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[Roxanna Bornemann]

When Reed Hastings and Marc Randolph founded Netflix (formerly known as Kibble) in 1997, the company appeared to be little more than an upstart DVD rental business whose only real value proposition was the mail-order element of its operation. Fast forward two decades and Netflix has become one of the biggest TV and movie studios in the world, with more subscribers than all the cable TV channels in America combined. How did Netflix go from renting movies to making them in just 20 years?

Legend has it that Reed Hastings decided to start Netflix after returning a copy of Apollo 13 to his local Blockbuster. Upon returning the movie, Hastings was told that he owed $40 in late fees. Fearing what his wife would say about such a steep late fee and convinced there must a better way to rent movies, Hastings began to devise what would later become Netflix.

1999: Netflix announces its new subscription model. Introduced at an initial price point of $15.95, the subscription plan allows Netflix members to rent up to four movies at a time, with no return-by dates.

2000-2003: Netflix enjoys consistent growth. However, despite increases in both revenue and subscribers, Netflix is still operating at a loss. The company reports a loss of $4.5M in Q1 of 2002 alone. Much of this loss is the result of an increase in operational expenses over costs reported in 2001.

Even at a relatively high monthly price point, Netflix offered greater convenience and value in a (then) crowded space. It did this by eliminating two mainstays of all home entertainment business models, while simultaneously applying just enough restrictions on members to drive further growth. This allowed Netflix to not only score early wins with consumers (Keep rentals as long as you like! No late fees!), but also helped the company to further differentiate itself from the Blockbusters and the Hollywood Videos while increasing revenue.

The financial challenges that Netflix experienced from 2000-2003 meant that diversifying its service offerings was as much a business necessity as a response to external forces. The company was still several years away from debuting the streaming service we know today. However, behind the scenes, the company was already investing heavily in making Netflix a more personal, individualized experience by introducing recommendations powered by the CineMatch algorithm.

Netflix knew that its growth strategy was working. By making it easier for people to find and rent the movies they loved, the company had built a relatively small but growing subscriber base. Netflix knew it wanted to further expand its subscriber base through its DVD rental business before transitioning them to its online streaming service, even if nobody else saw what the company was doing. And, while its competitors remained focused on the short-term, Netflix was busy developing and investing in the technical resources the company would need to grow even further.

Consumer demand for streaming video was practically nonexistent. For one, streaming technologies in 2007 were terrible. Even the fastest broadband connections lacked the capacity to handle the bit rate of higher-resolution video, which meant overall video quality was poorer than DVD. When Netflix launched its streaming product, Watch Now was only compatible with computers running Windows and would only work in Internet Explorer after users downloaded an applet to make the video player work.

Rather than focus on improving delivery of physical DVDs, Netflix would reinvent entertainment delivery by providing its subscribers with instant access to thousands of titles that they could binge-watch on any device. While cable companies were preoccupied with traditional business models and quarterly revenue targets, Netflix was already looking a decade into the future and beyond.

This was the real risk for Netflix. Even though its core business was growing and performing strongly, Hastings decided to invest time, money, and capital building a streaming product when there was no consumer demand and few people thought the idea could even work. However, because hardly anybody thought it would work, even fewer companies actively pursued it. By the time everybody else caught on, Netflix had the best streaming technology, the largest library of titles, and the biggest subscriber base.

2008: Netflix announces it will stop DVD retail sales just one week after debuting Watch Now on Mac platforms. The announcement comes less than one month after Netflix announces its partnership with premium American cable TV network Starz, which gave Netflix subscribers access to more than 2,500 movies and TV shows.

2011: Netflix announces the rebranding of its DVD rental business, which it calls Qwikster. Netflix planned to split its streaming business and its DVD rental business into two distinct subscription packages: Netflix for streaming, and Qwikster for rentals.

The Qwikster incident could have sunk lesser companies, but Hastings and Netflix handled the fallout almost perfectly. In an unusually frank blog post, Hastings assumed full responsibility for the Qwikster debacle. By listening to its customers, responding quickly, and acknowledging the role of poor executive decision-making, Netflix was not only able to get in front of the situation in the media but even managed to turn the incident into a positive PR exercise in damage control and executive accountability.

2013: Netflix debuts the political drama, House of Cards, its first high-profile original production. Although Netflix does not release viewership data for any of its titles, Nielsen estimates that House of Cards routinely attracts audiences comparable to those of major cable network TV shows.

The release of Beasts of No Nation pit Netflix against yet another powerful enemy: mainstream movie theaters. Until the release of Beasts of No Nation, no other company had dared attempt to disrupt the traditional entertainment production pipeline so audaciously, especially regarding theatrical release timelines. The film failed spectacularly at the box office (grossing just $50,699 nationwide with a theater average of $1,635), but Netflix was pleased with the performance of the film on its streaming service.

2016: Netflix goes live in 130 countries worldwide simultaneously. In a single step, Netflix transitions from an American company to a global media organization. Netflix gains more than 7M new subscribers in Q4 of 2016 as a result. Later that year, Netflix receives a record-breaking 54 nominations at the 68th Primetime Emmy Awards for its original programming. Amazon receives just 16 nominations for its own programming.

Something else that helped House of Cards stand out was the impressive roster of creative talent behind the show. Hollywood heavyweights including director David Fincher (Fight Club, The Social Network) and actor Kevin Spacey were both attached to the series, lending the new show some much-needed celebrity star power.

Of all the milestones Netflix has reached, eclipsing the total number of cable subscribers in America was an amazing achievement. Not only did Netflix go from being an upstart DVD rental business to one of the largest entertainment production companies in the world in less than 20 years, it also managed to consistently innovate in verticals that many analysts and experts deemed impenetrable before Netflix muscled its way in.

Not every idea has to reinvent the wheel. The best decisions are the ones that help your business grow, not the ones that only keep your competitors on their toes. Just as the simplest explanations are often the best explanations, sometimes the most obvious moves are the ones your business must make if you want to survive.

Late last year, I began collecting DVDs. My rationale was simple: Movies have been a big part of my life, and I want to own the things I love in material form. Friends and family were sympathetic to this new hobby, with reactions like:

But as I began frequenting a local video store to build out my collection, a funny thing happened: I started renting DVDs. And then an even stranger thing happened: I developed a fondness for renting DVDs.

Indeed, this newfound ritual is mystifying, even to me. Renting physical media brings me great joy, but I know this practice is quantifiably foolish. As such, this new routine has led to profound introspection. Why am I doing this? What are the costs of this outdated practice, and what benefits make these drawbacks worthwhile? Am I becoming a Luddite?

So today, we'll explore the fall of video stores, gauge the downsides of renting physical media, and attempt to quantify the strangely wonderous upsides that have endeared me to this near-extinct form of commerce.

It's tempting to wax poetic about the loss of local movie hubs, to rue the rise of Netflix and binge culture, but this shift is not without reason. For one thing, streaming subscriptions and digital rentals offer a more affordable home entertainment solution than renting physical media.

When we factor in these additional expenses, the cost of renting physical media (while still paying for streaming channels) is significantly higher than the cost of consuming those same movies through a combination of streaming subscriptions and digital rentals.

Amazon's Prime Video has over 26,300 movies available for renting and streaming. Compare this to my video store, which claims to have a library of over 47,000 titles. If we assume 20% of these DVDs are checked out or were never returned, then my local shop wins on title selection.

This isn't the end of the world; I typically just select a new movie. At the same time, content scarcity is a societal ill long-eradicated by the likes of Hulu, YouTube, and Peacock. It's bizarre to embrace the finite, to willingly incur problems already solved by Silicon Valley's finest. Still, to me, it's worth it. Ultimately, it's the material nature of the renting experience that draws me to this ritual, for better or worse.

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