Reed Hasting, today the CEO of the company Netflix, had forgotten to return the film “Apollo 13”, which he rented from a video store, on time. After the expensive late fee of 40 USD, the basic idea for Netflix formed in his mind. The following story shows how someone can benefit from the changing times and even adversity for one’s own success and ultimately profit from digitalization as well.
Reed Hasting and Marc Randolph founded Netflix in 1997 as an online DVD rental store. In the beginning, users could search for a film on the Internet and have Netflix send it to them as a DVD. The unique feature was that no fees were incurred if movies were returned late. The two founders ultimately expanded their business model and offered a flat rate: Their customers could now rent movies for a monthly fee—mainly blockbuster films in the early years.
With increasing Internet speed, Reed Hasting saw an opportunity to expand Netflix into a streaming portal. This meant the movies no longer had to be mailed, but instead could be viewed immediately via a web browser. The number of Netflix users was constantly increasing so that limited Internet speed was a problem. One option would have been to minimize the size of the video file—and its quality.
Then the Federal Communications Commission (US regulatory agency for communication channels) enacted a law allowed Internet providers to prioritize Internet speed for certain customers. This could allow business customers who require fast Internet connections to obtain them through corresponding agreements with their Internet providers. For Netflix, the decision was vital—faster Internet connections meant no reductions had to be made in the video quality.
The media groups in Hollywood gradually realized that Netflix represented a risk to their own business because fewer movies would be purchased. They ended their cooperation with Netflix. To avoid a shortage of entertainment for its customers, Netflix quickly founded its own movie studio and today successfully produces its own films and series. With Netflix able to analyse the viewing behaviour and preferences of its customers (they could evaluate movies), films could conversely be produced that were expected to appeal to users.
The networking of televisions, mobile phones, tablets and game consoles the Internet in the meantime can now allow Netflix to offer its services on all of these devices via app. The company started in 1997 with 30 employees. According to the company’s statements, at the end of 2016 Netflix had approximately 4700 employees and an annual revenue of 8.83 billion USD.