WEBVTT - Netflix vs Blockbuster 0:00:04.120 --> 0:00:07.160 Get in touch with technology with tech Stuff from how 0:00:07.200 --> 0:00:13.600 stuff Works dot com. Hey there, and welcome to tech Stuff. 0:00:13.640 --> 0:00:16.239 I'm your host, Jonathan Strickland. I'm an executive producer with 0:00:16.239 --> 0:00:19.080 How Stuff Works and I love all things tech. And 0:00:19.120 --> 0:00:24.640 we are now entering part three of our series about Netflix. 0:00:25.239 --> 0:00:28.760 The next episode, we'll kind of combine all the stuff 0:00:28.800 --> 0:00:32.879 that's been going on in ten years with uh, you 0:00:32.920 --> 0:00:35.559 know that kind of thing. That'll be the next episode. 0:00:35.600 --> 0:00:37.960 They'll be sort of where we are today. But this 0:00:38.000 --> 0:00:42.680 episode is all about Netflix is fight for survival when 0:00:43.080 --> 0:00:47.440 it was going up against some pretty big opponents in 0:00:47.479 --> 0:00:51.159 the world of video rental. So in our last two episodes, 0:00:51.200 --> 0:00:53.320 I looked at the founding of Netflix up to the 0:00:53.400 --> 0:00:57.080 departure of one of the co founders, Mark Randolph, the 0:00:57.080 --> 0:01:00.560 guy who actually wanted to build a web site that 0:01:00.640 --> 0:01:04.640 would be the Amazon dot Com of video rental. In 0:01:04.640 --> 0:01:07.039 this episode, I'll look at how the company began to 0:01:07.240 --> 0:01:12.959 usher in the era of digital delivery and fight off competitors. 0:01:13.160 --> 0:01:15.520 So to be fair, first of all, Netflix did not 0:01:15.880 --> 0:01:20.520 invent digital delivery of video. Video on demand experiments had 0:01:20.560 --> 0:01:23.640 begun in the mid nineties a few years before read 0:01:23.680 --> 0:01:27.840 Hastings and Mark Randolph co founded Netflix, so they did 0:01:27.880 --> 0:01:31.800 not invent this technology. Cable television had led the way, 0:01:31.959 --> 0:01:36.160 largely because cable could deliver the bandwidth required to uh 0:01:36.200 --> 0:01:39.960 to send video in the first place. During the nineties, 0:01:40.280 --> 0:01:44.320 many people access the Internet using dial up services, and 0:01:44.440 --> 0:01:47.720 that lacked the bandwidth to deliver real time video, so 0:01:47.760 --> 0:01:50.160 it wasn't the right time to use the Internet to 0:01:50.240 --> 0:01:54.760 deliver video services. Yet. It really wasn't until broadband internet 0:01:54.800 --> 0:01:57.440 slowly began to become a real thing in the early 0:01:57.480 --> 0:02:00.280 two thousands here in the United States that it was 0:02:00.280 --> 0:02:03.680 seen as a viable delivery mechanism for video content at all. 0:02:03.720 --> 0:02:06.200 But more about that in a little bit. In the 0:02:06.280 --> 0:02:10.840 spring of two thousand three, Netflix was a totally different 0:02:10.880 --> 0:02:16.720 company from a talent perspective than what the initial Netflix 0:02:16.800 --> 0:02:20.480 was all about. None of the original team members were 0:02:20.480 --> 0:02:24.040 still at the company. Read Hastings, who had provided the 0:02:24.120 --> 0:02:28.240 seed money for Netflix but who was not initially involved 0:02:28.240 --> 0:02:30.679 in the day to day operations of the company, was 0:02:30.760 --> 0:02:33.680 now running the show, and in March two thousand three, 0:02:34.080 --> 0:02:39.440 the company hit the landmark of one million subscribers that 0:02:39.520 --> 0:02:42.920 had long been seen as the turning point that this 0:02:42.960 --> 0:02:46.040 would be the moment when Netflix would turn into a 0:02:46.080 --> 0:02:49.880 profitable company. Blockbuster, meanwhile, I was trying to get into 0:02:49.880 --> 0:02:53.600 the game late and the end of two thousand three, 0:02:54.040 --> 0:02:57.600 they were looking to launch their own online the DVD 0:02:57.680 --> 0:03:02.200 rental service called Blockbuster on Line. Now. Originally the vision 0:03:02.240 --> 0:03:05.720 for Blockbuster Online was to be an online and in 0:03:05.880 --> 0:03:12.799 store hybrid service, but delays and changes and political shifts 0:03:12.960 --> 0:03:17.400 within Blockbuster ment that when the service finally debuted, it 0:03:17.440 --> 0:03:21.320 was an online rental subscription model, not that different from 0:03:21.400 --> 0:03:25.280 what Netflix was doing, but the nature of Blockbusters business 0:03:25.639 --> 0:03:30.560 with franchise owners opposing the very idea of online options. 0:03:30.760 --> 0:03:35.040 They were afraid that the online stores would cannibalize their 0:03:35.080 --> 0:03:40.760 own stores traffic. They argued to the CEO, John Antiocho, 0:03:40.920 --> 0:03:44.120 that this is a terrible, terrible choice. Don't do this. 0:03:44.560 --> 0:03:47.920 You're going to ruin our businesses. And so Antiocho in 0:03:47.920 --> 0:03:51.640 a way kind of capitulated a bit. He denied the 0:03:51.760 --> 0:03:58.680 online team any chance to leverage blockbusters established assets and relationships. 0:03:58.760 --> 0:04:03.200 So Blockbuster had relationships with movie studios. They were able 0:04:03.240 --> 0:04:07.920 to get really good deals on VHS titles for rental 0:04:08.160 --> 0:04:12.400 through these movie studios. None of that was available to 0:04:12.480 --> 0:04:16.080 the online team. They were not allowed to leverage any 0:04:16.080 --> 0:04:19.080 of the customer data that Blockbuster had gathered over the 0:04:19.160 --> 0:04:21.599 years of being in business, and it really put this 0:04:21.680 --> 0:04:24.680 initiative at a disadvantage. And if you listen to my 0:04:24.800 --> 0:04:28.680 episodes about Blockbuster, you know that this eventually doesn't work 0:04:28.680 --> 0:04:31.599 out so well for the company. But they were Despite 0:04:31.640 --> 0:04:36.040 these disadvantages, the team behind Blockbuster Online was still able 0:04:36.040 --> 0:04:40.479 to create a credible threat to Netflix. As for Netflix, 0:04:40.960 --> 0:04:43.840 it was going through a serious growth phase. By two 0:04:43.880 --> 0:04:47.440 thousand four of the company's share price had risen dramatically, 0:04:48.120 --> 0:04:51.760 quadrupling at one point and going beyond that to to 0:04:52.480 --> 0:04:57.040 quite high from its original opening amount. About three thousand 0:04:57.120 --> 0:05:01.240 new customers were signing up every day, a revenue growth 0:05:01.360 --> 0:05:05.480 was more than one year over year, and Hastings announced 0:05:05.480 --> 0:05:08.360 to investors than the company planned to introduce a movie 0:05:08.400 --> 0:05:11.920 download service at some point in two thousand five, which 0:05:11.960 --> 0:05:14.360 would then mean the company was dipping its toe into 0:05:14.440 --> 0:05:17.840 digital delivery, though in this case we're talking about digital 0:05:17.839 --> 0:05:21.479 delivery and that you would purchase a movie and download 0:05:21.520 --> 0:05:24.640 it to a device, uh, not digital delivery in the 0:05:24.680 --> 0:05:27.599 sense of streaming movies that still was in the future. 0:05:28.080 --> 0:05:31.279 Netflix began to advertise on television in two thousand four, 0:05:31.720 --> 0:05:36.680 and they saw subscription numbers skyrocket. That sounds great, except 0:05:36.760 --> 0:05:41.920 there was one tiny problem, which was that to entice customers, 0:05:42.680 --> 0:05:46.200 new subscriptions would include a free trial for a month, 0:05:46.480 --> 0:05:49.720 so for the first month of a customer would have 0:05:49.839 --> 0:05:54.839 free rentals. And that meant that while you saw customer 0:05:54.920 --> 0:05:59.599 numbers increasing dramatically, the revenues weren't because people were taking 0:05:59.600 --> 0:06:03.440 advantage of that one month of free service. So the 0:06:03.440 --> 0:06:06.839 company actually posted a dramatic quarterly loss in two thousand 0:06:06.920 --> 0:06:09.200 four because so many people had signed up and we're 0:06:09.320 --> 0:06:13.200 using that free month and uh, it's kind of funny 0:06:13.200 --> 0:06:16.560 to think about, but in a way, Netflix was suffering 0:06:16.680 --> 0:06:20.599 such a big loss because they were so successful because 0:06:20.680 --> 0:06:23.680 they had so many new customers signing up. But the 0:06:23.720 --> 0:06:27.520 adoption of the service was helping Netflix more than it 0:06:27.560 --> 0:06:30.479 was hurting it. In the long run, the stock price 0:06:30.560 --> 0:06:34.080 had grown significantly. It led Netflix to split the stock 0:06:34.160 --> 0:06:37.120 in February two thousand four. I've talked about stock splits 0:06:37.120 --> 0:06:41.160 in the past. Typically it's when a company uh decides 0:06:41.279 --> 0:06:46.360 to create new shares, awarding those new shares to people 0:06:46.400 --> 0:06:50.000 who already hold shares in the company, and by increasing 0:06:50.000 --> 0:06:52.760 the number of shares, they reduced the cost per share, 0:06:53.040 --> 0:06:57.839 because you can't magically make a company more valuable this way, right, 0:06:58.200 --> 0:07:00.760 So if you have a hundred thousand shares and they're 0:07:00.800 --> 0:07:03.440 ten dollars a share, and then you decide to double 0:07:03.480 --> 0:07:06.440 the number of shares, you have to half the price 0:07:06.600 --> 0:07:09.080 per share. So you have two hundred thousand shares now, 0:07:09.320 --> 0:07:12.080 but now they're five dollars per share because overall the 0:07:12.160 --> 0:07:15.280 value of the company has to remain the same. The 0:07:15.360 --> 0:07:18.240 value of the company can increase as the market values 0:07:18.280 --> 0:07:20.840 it more, but you can't make it increased just by 0:07:20.840 --> 0:07:24.280 splitting the stock. And the whole point behind splitting stocks 0:07:24.400 --> 0:07:29.080 tends to be the philosophy that by having a lower 0:07:29.120 --> 0:07:34.600 per share price, you increase the liquidity within the market. 0:07:34.640 --> 0:07:40.040 People trade more readily, which is seen as or it 0:07:40.080 --> 0:07:43.600 can be seen as a way of measuring company health. 0:07:44.280 --> 0:07:49.160 Uh And you can you can encourage smaller investors to 0:07:49.240 --> 0:07:52.000 invest in your company this way because on a per 0:07:52.080 --> 0:07:56.720 share basis, the price isn't prohibitive. Right If if every 0:07:56.760 --> 0:07:59.320 share costs a hundred and fifty dollars, you're not going 0:07:59.360 --> 0:08:03.120 to get a love small investors, So they split the 0:08:03.160 --> 0:08:07.480 stock into thousand four. Later that same year, Netflix raised 0:08:07.520 --> 0:08:10.119 the fee for having three films out at a time. 0:08:10.560 --> 0:08:13.760 The fee had been nineteen dollars ninety nine cents per month, 0:08:14.080 --> 0:08:17.040 and they raised it to twenty one dollars nine cents 0:08:17.080 --> 0:08:20.880 per month. This initially gave Blockbuster a boost of confidence 0:08:21.320 --> 0:08:24.760 because they had their online service planned which had not 0:08:24.840 --> 0:08:28.040 yet launched, and they had already priced it to be 0:08:28.120 --> 0:08:32.360 the same as Netflix. So now when Netflix new prices, 0:08:32.440 --> 0:08:36.360 the Blockbuster offering would actually be cheaper. This would give 0:08:36.400 --> 0:08:39.440 Blockbuster the chance to undercut Netflix, which was seen as 0:08:39.440 --> 0:08:43.400 a very valuable tool. So the Blockbuster service entered into 0:08:43.520 --> 0:08:47.600 a test phase on July two thousand four, which happened 0:08:47.600 --> 0:08:49.760 to be the same day that Netflix was holding an 0:08:49.760 --> 0:08:54.520 earnings call, and this timing was not coincidental. Blockbuster was 0:08:54.600 --> 0:08:58.840 targeting the earnings call specifically in order to essentially send 0:08:58.880 --> 0:09:03.280 Netflix a message essentially saying watch your back. Netflix stock 0:09:03.480 --> 0:09:06.520 took a sharp dive in price as investors started to 0:09:06.559 --> 0:09:09.839 get nervous because Blockbuster had already proven to be a 0:09:09.880 --> 0:09:13.079 giant in video rentals, and if the company was really 0:09:13.160 --> 0:09:17.440 behind this this service, it could mean that they would 0:09:17.840 --> 0:09:21.080 price Netflix out. Of business. Even if Blockbuster were to 0:09:21.120 --> 0:09:24.600 take a loss in the short term, if they could 0:09:24.679 --> 0:09:29.480 outlast Netflix, if they could sap away enough customers so 0:09:29.559 --> 0:09:33.520 the Netflix isn't making enough money, then they could stand triumphant. 0:09:33.600 --> 0:09:36.800 And then once Netflix is gone, they could increase prices 0:09:36.920 --> 0:09:38.920 or even get rid of the service entirely if they 0:09:38.920 --> 0:09:43.200 wanted to. So this was not a great move, and 0:09:43.559 --> 0:09:47.480 the dive in price meant Netflix lost about sixty percent 0:09:47.679 --> 0:09:50.920 of its market value in a week. Market value is 0:09:50.960 --> 0:09:54.280 that measurement we use when we we take the number 0:09:54.360 --> 0:09:57.080 of outstanding shares in the company and we multiply it 0:09:57.120 --> 0:09:59.640 by the price per share, then you get the market 0:09:59.720 --> 0:10:03.439 value of a company. If it hadn't been for Blockbusters 0:10:03.559 --> 0:10:08.280 other problems which were largely driven by the investor, Carl 0:10:08.480 --> 0:10:10.959 Icon and his attempts to steer the company in a 0:10:11.000 --> 0:10:15.000 particular direction. Specifically, he wanted a Blockbuster to buy up 0:10:15.040 --> 0:10:21.160 a rival, major UH competitor, Hollywood Video. All of those 0:10:21.320 --> 0:10:24.120 machinations going on in the background, we're really taking up 0:10:24.120 --> 0:10:30.320 a lot of of corporate focus, and the senior staff 0:10:30.400 --> 0:10:33.280 over at Blockbuster we're trying to fight off Icon. If 0:10:33.320 --> 0:10:36.240 that had not happened, Blockbuster Online might have posed a 0:10:36.360 --> 0:10:39.240 much larger threat to Netflix, but at the time it 0:10:39.280 --> 0:10:43.319 was probably a scary competitor, but it was small potatoes 0:10:43.360 --> 0:10:46.320 compared to another potential threat that appeared to be on 0:10:46.360 --> 0:10:50.680 the horizon, which was Amazon dot Com, which was rumored 0:10:50.880 --> 0:10:54.200 to be getting ready to launch its own DVD online 0:10:54.200 --> 0:10:57.920 rental service, and that seemed to be the real threat 0:10:58.320 --> 0:11:01.360 because again, Netflix originally was supposed to be the Amazon 0:11:01.440 --> 0:11:05.920 dot Com of renting videos online. If Amazon got into it, 0:11:05.920 --> 0:11:08.360 it would by definition be the Amazon dot Com of 0:11:08.440 --> 0:11:11.600 doing that. So to ward off Amazon, Hastings made the 0:11:11.640 --> 0:11:14.800 decision to cut the subscription price. They had raised it 0:11:14.840 --> 0:11:18.959 not that long ago. They decided, let's cut it too 0:11:19.000 --> 0:11:23.080 as low as we can possibly go without taking too 0:11:23.080 --> 0:11:26.440 big of a hit, and ultimately they cut the price 0:11:26.480 --> 0:11:30.160 by eight percent, down to seventeen dollars cents per month. 0:11:31.080 --> 0:11:34.840 Netflix had been buying properties in the United Kingdom. They 0:11:34.920 --> 0:11:39.640 were anticipating expanding internationally and launching the service over in 0:11:39.640 --> 0:11:42.319 the UK, but Hastings decided that they were going to 0:11:42.440 --> 0:11:44.360 have to put that on hold for a short while 0:11:45.160 --> 0:11:47.880 until late two thousand five at the earliest, because he 0:11:47.920 --> 0:11:51.880 wanted the company's full focus on competing against Amazon. Now, 0:11:51.920 --> 0:11:54.400 that was complicated by the fact that Amazon had already 0:11:54.559 --> 0:11:57.960 launched a net based DVD rental service in the UK. 0:11:58.720 --> 0:12:01.880 They had not launched one US, but they used the 0:12:02.000 --> 0:12:05.439 UK as sort of a testing ground. So Hastings told 0:12:05.480 --> 0:12:09.680 investors that Blockbuster wasn't something to worry about. He said 0:12:09.880 --> 0:12:14.200 that company has doomed itself. They said, if online rental 0:12:14.800 --> 0:12:18.480 is going to continue in its trajectory, it's going to 0:12:20.240 --> 0:12:24.080 increasingly pull business out of brick and mortar stores. That 0:12:24.120 --> 0:12:26.880 you're gonna see fewer and fewer people going to the 0:12:26.960 --> 0:12:31.480 stores to rent movies, and that if Blockbuster is putting 0:12:32.120 --> 0:12:36.280 effort behind this, then they're going to cannibalize their own business. 0:12:36.320 --> 0:12:39.480 They're going to take customers away from those brick and 0:12:39.480 --> 0:12:43.520 mortar stores, and so they're not ultimately going to come 0:12:43.520 --> 0:12:47.240 out ahead. They're gonna shift customers from one model to another. 0:12:47.840 --> 0:12:51.880 But ultimately, since the company itself was built upon the 0:12:51.920 --> 0:12:56.480 foundation of video rental stores, they would be marking themselves 0:12:56.480 --> 0:12:59.520 for their own destruction. And they said that Netflix would 0:12:59.559 --> 0:13:03.120 actually be in a really good position too to weather 0:13:03.240 --> 0:13:06.040 all of that, that it would be strong on the 0:13:06.040 --> 0:13:09.680 other side, whereas Blockbuster would end up taking the ground 0:13:09.720 --> 0:13:15.200 out from underneath itself, but waiting for this to happen 0:13:15.559 --> 0:13:19.040 was really hard. Blockbuster ran an ad during the two 0:13:19.080 --> 0:13:22.400 thousand five Super Bowl, and during that ad they dropped 0:13:22.440 --> 0:13:26.360 the price for their online service for video rental to 0:13:26.520 --> 0:13:30.480 fourteen dollars nine cents per month for a service that 0:13:30.559 --> 0:13:33.559 was very similar and essentially the same thing as Netflix's 0:13:33.960 --> 0:13:38.040 three out subscription base, which was three dollars more expensive 0:13:38.080 --> 0:13:43.240 per month. The CFO of Netflix argued they should hold firm. 0:13:43.400 --> 0:13:46.600 They should not drop their price again, and the reason was, 0:13:46.920 --> 0:13:51.960 he said, Blockbusters bleeding itself out. It is purposefully losing 0:13:52.040 --> 0:13:56.200 money per subscriber on this deal in the hopes that 0:13:56.240 --> 0:14:00.440 they will be able to put us under siege. Not 0:14:00.640 --> 0:14:04.120 the Steven Seagal film, and wait until we're out of money, 0:14:04.440 --> 0:14:06.640 and we should not try and get into a price war. 0:14:06.760 --> 0:14:09.319 That's just going to make it harder for us if 0:14:09.360 --> 0:14:11.760 we do that. By the end of two thousand five, 0:14:12.160 --> 0:14:15.720 Netflix posted a profit in three of the four quarters, 0:14:15.760 --> 0:14:19.240 which was good news. The company launched a download service 0:14:19.320 --> 0:14:22.280 in which customers could purchase a digital copy of a movie. 0:14:22.640 --> 0:14:25.800 At least they had that in a limited rollout, and 0:14:25.840 --> 0:14:28.280 in April two thousand five, Hastings set on a conference 0:14:28.280 --> 0:14:32.960 call that Blockbuster had thrown everything they had at him 0:14:33.000 --> 0:14:37.040 except the kitchen sink, and the very next day he 0:14:37.080 --> 0:14:40.360 found an enormous package waiting for him. It was from 0:14:40.400 --> 0:14:46.360 Blockbuster and inside was, of course, a kitchen sink. So 0:14:46.400 --> 0:14:49.400 what would come next? Well, I'll tell you, but first 0:14:49.480 --> 0:14:59.760 let's take a quick break to thank our sponsor. Now, 0:15:00.000 --> 0:15:03.400 on all of Netflix's woes were coming from outside the company, 0:15:03.480 --> 0:15:07.800 They weren't all external threats. One policy that landed Netflix 0:15:07.840 --> 0:15:10.840 into some trouble had to do with its algorithms that 0:15:11.000 --> 0:15:14.440 decided who would get the next available copy of a 0:15:14.480 --> 0:15:18.040 particular DVD. Not. On a previous episode, you heard how 0:15:18.080 --> 0:15:20.480 the algorithm was supposed to work, which is that you 0:15:20.480 --> 0:15:24.200 would create a queue, and you would put the movies 0:15:24.280 --> 0:15:26.520 in order in your queue, in the order you wanted 0:15:26.520 --> 0:15:30.880 to get them, and at least the idea was you 0:15:30.920 --> 0:15:36.800 would get the next available version of that title as 0:15:36.800 --> 0:15:39.640 soon as possible. That the higher ranked the movies were, 0:15:39.640 --> 0:15:41.080 the more likely you were going to get one of 0:15:41.120 --> 0:15:46.080 those titles, assuming there was any availability, And obviously new 0:15:46.120 --> 0:15:50.600 releases would be the hardest to get initially because everybody 0:15:50.640 --> 0:15:53.880 wants to see them. Now, you would think this would 0:15:53.920 --> 0:15:56.360 all be by the order in which users had placed 0:15:56.400 --> 0:16:01.120 a title into their cues, adjusted by the ranking within 0:16:01.160 --> 0:16:04.160 the queues themselves. So in other words, let's say that 0:16:04.320 --> 0:16:06.320 you and I both want to see Big Trouble in 0:16:06.320 --> 0:16:08.720 Little China, because, as we know, it's one of the 0:16:08.760 --> 0:16:11.680 greatest movies ever made. I put it in my queue. 0:16:12.040 --> 0:16:16.280 But in my queue, I put it in the fifteen spot. Uh, 0:16:16.920 --> 0:16:19.280 because I've seen the movie before. I love it, but 0:16:19.520 --> 0:16:21.720 there are other movies I want to see more at 0:16:21.840 --> 0:16:25.000 the at the time, so it's number fifteen in my queue. 0:16:25.360 --> 0:16:28.600 The following day, you add Big Trouble in Little China 0:16:28.640 --> 0:16:30.880 to your queue, but you put it at the number 0:16:30.880 --> 0:16:34.400 one spot. You know, I really want to see this movie. Well, 0:16:34.480 --> 0:16:37.320 based upon what we understood the algorithm to do at 0:16:37.320 --> 0:16:40.720 the time, we would have thought the algorithm would essentially say, well, 0:16:40.800 --> 0:16:43.800 Jonathan added it first, but he's also marked it at 0:16:43.840 --> 0:16:46.720 a lower priority by its place on the queue, So 0:16:46.720 --> 0:16:49.480 I'm gonna send it to the other person. This other 0:16:49.520 --> 0:16:52.520 person who has impeccable taste in movies, They're going to 0:16:52.520 --> 0:16:55.480 get the movie first because they ranked it higher. That's 0:16:55.480 --> 0:16:58.440 how we all understood the algorithm to work. But that's 0:16:58.440 --> 0:17:04.359 not how it actually worked, and Netflix admitted as much. 0:17:04.359 --> 0:17:06.399 They were forced to in the face of a class 0:17:06.440 --> 0:17:11.080 action lawsuit. The company revealed that it would give preferential 0:17:11.080 --> 0:17:15.520 treatment to people who had rented fewer DVDs when there 0:17:15.600 --> 0:17:19.600 was a high demand for certain titles. So why would 0:17:19.600 --> 0:17:23.439 people who aren't renting as many DVDs get their choice 0:17:23.560 --> 0:17:27.160 earlier than people who were loyal customers. Well, the corporate 0:17:27.160 --> 0:17:30.159 logic was that the people who were renting just a 0:17:30.200 --> 0:17:33.680 few DVDs were the most likely to leave the service. 0:17:33.760 --> 0:17:37.560 They were the least anchored to it, and Netflix would 0:17:37.600 --> 0:17:41.440 call those customers birds, and to prevent the birds from 0:17:41.440 --> 0:17:44.320 flying off, they would make sure the birds got what 0:17:44.400 --> 0:17:48.600 they wanted as quickly as possible. But on the flip side, 0:17:49.040 --> 0:17:51.880 that meant the loyal customers, the ones who would rent 0:17:51.960 --> 0:17:55.000 frequently and who were more likely to stick with Netflix, 0:17:55.600 --> 0:17:59.040 they got passed over more frequently. It didn't matter if 0:17:59.119 --> 0:18:01.399 they had assigned the title to a higher spot on 0:18:01.440 --> 0:18:04.720 their queue, or if they had added the title months 0:18:04.760 --> 0:18:09.560 before the birds had done so, and that seemed inherently unfair. 0:18:10.359 --> 0:18:13.560 Netflix would settle that lawsuit and a lot of claimants 0:18:13.600 --> 0:18:17.840 ended up getting free rentals as compensation, so that was something, 0:18:17.880 --> 0:18:21.920 but it was a message that a lot of people 0:18:22.160 --> 0:18:29.280 mark down as saying read Hastings doesn't necessarily take customer 0:18:30.200 --> 0:18:35.520 uh desires into account when he makes decisions, and that 0:18:35.560 --> 0:18:40.040 would be a feeling that would get reinforced multiple times 0:18:40.040 --> 0:18:44.000 over the next several years. Hastings incorporated a feature called 0:18:44.160 --> 0:18:48.159 Friends in the Netflix website experience. This would allow users 0:18:48.200 --> 0:18:51.480 to share their movie que selections with each other if 0:18:51.520 --> 0:18:54.320 they chose to. It's kind of like a social platform. 0:18:54.359 --> 0:18:56.960 They could say, all right, well, my friend Susie is 0:18:57.000 --> 0:18:59.240 also using Netflix, so I'm going to share my cue 0:18:59.240 --> 0:19:02.240 with Susie. Not not to share it across where Susie 0:19:02.280 --> 0:19:04.320 is going to get my movies, but that Susie can 0:19:04.320 --> 0:19:08.639 see which movies I am looking forward to watching. Netflix 0:19:08.680 --> 0:19:12.640 could not do that automatically because there are federal privacy 0:19:12.720 --> 0:19:16.440 laws in the United States that had previously established. Video 0:19:16.480 --> 0:19:20.120 stores were not allowed to publish what a customer had 0:19:20.160 --> 0:19:25.160 rented their rental history. That would be a violation of privacy. However, 0:19:25.560 --> 0:19:29.800 Netflix could create the opportunity for users to opt in 0:19:30.040 --> 0:19:33.679 and choose to share the information Netflix just couldn't do 0:19:33.720 --> 0:19:38.840 it automatically on its own. Another thing that the developers 0:19:38.840 --> 0:19:42.879 over at Netflix introduced was a concept called Profiles that 0:19:42.920 --> 0:19:46.840 would allow a single user account to create separate profiles 0:19:47.160 --> 0:19:50.560 within a household. So let's say that you know, it's 0:19:50.560 --> 0:19:54.440 it's a couple of spouses, some kids. Everyone could get 0:19:54.440 --> 0:19:57.879 their own profile with their own cues. That way, if 0:19:57.920 --> 0:20:01.400 one person favored action movies, someone else likes rom coms, 0:20:01.440 --> 0:20:05.280 someone else is really into, you know, deep thinking science fiction, 0:20:05.520 --> 0:20:08.640 they could each maintain their separate cues and they could 0:20:08.640 --> 0:20:11.879 get separate suggestions for films they might want to rent 0:20:12.119 --> 0:20:15.679 based upon their individual preferences and not have it just 0:20:15.960 --> 0:20:19.880 all filter into one big, messy que. Read Hastings actually 0:20:19.880 --> 0:20:22.440 did not like this feature at all. He did not 0:20:22.560 --> 0:20:25.080 want to implement it. He felt that it was going 0:20:25.160 --> 0:20:28.520 to make it harder to program changes because it added 0:20:28.760 --> 0:20:32.479 unnecessary complications. He just viewed this as being very messy, 0:20:32.600 --> 0:20:36.800 very human, not very efficient. But customers were actually calling 0:20:36.840 --> 0:20:40.040 for this feature, and as it turned out, both Profiles 0:20:40.040 --> 0:20:43.639 and Friends features would set off some more warning flags 0:20:43.680 --> 0:20:47.480 that would reinforce this idea that read Hastings did not 0:20:47.640 --> 0:20:53.720 necessarily consider. Customer wants and needs and desires to be 0:20:53.880 --> 0:20:56.879 very high among the priority lists of things that the 0:20:56.920 --> 0:20:59.840 company needed to focus on. Back on the block but 0:21:00.000 --> 0:21:04.560 sster warfront. Netflix won a victory when Walmart decided, after 0:21:04.640 --> 0:21:09.000 a failed attempt to get uh the online DV rent 0:21:09.040 --> 0:21:11.920 toll business going, that it was going to pull out 0:21:11.920 --> 0:21:14.600 of that business entirely. Walmart said, you know, we tried. 0:21:14.880 --> 0:21:17.080 This isn't working for us. It doesn't fall into our 0:21:17.080 --> 0:21:23.440 business plan. And the the agreement between Walmart and Netflix 0:21:23.480 --> 0:21:30.200 was that Walmart would instead direct customers to Netflix and 0:21:30.320 --> 0:21:34.440 even have a deal where people who had been customers 0:21:34.480 --> 0:21:39.480 of Walmart's online DVD rental business could become members over 0:21:39.520 --> 0:21:43.119 at Netflix for a reduced membership fee for a year. 0:21:43.800 --> 0:21:47.280 So that was a big deal in that this competitor 0:21:47.320 --> 0:21:49.879 and not not only was getting out of the market, they 0:21:49.920 --> 0:21:54.560 were handing over their customers to Netflix. Blockbuster did not 0:21:54.720 --> 0:21:58.280 like that. They also ended up having to raise prices 0:21:58.320 --> 0:22:01.840 to seventeen dollars nine for the three DVD at a 0:22:01.880 --> 0:22:05.240 time service. They had been at fourt but now they 0:22:05.240 --> 0:22:08.119 brought it up in line with Netflix, just as people 0:22:08.160 --> 0:22:10.639 and Netflix had predicted. They said, well, Blockbuster was going 0:22:10.680 --> 0:22:12.760 to have to do this because they were losing so 0:22:12.840 --> 0:22:15.919 much money on a per subscription basis that it was 0:22:15.960 --> 0:22:20.440 not something that could be supported indefinitely. Even better news 0:22:20.480 --> 0:22:24.439 for Netflix, it looked like Amazon was actually not going 0:22:24.520 --> 0:22:27.280 to get into the DVD rental space in the United 0:22:27.280 --> 0:22:30.080 States at all. So at the end of two thousand five, 0:22:30.160 --> 0:22:32.560 Netflix had a market value of about one and a 0:22:32.560 --> 0:22:37.600 half billion dollars. It also had eliminated its debt, and 0:22:37.640 --> 0:22:41.320 it had four point two million subscribers. Blockbuster, on the 0:22:41.359 --> 0:22:44.280 other hand, was more than a billion dollars in debt 0:22:44.840 --> 0:22:48.240 and had a market value of six four million dollars. 0:22:48.280 --> 0:22:52.960 So the fortunes had changed dramatically for both companies. But Blockbuster, 0:22:53.359 --> 0:22:58.080 though knocked down, wasn't out. It was still fighting, and 0:22:58.680 --> 0:23:02.720 there was another trick up Blockbusters giant sleeve that would 0:23:02.720 --> 0:23:05.640 cause Netflix more grief. Just a little later in two 0:23:05.640 --> 0:23:08.480 thousand six, the world was looking at the Internet as 0:23:08.520 --> 0:23:12.320 a possible delivery mechanism for long form video. So YouTube 0:23:12.400 --> 0:23:15.200 had launched in two thousand five that was already becoming 0:23:15.200 --> 0:23:19.159 a popular place for short form user generated video. But 0:23:19.280 --> 0:23:22.320 as for the studio backed stuff, that was a different story. 0:23:22.440 --> 0:23:26.520 For one thing, the landscape was really messy from an 0:23:26.520 --> 0:23:31.280 industry perspective, most movie and television studios were part of 0:23:31.400 --> 0:23:36.600 larger conglomerates, and those conglomerates also included distribution channels like 0:23:36.760 --> 0:23:42.000 cable networks or other cable distributors and Internet service providers 0:23:42.040 --> 0:23:44.879 were starting to buy up media companies to or get 0:23:45.040 --> 0:23:48.400 acquired by those same sort of conglomerates, and this thing 0:23:48.480 --> 0:23:53.080 made things really messy. You add lines of distribution content 0:23:53.200 --> 0:23:56.000 all getting bubbled up with each other, and an independent 0:23:56.000 --> 0:24:01.280 company like Netflix was put kind of outside of all that. Meanwhile, 0:24:01.320 --> 0:24:06.240 you had entrenched entities like HBO or Showtime, these premium 0:24:06.359 --> 0:24:09.679 channels that would pay enormous amounts of money to studios 0:24:09.840 --> 0:24:13.520 in order to get exclusive cable rights to different properties, 0:24:13.760 --> 0:24:16.720 so there were very few incentives in place on that 0:24:16.840 --> 0:24:20.199 side to change things up now. Originally the plan for 0:24:20.240 --> 0:24:23.960 Netflix was to roll out a wider download service like 0:24:24.000 --> 0:24:26.639 the one it had tested in two thousand five, but 0:24:26.760 --> 0:24:30.280 the company scrapped those plans, so instead there was a 0:24:30.280 --> 0:24:33.439 more bold idea in the works. It would involve a 0:24:33.520 --> 0:24:37.960 media player that would be uh that would run on 0:24:38.480 --> 0:24:42.679 a computer device, maybe a computer, desktop, laptop, maybe a 0:24:42.720 --> 0:24:46.720 portable device, and it would be allowed to play streaming 0:24:46.920 --> 0:24:50.639 video content, so instead of downloading something, you would stream 0:24:50.640 --> 0:24:53.280 it from a server. This was in contrast to a 0:24:53.320 --> 0:24:56.720 strategy that a company like Disney was trying to employ. 0:24:56.760 --> 0:25:00.560 Disney had introduced a proprietary set top box and a 0:25:00.640 --> 0:25:04.600 download service called movie Beam. Hastings felt that it made 0:25:04.600 --> 0:25:08.280 more sense to create a lightweight media player that could 0:25:08.280 --> 0:25:13.119 be installed on numerous types of hardware owned by other companies. 0:25:13.320 --> 0:25:16.760 So hardware manufactured by different companies and sold by different 0:25:16.760 --> 0:25:21.199 companies could also include this media player as part of 0:25:21.200 --> 0:25:26.000