04,320 --> 00:19:08,639 Speaker 1: see which movies I am looking forward to watching. Netflix 304 00:19:08,680 --> 00:19:12,640 Speaker 1: could not do that automatically because there are federal privacy 305 00:19:12,720 --> 00:19:16,440 Speaker 1: laws in the United States that had previously established. Video 306 00:19:16,480 --> 00:19:20,120 Speaker 1: stores were not allowed to publish what a customer had 307 00:19:20,160 --> 00:19:25,160 Speaker 1: rented their rental history. That would be a violation of privacy. However, 308 00:19:25,560 --> 00:19:29,800 Speaker 1: Netflix could create the opportunity for users to opt in 309 00:19:30,040 --> 00:19:33,679 Speaker 1: and choose to share the information Netflix just couldn't do 310 00:19:33,720 --> 00:19:38,840 Speaker 1: it automatically on its own. Another thing that the developers 311 00:19:38,840 --> 00:19:42,879 Speaker 1: over at Netflix introduced was a concept called Profiles that 312 00:19:42,920 --> 00:19:46,840 Speaker 1: would allow a single user account to create separate profiles 313 00:19:47,160 --> 00:19:50,560 Speaker 1: within a household. So let's say that you know, it's 314 00:19:50,560 --> 00:19:54,440 Speaker 1: it's a couple of spouses, some kids. Everyone could get 315 00:19:54,440 --> 00:19:57,879 Speaker 1: their own profile with their own cues. That way, if 316 00:19:57,920 --> 00:20:01,400 Speaker 1: one person favored action movies, someone else likes rom coms, 317 00:20:01,440 --> 00:20:05,280 Speaker 1: someone else is really into, you know, deep thinking science fiction, 318 00:20:05,520 --> 00:20:08,640 Speaker 1: they could each maintain their separate cues and they could 319 00:20:08,640 --> 00:20:11,879 Speaker 1: get separate suggestions for films they might want to rent 320 00:20:12,119 --> 00:20:15,679 Speaker 1: based upon their individual preferences and not have it just 321 00:20:15,960 --> 00:20:19,880 Speaker 1: all filter into one big, messy que. Read Hastings actually 322 00:20:19,880 --> 00:20:22,440 Speaker 1: did not like this feature at all. He did not 323 00:20:22,560 --> 00:20:25,080 Speaker 1: want to implement it. He felt that it was going 324 00:20:25,160 --> 00:20:28,520 Speaker 1: to make it harder to program changes because it added 325 00:20:28,760 --> 00:20:32,479 Speaker 1: unnecessary complications. He just viewed this as being very messy, 326 00:20:32,600 --> 00:20:36,800 Speaker 1: very human, not very efficient. But customers were actually calling 327 00:20:36,840 --> 00:20:40,040 Speaker 1: for this feature, and as it turned out, both Profiles 328 00:20:40,040 --> 00:20:43,639 Speaker 1: and Friends features would set off some more warning flags 329 00:20:43,680 --> 00:20:47,480 Speaker 1: that would reinforce this idea that read Hastings did not 330 00:20:47,640 --> 00:20:53,720 Speaker 1: necessarily consider. Customer wants and needs and desires to be 331 00:20:53,880 --> 00:20:56,879 Speaker 1: very high among the priority lists of things that the 332 00:20:56,920 --> 00:20:59,840 Speaker 1: company needed to focus on. Back on the block but 333 00:21:00,000 --> 00:21:04,560 Speaker 1: sster warfront. Netflix won a victory when Walmart decided, after 334 00:21:04,640 --> 00:21:09,000 Speaker 1: a failed attempt to get uh the online DV rent 335 00:21:09,040 --> 00:21:11,920 Speaker 1: toll business going, that it was going to pull out 336 00:21:11,920 --> 00:21:14,600 Speaker 1: of that business entirely. Walmart said, you know, we tried. 337 00:21:14,880 --> 00:21:17,080 Speaker 1: This isn't working for us. It doesn't fall into our 338 00:21:17,080 --> 00:21:23,440 Speaker 1: business plan. And the the agreement between Walmart and Netflix 339 00:21:23,480 --> 00:21:30,200 Speaker 1: was that Walmart would instead direct customers to Netflix and 340 00:21:30,320 --> 00:21:34,440 Speaker 1: even have a deal where people who had been customers 341 00:21:34,480 --> 00:21:39,480 Speaker 1: of Walmart's online DVD rental business could become members over 342 00:21:39,520 --> 00:21:43,119 Speaker 1: at Netflix for a reduced membership fee for a year. 343 00:21:43,800 --> 00:21:47,280 Speaker 1: So that was a big deal in that this competitor 344 00:21:47,320 --> 00:21:49,879 Speaker 1: and not not only was getting out of the market, they 345 00:21:49,920 --> 00:21:54,560 Speaker 1: were handing over their customers to Netflix. Blockbuster did not 346 00:21:54,720 --> 00:21:58,280 Speaker 1: like that. They also ended up having to raise prices 347 00:21:58,320 --> 00:22:01,840 Speaker 1: to seventeen dollars nine for the three DVD at a 348 00:22:01,880 --> 00:22:05,240 Speaker 1: time service. They had been at fourt but now they 349 00:22:05,240 --> 00:22:08,119 Speaker 1: brought it up in line with Netflix, just as people 350 00:22:08,160 --> 00:22:10,639 Speaker 1: and Netflix had predicted. They said, well, Blockbuster was going 351 00:22:10,680 --> 00:22:12,760 Speaker 1: to have to do this because they were losing so 352 00:22:12,840 --> 00:22:15,919 Speaker 1: much money on a per subscription basis that it was 353 00:22:15,960 --> 00:22:20,440 Speaker 1: not something that could be supported indefinitely. Even better news 354 00:22:20,480 --> 00:22:24,439 Speaker 1: for Netflix, it looked like Amazon was actually not going 355 00:22:24,520 --> 00:22:27,280 Speaker 1: to get into the DVD rental space in the United 356 00:22:27,280 --> 00:22:30,080 Speaker 1: States at all. So at the end of two thousand five, 357 00:22:30,160 --> 00:22:32,560 Speaker 1: Netflix had a market value of about one and a 358 00:22:32,560 --> 00:22:37,600 Speaker 1: half billion dollars. It also had eliminated its debt, and 359 00:22:37,640 --> 00:22:41,320 Speaker 1: it had four point two million subscribers. Blockbuster, on the 360 00:22:41,359 --> 00:22:44,280 Speaker 1: other hand, was more than a billion dollars in debt 361 00:22:44,840 --> 00:22:48,240 Speaker 1: and had a market value of six four million dollars. 362 00:22:48,280 --> 00:22:52,960 Speaker 1: So the fortunes had changed dramatically for both companies. But Blockbuster, 363 00:22:53,359 --> 00:22:58,080 Speaker 1: though knocked down, wasn't out. It was still fighting, and 364 00:22:58,680 --> 00:23:02,720 Speaker 1: there was another trick up Blockbusters giant sleeve that would 365 00:23:02,720 --> 00:23:05,640 Speaker 1: cause Netflix more grief. Just a little later in two 366 00:23:05,640 --> 00:23:08,480 Speaker 1: thousand six, the world was looking at the Internet as 367 00:23:08,520 --> 00:23:12,320 Speaker 1: a possible delivery mechanism for long form video. So YouTube 368 00:23:12,400 --> 00:23:15,200 Speaker 1: had launched in two thousand five that was already becoming 369 00:23:15,200 --> 00:23:19,159 Speaker 1: a popular place for short form user generated video. But 370 00:23:19,280 --> 00:23:22,320 Speaker 1: as for the studio backed stuff, that was a different story. 371 00:23:22,440 --> 00:23:26,520 Speaker 1: For one thing, the landscape was really messy from an 372 00:23:26,520 --> 00:23:31,280 Speaker 1: industry perspective, most movie and television studios were part of 373 00:23:31,400 --> 00:23:36,600 Speaker 1: larger conglomerates, and those conglomerates also included distribution channels like 374 00:23:36,760 --> 00:23:42,000 Speaker 1: cable networks or other cable distributors and Internet service providers 375 00:23:42,040 --> 00:23:44,879 Speaker 1: were starting to buy up media companies to or get 376 00:23:45,040 --> 00:23:48,400 Speaker 1: acquired by those same sort of conglomerates, and this thing 377 00:23:48,480 --> 00:23:53,080 Speaker 1: made things really messy. You add lines of distribution content 378 00:23:53,200 --> 00:23:56,000 Speaker 1: all getting bubbled up with each other, and an independent 379 00:23:56,000 --> 00:24:01,280 Speaker 1: company like Netflix was put kind of outside of all that. Meanwhile, 380 00:24:01,320 --> 00:24:06,240 Speaker 1: you had entrenched entities like HBO or Showtime, these premium 381 00:24:06,359 --> 00:24:09,679 Speaker 1: channels that would pay enormous amounts of money to studios 382 00:24:09,840 --> 00:24:13,520 Speaker 1: in order to get exclusive cable rights to different properties, 383 00:24:13,760 --> 00:24:16,720 Speaker 1: so there were very few incentives in place on that 384 00:24:16,840 --> 00:24:20,199 Speaker 1: side to change things up now. Originally the plan for 385 00:24:20,240 --> 00:24:23,960 Speaker 1: Netflix was to roll out a wider download service like 386 00:24:24,000 --> 00:24:26,639 Speaker 1: the one it had tested in two thousand five, but 387 00:24:26,760 --> 00:24:30,280 Speaker 1: the company scrapped those plans, so instead there was a 388 00:24:30,280 --> 00:24:33,439 Speaker 1: more bold idea in the works. It would involve a 389 00:24:33,520 --> 00:24:37,960 Speaker 1: media player that would be uh that would run on 390 00:24:38,480 --> 00:24:42,679 Speaker 1: a computer device, maybe a computer, desktop, laptop, maybe a 391 00:24:42,720 --> 00:24:46,720 Speaker 1: portable device, and it would be allowed to play streaming 392 00:24:46,920 --> 00:24:50,639 Speaker 1: video content, so instead of downloading something, you would stream 393 00:24:50,640 --> 00:24:53,280 Speaker 1: it from a server. This was in contrast to a 394 00:24:53,320 --> 00:24:56,720 Speaker 1: strategy that a company like Disney was trying to employ. 395 00:24:56,760 --> 00:25:00,560 Speaker 1: Disney had introduced a proprietary set top box and a 396 00:25:00,640 --> 00:25:04,600 Speaker 1: download service called movie Beam. Hastings felt that it made 397 00:25:04,600 --> 00:25:08,280 Speaker 1: more sense to create a lightweight media player that could 398 00:25:08,280 --> 00:25:13,119 Speaker 1: be installed on numerous types of hardware owned by other companies. 399 00:25:13,320 --> 00:25:16,760 Speaker 1: So hardware manufactured by different companies and sold by different 400 00:25:16,760 --> 00:25:21,199 Speaker 1: companies could also include this media player as part of 401 00:25:21,200 --> 00:25:26,000 Speaker 1: the installation rather than producing their own hardware, and that 402 00:25:26,000 --> 00:25:29,960 Speaker 1: would bring price down for development and more importantly, for adoption. 403 00:25:30,240 --> 00:25:33,000 Speaker 1: You wouldn't have to have, you know, a brand new 404 00:25:33,040 --> 00:25:36,320 Speaker 1: set top box sold by Netflix for a couple hundred bucks. 405 00:25:36,760 --> 00:25:39,440 Speaker 1: This was super important because it was clear Netflix was 406 00:25:39,480 --> 00:25:42,119 Speaker 1: going to have to spend a lot of money to 407 00:25:42,200 --> 00:25:45,919 Speaker 1: get into this digital distribution world, because it was going 408 00:25:45,960 --> 00:25:48,680 Speaker 1: to cost a huge amount to get the rights to 409 00:25:48,960 --> 00:25:53,280 Speaker 1: serve up streaming media from the various content creators. Netflix 410 00:25:53,359 --> 00:25:56,600 Speaker 1: wasn't creating its own content yet in those days, so 411 00:25:56,600 --> 00:25:58,760 Speaker 1: it was gonna have to pay licensing fees to all 412 00:25:58,840 --> 00:26:01,600 Speaker 1: the different creators out there. That were making the stuff 413 00:26:01,600 --> 00:26:04,600 Speaker 1: that people wanted to see. The licensing fees were going 414 00:26:04,640 --> 00:26:07,720 Speaker 1: to be an incredible expense, so there had to be 415 00:26:07,760 --> 00:26:10,359 Speaker 1: a way to convince a large number of people to 416 00:26:10,600 --> 00:26:14,280 Speaker 1: enroll in the service to offset these huge costs that 417 00:26:14,320 --> 00:26:16,680 Speaker 1: the company was going to encounter as it built out 418 00:26:16,720 --> 00:26:21,639 Speaker 1: a streaming inventory of TV shows and movies. Meanwhile, Netflix 419 00:26:21,640 --> 00:26:26,080 Speaker 1: and Blockbuster Online traded lawsuits with each other. Netflix alleged 420 00:26:26,119 --> 00:26:30,719 Speaker 1: that Blockbuster Online was infringing upon trademarks, and Blockbuster Online 421 00:26:30,720 --> 00:26:34,080 Speaker 1: said Netflix was suing them in order to try and 422 00:26:34,119 --> 00:26:37,280 Speaker 1: force a competitor out of an industry and create an 423 00:26:37,280 --> 00:26:42,400 Speaker 1: effective monopoly. Eventually, the company settled both lawsuits, and one 424 00:26:42,400 --> 00:26:45,479 Speaker 1: of the terms of the settlement allegedly because this has 425 00:26:45,520 --> 00:26:49,280 Speaker 1: never been publicly acknowledged, but as far as I can tell, UH, 426 00:26:49,440 --> 00:26:52,280 Speaker 1: one of the terms was that read Hastings would no 427 00:26:52,480 --> 00:26:56,600 Speaker 1: longer be allowed to tell his story that Netflix was 428 00:26:56,640 --> 00:27:01,160 Speaker 1: the creation that was inspired by a late fee from Blockbuster, 429 00:27:01,440 --> 00:27:04,080 Speaker 1: and it was around this time that if read Hastings 430 00:27:04,080 --> 00:27:08,199 Speaker 1: did tell that story, the identity of the video store 431 00:27:08,280 --> 00:27:11,320 Speaker 1: in question would no longer be a Blockbuster, but rather 432 00:27:11,560 --> 00:27:15,080 Speaker 1: a mom and pop video rental store in California that 433 00:27:15,160 --> 00:27:18,880 Speaker 1: had long since gone out of business. So uh, this 434 00:27:19,000 --> 00:27:25,200 Speaker 1: was another indication that that story of Netflix's origin was apocryphal. 435 00:27:25,600 --> 00:27:28,280 Speaker 1: Now I have a bit more to say about what 436 00:27:28,359 --> 00:27:32,640 Speaker 1: Netflix and Blockbuster did toward the end of the first 437 00:27:32,680 --> 00:27:35,520 Speaker 1: decade of two thousand, but first let's take a quick 438 00:27:35,560 --> 00:27:46,760 Speaker 1: break to thank our sponsor. In two thousand seven, on January, 439 00:27:47,600 --> 00:27:51,800 Speaker 1: Netflix announced it would launch a streaming video service online, 440 00:27:52,200 --> 00:27:55,720 Speaker 1: and the initial library was limited to one thousand titles. 441 00:27:56,320 --> 00:27:59,280 Speaker 1: So whenever you get on Netflix then you say there's 442 00:27:59,320 --> 00:28:02,240 Speaker 1: nothing to watch. Just imagine back when it was only 443 00:28:02,280 --> 00:28:05,320 Speaker 1: a thousand titles total. So why would you launch a 444 00:28:05,400 --> 00:28:08,679 Speaker 1: service with so few titles in the first place. The 445 00:28:08,720 --> 00:28:12,960 Speaker 1: general consensus was that Netflix's hand was sort of forced 446 00:28:13,040 --> 00:28:15,919 Speaker 1: because it was still trying to fight off Blockbuster, and 447 00:28:15,960 --> 00:28:20,080 Speaker 1: Blockbuster had launched a service called Total Access that ended 448 00:28:20,160 --> 00:28:26,040 Speaker 1: up being incredibly popular and was rapidly siphoning away customers 449 00:28:26,040 --> 00:28:28,359 Speaker 1: who would have signed up to Netflix and instead they 450 00:28:28,400 --> 00:28:31,200 Speaker 1: were signing up with Blockbuster. Now here's the funny thing. 451 00:28:31,520 --> 00:28:37,000 Speaker 1: Total Access was a hybrid DVD rental service, and it 452 00:28:37,040 --> 00:28:41,960 Speaker 1: was what Blockbuster Online was intended to be years earlier. 453 00:28:42,000 --> 00:28:45,000 Speaker 1: It was supposed to be this combination of online and 454 00:28:45,040 --> 00:28:48,760 Speaker 1: brick and mortar stores. UH. It was supposed to leverage 455 00:28:49,000 --> 00:28:55,560 Speaker 1: the strengths of Blockbuster along with this new online delivery 456 00:28:55,600 --> 00:28:59,400 Speaker 1: model and UH or at least online rental model, I 457 00:28:59,400 --> 00:29:03,120 Speaker 1: should say, because the the delivery was still in DVD format. 458 00:29:03,480 --> 00:29:05,880 Speaker 1: So here's how it was going to work. In fact, 459 00:29:05,960 --> 00:29:08,360 Speaker 1: here's how it did work. If you signed up for 460 00:29:08,400 --> 00:29:12,560 Speaker 1: the service, then you could create a queue very similar 461 00:29:12,600 --> 00:29:16,040 Speaker 1: to what you would do on Netflix of different movies 462 00:29:16,080 --> 00:29:19,320 Speaker 1: you wanted to watch, and based upon the level that 463 00:29:19,400 --> 00:29:22,120 Speaker 1: you had subscribed to, you would get a number of 464 00:29:22,240 --> 00:29:25,600 Speaker 1: DVDs from that queue sent to you. After you watched it, 465 00:29:25,760 --> 00:29:28,280 Speaker 1: you could do one of two things. You could PLoP 466 00:29:28,600 --> 00:29:32,000 Speaker 1: the the viewed DVD back into an envelope and mail 467 00:29:32,040 --> 00:29:34,920 Speaker 1: it back to Blockbuster, whereupon, once it was processed, they 468 00:29:34,920 --> 00:29:37,480 Speaker 1: would send you the next one on your list. Or 469 00:29:37,920 --> 00:29:41,560 Speaker 1: you could actually take that DVD and return it to 470 00:29:41,640 --> 00:29:44,200 Speaker 1: a Blockbuster store. And if you return it to a 471 00:29:44,240 --> 00:29:47,960 Speaker 1: Blockbuster store, that DVD would also act as if it 472 00:29:47,960 --> 00:29:52,040 Speaker 1: were a free rental coupon. You could immediately rent any 473 00:29:52,080 --> 00:29:56,800 Speaker 1: movie in that Blockbuster store for free, and meanwhile, the 474 00:29:56,800 --> 00:30:01,320 Speaker 1: Blockbuster store would scan in your return, which would immediately 475 00:30:01,960 --> 00:30:06,000 Speaker 1: indicate to the distribution center to send you the next 476 00:30:06,080 --> 00:30:08,800 Speaker 1: movie on your queue. So not only were you getting 477 00:30:08,800 --> 00:30:11,080 Speaker 1: a free rental that didn't have to be on your 478 00:30:11,120 --> 00:30:13,600 Speaker 1: queue at all, the next movie under queue, at least 479 00:30:13,640 --> 00:30:16,520 Speaker 1: the next available movie on your queue, would then get 480 00:30:16,520 --> 00:30:21,240 Speaker 1: sent to you. So this was a very attractive proposition. 481 00:30:21,360 --> 00:30:24,400 Speaker 1: It was something that Netflix could not offer because they 482 00:30:24,400 --> 00:30:28,400 Speaker 1: didn't have those brick and mortar stores and Blockbuster had that. 483 00:30:28,640 --> 00:30:32,600 Speaker 1: You know, that was an established, entrenched model for Blockbuster. 484 00:30:33,240 --> 00:30:36,920 Speaker 1: So this was an opportunity for Blockbuster to really put 485 00:30:36,960 --> 00:30:40,520 Speaker 1: the hurt on Netflix. Their service attracted more than two 486 00:30:40,560 --> 00:30:44,479 Speaker 1: million customers in just a few short months, uh and 487 00:30:44,640 --> 00:30:49,000 Speaker 1: it really posed another big threat to Netflix. Now, the 488 00:30:49,080 --> 00:30:53,200 Speaker 1: problem for Blockbuster was that the way they were pricing 489 00:30:53,200 --> 00:30:57,280 Speaker 1: this model was unsustainable. They could not do it indefinitely. 490 00:30:57,600 --> 00:31:03,120 Speaker 1: They were losing money on every transaction, especially since these 491 00:31:03,320 --> 00:31:08,160 Speaker 1: returned disks to the Blockbuster stores were resulting in free 492 00:31:08,200 --> 00:31:11,600 Speaker 1: rentals that took away the opportunity for the business to 493 00:31:11,680 --> 00:31:15,480 Speaker 1: rent that to someone else, so there was lost revenue. 494 00:31:15,960 --> 00:31:18,960 Speaker 1: It was seen as valuable in the sense that Blockbuster 495 00:31:19,080 --> 00:31:22,040 Speaker 1: was trying to catch up and overtake Netflix. But there 496 00:31:22,120 --> 00:31:24,680 Speaker 1: was no way it could keep doing this forever. So 497 00:31:24,760 --> 00:31:28,040 Speaker 1: the question was could Netflix stick around long enough to 498 00:31:28,800 --> 00:31:33,200 Speaker 1: outlast Blockbusters attempt to run them out of business. John 499 00:31:33,240 --> 00:31:35,920 Speaker 1: Antiocho would not get the chance to find out this answer. 500 00:31:35,960 --> 00:31:38,960 Speaker 1: He was the CEO of Blockbuster at that time, but 501 00:31:39,120 --> 00:31:43,200 Speaker 1: he had a really big fight with Carl Icon, who 502 00:31:43,280 --> 00:31:49,760 Speaker 1: owned a significant percentage of Blockbuster and controlled the vote 503 00:31:49,960 --> 00:31:53,760 Speaker 1: of a lot of shareholders in Blockbuster and had a 504 00:31:53,840 --> 00:31:57,880 Speaker 1: lot of power as a result. So Antiocho would resign 505 00:31:58,080 --> 00:32:03,720 Speaker 1: as CEO. Uh This was largely after a dispute he 506 00:32:03,800 --> 00:32:08,360 Speaker 1: had with the board of directors based on his bonuses 507 00:32:08,440 --> 00:32:12,240 Speaker 1: that he had earned that year he was those bonuses 508 00:32:12,240 --> 00:32:15,480 Speaker 1: were cut in half despite an agreement that had been 509 00:32:16,480 --> 00:32:19,960 Speaker 1: arrived at earlier in the year. So he leaves and 510 00:32:20,000 --> 00:32:23,080 Speaker 1: the news incoming CEO was a guy named James Keys. 511 00:32:23,400 --> 00:32:26,160 Speaker 1: I talked all about this in the Blockbuster episodes, but 512 00:32:26,320 --> 00:32:29,120 Speaker 1: Keys wanted to refocus on the brick and mortar stores 513 00:32:29,200 --> 00:32:33,120 Speaker 1: and he saw the online stuff as being unnecessary and distracting, 514 00:32:33,640 --> 00:32:38,480 Speaker 1: and it was a huge blow to Blockbusters strategy that 515 00:32:38,720 --> 00:32:41,320 Speaker 1: was actually working, at least in the sense that it 516 00:32:41,440 --> 00:32:45,960 Speaker 1: was having a big impact on Netflix's business, so pretty much, 517 00:32:46,200 --> 00:32:50,960 Speaker 1: Keys is a rival at Blockbuster, spelled the eventual doom 518 00:32:51,120 --> 00:32:55,400 Speaker 1: of Blockbuster Online, and ultimately you could argue the company 519 00:32:55,440 --> 00:32:59,120 Speaker 1: as a whole. So when Hastings announced that they were 520 00:32:59,120 --> 00:33:02,000 Speaker 1: going to do this inner streaming service, some people were 521 00:33:02,000 --> 00:33:05,840 Speaker 1: skeptical that it would ever succeed because there are people 522 00:33:05,840 --> 00:33:07,840 Speaker 1: who are saying, who the heck wants to watch a 523 00:33:07,920 --> 00:33:10,280 Speaker 1: movie on a small screen? Who wants to watch a 524 00:33:10,320 --> 00:33:14,000 Speaker 1: movie on their laptop or on a desktop or on 525 00:33:14,080 --> 00:33:17,040 Speaker 1: a portable device when they have a big screen television 526 00:33:17,120 --> 00:33:20,320 Speaker 1: and home theater sound system. Because the prevailing wisdom at 527 00:33:20,320 --> 00:33:23,640 Speaker 1: the time was that the quality of the experience mattered 528 00:33:23,680 --> 00:33:27,400 Speaker 1: more than the convenience. But we've seen time and time 529 00:33:27,400 --> 00:33:30,360 Speaker 1: again that convenience matters a whole lot. I mean, the 530 00:33:30,480 --> 00:33:36,800 Speaker 1: MP three compression format proves convenience matters a lot because 531 00:33:36,800 --> 00:33:40,720 Speaker 1: a lot of people are willing to listen to formats 532 00:33:40,720 --> 00:33:44,040 Speaker 1: that are lossy, that where you literally lose information you 533 00:33:44,080 --> 00:33:48,360 Speaker 1: don't have the full sound file represented there, and they're 534 00:33:48,360 --> 00:33:51,120 Speaker 1: willing to do it because the convenience of the form 535 00:33:51,200 --> 00:33:57,080 Speaker 1: factor was more than it seemed to compensate for the 536 00:33:57,720 --> 00:34:01,520 Speaker 1: decline in quality the streaming form at would essentially prove 537 00:34:01,640 --> 00:34:04,000 Speaker 1: the same sort of thing, but for video. And one 538 00:34:04,040 --> 00:34:06,920 Speaker 1: thing that would really help Netflix in the long term 539 00:34:07,040 --> 00:34:10,520 Speaker 1: would also debut later in two thousand seven. That would 540 00:34:10,520 --> 00:34:15,200 Speaker 1: be Apple's iPhone. Now, the iPhone did not initially support video, 541 00:34:15,320 --> 00:34:18,799 Speaker 1: it did not natively support Netflix when it launched, but 542 00:34:18,920 --> 00:34:22,359 Speaker 1: it would create a new market for consumers, a new 543 00:34:22,480 --> 00:34:26,399 Speaker 1: category in the industry, which would be the consumer smartphone. 544 00:34:26,640 --> 00:34:29,600 Speaker 1: There were smartphones before the iPhone, but they were largely 545 00:34:29,640 --> 00:34:33,320 Speaker 1: the domain of business executives. But the iPhone made smartphones 546 00:34:33,360 --> 00:34:37,000 Speaker 1: more consumer friendly and attractive, and the form factor would 547 00:34:37,040 --> 00:34:40,319 Speaker 1: set the stage for mobile viewing of content. And it 548 00:34:40,320 --> 00:34:43,360 Speaker 1: would take some time before the iPhone would support video, 549 00:34:43,560 --> 00:34:47,640 Speaker 1: and more time for a Netflix app to be available, 550 00:34:48,320 --> 00:34:52,080 Speaker 1: but even more time for cellular technology to actually support 551 00:34:52,120 --> 00:34:55,240 Speaker 1: streaming video to a mobile device. But this was setting 552 00:34:55,239 --> 00:34:58,480 Speaker 1: the groundwork, and there's no doubt that the smartphone in 553 00:34:58,520 --> 00:35:02,560 Speaker 1: general helps submit streaming videos place. Two thousand and eight 554 00:35:02,960 --> 00:35:06,880 Speaker 1: was a great year for Netflix because Blockbuster Online was 555 00:35:07,000 --> 00:35:10,040 Speaker 1: essentially a non factor. Now they no longer really had 556 00:35:10,120 --> 00:35:15,480 Speaker 1: a competitor, at least in the online space. Um Blockbuster 557 00:35:15,640 --> 00:35:20,960 Speaker 1: had abandoned the total access service Keys had had argued 558 00:35:21,000 --> 00:35:24,360 Speaker 1: for that customers who had opted for Blockbuster over Netflix, 559 00:35:24,400 --> 00:35:28,239 Speaker 1: now we're coming back over to Netflix because Blockbuster no 560 00:35:28,320 --> 00:35:32,520 Speaker 1: longer had a product there. Netflix's instant streaming service was 561 00:35:32,600 --> 00:35:37,520 Speaker 1: gaining in popularity faster than even Hastings had anticipated. And 562 00:35:37,719 --> 00:35:42,319 Speaker 1: Hasting saw online video is belonging to three categories. You 563 00:35:42,320 --> 00:35:46,680 Speaker 1: would have the download category, where you purchase a piece 564 00:35:46,719 --> 00:35:49,360 Speaker 1: of content and you get to download it to a device, 565 00:35:49,680 --> 00:35:52,799 Speaker 1: and he said, Apple owns that space. We are not 566 00:35:53,080 --> 00:35:55,800 Speaker 1: going to be able to compete with Apple. That's their domain. 567 00:35:56,239 --> 00:35:59,560 Speaker 1: Then you had free user generated content which you would 568 00:35:59,560 --> 00:36:03,239 Speaker 1: watch in streaming format, and YouTube was clearly the destination 569 00:36:03,239 --> 00:36:04,960 Speaker 1: for that. So Netflix was not going to own that 570 00:36:05,080 --> 00:36:08,399 Speaker 1: space either. But Netflix could be the home of the 571 00:36:08,480 --> 00:36:11,840 Speaker 1: third branch of online video, which was a subscription based 572 00:36:11,960 --> 00:36:16,839 Speaker 1: service providing streaming premium content. And it was also two 573 00:36:16,840 --> 00:36:20,000 Speaker 1: thousand and eight when Netflix began a strategy that would 574 00:36:20,080 --> 00:36:23,800 Speaker 1: end up being incredibly successful. The company signed an agreement 575 00:36:23,880 --> 00:36:26,760 Speaker 1: with l G which was creating a set top box 576 00:36:27,120 --> 00:36:30,839 Speaker 1: with some smart TV capabilities. So the agreement meant that 577 00:36:30,920 --> 00:36:35,920 Speaker 1: Netflix is streaming software that video Player would get installed 578 00:36:36,080 --> 00:36:39,000 Speaker 1: directly onto the set top box. So it became a 579 00:36:39,120 --> 00:36:43,560 Speaker 1: native application on this hardware device, and it allowed customers 580 00:36:43,600 --> 00:36:47,200 Speaker 1: to watch their streaming content directly on their television sets 581 00:36:47,480 --> 00:36:50,240 Speaker 1: without having to hook up a PC to the entertainment system, 582 00:36:50,400 --> 00:36:52,400 Speaker 1: which was a barrier for a lot of people. For 583 00:36:52,440 --> 00:36:54,359 Speaker 1: a lot of people, the idea of trying to hook 584 00:36:54,440 --> 00:36:58,680 Speaker 1: up a computer to a television was intimidating. It didn't 585 00:36:58,680 --> 00:37:02,600 Speaker 1: seem as intuitive as setting up a cable box or VCR, 586 00:37:02,640 --> 00:37:05,400 Speaker 1: a DVD player some other set top bucks that was 587 00:37:05,440 --> 00:37:08,680 Speaker 1: made specifically for that purpose, and this marked the beginning 588 00:37:09,040 --> 00:37:11,759 Speaker 1: of a movement for Netflix to try and make sure 589 00:37:11,800 --> 00:37:15,239 Speaker 1: that it's video player was as was available on as 590 00:37:15,280 --> 00:37:19,200 Speaker 1: many different platforms as was possible. The idea was go 591 00:37:19,440 --> 00:37:23,399 Speaker 1: to where the people are, and the Roku box, which 592 00:37:23,400 --> 00:37:26,839 Speaker 1: followed later in that year was another big example. In fact, 593 00:37:27,160 --> 00:37:30,880 Speaker 1: Roku had started off as a fledgling company within Netflix itself. 594 00:37:30,920 --> 00:37:33,279 Speaker 1: It was incubated by Read Hastings and then a guy 595 00:37:33,360 --> 00:37:36,640 Speaker 1: named Anthony Wood, and the original Roku was a small 596 00:37:36,680 --> 00:37:39,080 Speaker 1: set top box that was easy to set up and 597 00:37:39,080 --> 00:37:42,400 Speaker 1: would give customers access to more than ten thousand movie titles, 598 00:37:42,680 --> 00:37:46,600 Speaker 1: mostly through Netflix, and all it required to access those 599 00:37:46,640 --> 00:37:50,640 Speaker 1: would be a Netflix subscription, so it was very intuitive 600 00:37:50,640 --> 00:37:52,279 Speaker 1: to use, it was easy to set up, it was 601 00:37:53,320 --> 00:37:56,080 Speaker 1: so it was reasonably priced, and it was a very 602 00:37:56,160 --> 00:38:01,319 Speaker 1: popular uh uh electronic divi ice in two thousand eight, 603 00:38:01,360 --> 00:38:05,120 Speaker 1: and so much so that they sold out frequently and 604 00:38:05,160 --> 00:38:07,920 Speaker 1: would have to you know, restock and go through another 605 00:38:07,960 --> 00:38:11,839 Speaker 1: manufacturing run several times in order to meet demand. That 606 00:38:11,920 --> 00:38:14,520 Speaker 1: was followed by Netflix being included as a service you 607 00:38:14,560 --> 00:38:18,799 Speaker 1: could access through Microsoft's Xbox three sixt console that was 608 00:38:18,840 --> 00:38:22,040 Speaker 1: announced at E three and two thousand eight, So again 609 00:38:22,080 --> 00:38:24,560 Speaker 1: it was about get in front of people where the 610 00:38:24,560 --> 00:38:28,520 Speaker 1: people are. Those deals open up more opportunities with hardware manufacturers, 611 00:38:28,840 --> 00:38:32,920 Speaker 1: from Blu ray players to smart TV companies, to laptops 612 00:38:32,920 --> 00:38:35,440 Speaker 1: to mobile devices. So from two thousand eight to two 613 00:38:35,480 --> 00:38:40,000 Speaker 1: thousand eleven, Netflix would end up being incorporated directly into 614 00:38:40,080 --> 00:38:45,200 Speaker 1: two hundred different Internet enabled devices, so it really was everywhere. 615 00:38:45,960 --> 00:38:49,000 Speaker 1: In two thousand eight, Hastings decided to get rid of 616 00:38:49,040 --> 00:38:53,680 Speaker 1: that profile's feature that he had resisted a few years earlier, 617 00:38:54,120 --> 00:38:58,440 Speaker 1: and there was considerable backlash among Netflix users at that announcement, 618 00:38:58,760 --> 00:39:02,440 Speaker 1: so in a rare remove, Netflix would actually reverse course 619 00:39:02,719 --> 00:39:05,760 Speaker 1: and reinstate the feature about a week and a half 620 00:39:05,800 --> 00:39:08,760 Speaker 1: after they took it out, at least for the time being. 621 00:39:09,120 --> 00:39:11,919 Speaker 1: They would remove it again a couple of years later. 622 00:39:12,440 --> 00:39:15,160 Speaker 1: As two thousand eight came to a close. The United 623 00:39:15,200 --> 00:39:20,399 Speaker 1: States was entering a recession, but that actually helped Netflix. 624 00:39:20,760 --> 00:39:23,360 Speaker 1: So how could that be? While people were turning to 625 00:39:23,440 --> 00:39:28,840 Speaker 1: Netflix as a source of affordable entertainment compared to going 626 00:39:28,840 --> 00:39:31,400 Speaker 1: out to the movies or going to an expensive restaurant. 627 00:39:31,640 --> 00:39:33,600 Speaker 1: You could stay in and you could watch Netflix, you 628 00:39:33,600 --> 00:39:36,120 Speaker 1: could order a pizza. The fact that you could get 629 00:39:36,160 --> 00:39:40,160 Speaker 1: Netflix on so many different devices with the streaming service, 630 00:39:40,239 --> 00:39:43,640 Speaker 1: coupled with the fact that you could still rent DVDs 631 00:39:43,920 --> 00:39:47,719 Speaker 1: through their online service gets sent through the mail. All 632 00:39:47,760 --> 00:39:50,400 Speaker 1: of that was still around two and meant that Netflix 633 00:39:50,480 --> 00:39:54,120 Speaker 1: was in a pretty strong position despite the recession. So 634 00:39:54,200 --> 00:39:57,600 Speaker 1: the battle with Blockbuster was pretty much over. By mid 635 00:39:57,600 --> 00:40:01,360 Speaker 1: two thousand eight. They were already removed rumors that Blockbuster 636 00:40:01,480 --> 00:40:03,920 Speaker 1: was going to have to declare bankruptcy. That would not 637 00:40:04,080 --> 00:40:09,160 Speaker 1: happen until but at that point, Netflix had sort of 638 00:40:09,239 --> 00:40:13,600 Speaker 1: changed it's it's crosshairs. They no longer consider Blockbuster to 639 00:40:13,640 --> 00:40:18,080 Speaker 1: be their big threat. Now their biggest competitor, according to Hastings, 640 00:40:18,280 --> 00:40:20,799 Speaker 1: was red Box, which, of course was founded by a 641 00:40:20,840 --> 00:40:27,959 Speaker 1: former Netflix executive, and they also we're running into more 642 00:40:28,000 --> 00:40:31,640 Speaker 1: problems between movie studios and television studios. A lot of 643 00:40:31,640 --> 00:40:37,400 Speaker 1: those companies resented Netflix's dominant position in online delivery, and 644 00:40:37,480 --> 00:40:42,120 Speaker 1: before long, new digital services would soon arise to challenge 645 00:40:42,160 --> 00:40:46,480 Speaker 1: Netflix in that arena, and Netflix itself would also make 646 00:40:46,680 --> 00:40:50,880 Speaker 1: some pretty notable mistakes in the next couple of years, 647 00:40:50,920 --> 00:40:54,000 Speaker 1: some of which would end up being the basis for 648 00:40:54,200 --> 00:40:59,440 Speaker 1: some some extensive jokes at Netflix's expense. So in our 649 00:40:59,480 --> 00:41:02,520 Speaker 1: next episod, we'll look at how Netflix transitioned to focus 650 00:41:02,600 --> 00:41:07,520 Speaker 1: primarily on streaming and and the DVD became a less 651 00:41:07,600 --> 00:41:10,959 Speaker 1: important part of its business, and how a little move 652 00:41:11,040 --> 00:41:15,360 Speaker 1: called quickxter blew up and read Hastings face. That wraps 653 00:41:15,480 --> 00:41:18,160 Speaker 1: up this episode. However, if any of you out there 654 00:41:18,200 --> 00:41:20,799 Speaker 1: have suggestions for future episodes of tech Stuff. Maybe it's 655 00:41:20,800 --> 00:41:23,120 Speaker 1: a company, maybe it's a technology, maybe it's a person 656 00:41:23,200 --> 00:41:25,680 Speaker 1: in tech. Maybe there's someone I should interview or have 657 00:41:25,840 --> 00:41:28,480 Speaker 1: on as a guest, send me an email and let 658 00:41:28,520 --> 00:41:30,880 Speaker 1: me know about it. 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All of those are available 669 00:42:05,520 --> 00:42:07,920 Speaker 1: at our store and more. We're adding new designs all 670 00:42:07,920 --> 00:42:10,399 Speaker 1: the time, so go check that out. And also don't 671 00:42:10,440 --> 00:42:13,960 Speaker 1: forget to follow us on Instagram and I'll talk to 672 00:42:14,040 --> 00:42:23,080 Speaker 1: you again really soon for more on this and thousands 673 00:42:23,120 --> 00:42:35,359 Speaker 1: of other topics because it how staff works dot com