September 25, 2018 • 40 mins
Netflix has shifted focus to streaming video, though it still operates a DVD rental service. What were some of the challenges and roadblocks the company encountered over the past few years? And what the heck was Qwikster?
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Episode Transcript
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Speaker 1 (00:04):
Get in touch with technology with tech Stuff from how
stuff Works dot com. Hey there, and welcome to tech Stuff.
I'm your host, Jonathan Strickland. I'm an executive producer with
how Stuff Works in the love of all things tech,
and we have made it. You and I together, we
have crawled through the history of Netflix, and we are
(00:25):
in the final for now at least chapter of that
history where really I'm looking at the formative experiences and
years of Netflix. Uh, when we get past a certain point,
we'll be doing a lot of skipping forward because it
ends up being sort of the story of they did
(00:46):
more of what they just did, but with more money.
That tends to be the theme of the last few years. However,
in the last episode on the History of Netflix, I
gave a rundown of how Blockbuster had a fighting chance
to catch up to Netflix's model of online DVD rental
after lagging behind, and they had introduced a feature called
(01:09):
total Access, but the new CEO of Blockbuster, the incoming CEO,
changed the direction of the company to focus back on
traditional brick and mortar stores, and as a result, Total
Access was discontinued. In that vacuum, Netflix was able to
flourish in that online DVD rental space. They no longer
(01:30):
had a major competitor. The closest was red Box, which
was on the rise, but they had a totally different
approach to DVD rentals, and they were at least initially
targeting a different demographic, so that wasn't as big of
a concern at least initially. So Netflix was really able
to kind of grow without having to worry about an
(01:51):
opponent taking them down. Now, to start this episode, we're
actually going to backtrack just a little bit. In that
last episode, I got up to two thousand eight, but
for this part to talk about the streaming side of
Netflix's business, because the last time it was mostly about
the DVD side, we have to go back a little
bit to two thousand six because it was September two
(02:14):
thousand six when Amazon launched a service it originally called
Amazon Unboxed. That was the name of a digital video
download service. You could purchase movies and TV shows off
Amazon and then download them to a device to watch.
I would later evolve into Amazon Instant Video, and then
(02:34):
Amazon would eventually transition away from offering video downloads and
then focus instead on delivering streaming videos, so you would
be able to watch that content. It would remain in
your library if you if you actually purchased it as
opposed to rent in it, and you could watch it
whenever you wanted, as long as you were logged into
your Amazon account. But the video would quote unquote live
(02:56):
on Amazon servers, you wouldn't download it to your machine.
Early on, this was not a direct competitor to Netflix's
streaming video service, because again, this was more of a
download a purchase process, and Netflix had already gotten out
of that market in two thousand five. However, it would
become a major competitor later on, and then on March twenty,
(03:19):
two thousand seven, another competitor rose up. That's when NBC
Universal and News Corps held a joint announcement for a
new online service that they were going to call Hulu.
The service would not go into beta testing until the
fall of two thousand seven, so this was a preliminary announcement,
and the official debut of the website to the general
(03:41):
public happened almost a year later, actually, and in March
of two thousand eight. This was a big deal for
Netflix and it's streaming strategy. It was a real alternative
to what Netflix was doing now. For one thing, the
reason why this was a big deal and a potential
threat is that Netflix is an independent company. It is
(04:03):
not part of a larger conglomerate that owns content studios. Hulu, however,
represented a joint venture between lots of different partners, including
NBC Universal, which includes both NBC the broadcast company and
Universal Studios, and also news Core, which includes the company's
(04:23):
Fox Broadcasting and twentieth century Fox. Hulu would have a
huge advantage in that the companies that were making the
content we're also responsible for bringing to life this delivery system.
So it was not a big stretch to guess that
those companies would favor sending their content to Hulu rather
(04:45):
than to Netflix, and that they would leverage this to
make an advantage and take away some of Netflix's power. Well.
Complicating matters was that Disney Studios, through its subsidiary ABC,
would announce that it was going to take a steak
in ownership of Hulu in two thousand nine, and while
News Corporation would transfer its steak to twenty first Century Fox,
(05:09):
the fact Disney then moved to acquire twenty first century
meant that the major players were pretty much the same um.
Some of the ownership was switching, but it wasn't like
a lot of new players were coming in. Also, Comcast
would announce an intention to acquire a majority stake in
NBC Universal in December two thousand nine, which might have
seemed like all these big major players in creating movies
(05:31):
and television, we're starting to align against Netflix and Netflix's
plan for streaming content. Other partners in the venture, at
least initially, would include a O. L. Facebook, my Space,
which was still a thing back in two thousand seven,
and Yahoo, which you could argue was also still a
(05:52):
thing in two thousand seven. Fun side fact, hulu dot
com had actually existed since as a website, but it
wasn't associated with streaming video, so what was going on. Originally,
hulu dot com belonged to a woman named Amy Hung,
who used it as a personal blog site. NBC would
(06:13):
purchase this site sometime in two thousand seven, and it
was Hung who had said that the name Hulu was
her reference to a Chinese word for gourd, and that
people in China would hollow out these kinds of gourds
in order to store precious things inside them, so it
was a container for precious things. When the Hulu dot
(06:33):
com streaming site launched and allowed people to sign up
in October two thousand seven, it included that definition. It
was actually an expanded version of the definition, and it
raids verbatim. Here we go. Quote in Mandarin Hulu has
two interesting meanings, each highly relevant to our mission. The
(06:54):
primary meaning interested us because it is used in an
ancient Chinese proverb that describes the Hulu as the holder
of precious things. It literally translates to gourd, and in
ancient times the Hulu was hollowed out and used to
hold precious things. The secondary meaning is interactive recording. We
saw both definitions as appropriate bookends and highly relevant to
(07:17):
the mission of Hulu. End quote. When Hulu launched, it
worked in a fundamentally different way from Netflix. So Netflix
would offer a digital distribution through a subscription service, and
originally it was an add on to DVD rentals. It
didn't exist as its own individual offering for at least
(07:38):
not at first. Hulu did not offer up a subscription service. Initially,
on Netflix, you could watch films and TV shows commercial free.
On Hulu. The videos were ads supported so you would
get one or two commercials either before, sometimes inserted into
the middle of the content you were watching. Netflix would
(08:00):
offer up entire seasons of shows for whatever available titles
it had, although they tended to be older shows, or
they were older seasons of shows, not the most recent ones.
Sometimes it might be not be the most recent two
or three seasons. Hulu offered up several recent episodes of
currently airing shows, so usually it was five. You get
(08:22):
the five most recent episodes, and then sporadically you might
get access to earlier seasons of those shows. Uh As
new shows would debut, new episodes would debut on television
about a few days maybe a week later, they would
find their way to Hulu and they would knock off
the oldest of the most recent five episodes off the list.
(08:45):
So once you got the episode six of a new
show like It's just airing that year, then when episode
six would move over to Hulu, it would knock off
episode one, and then you would just have episodes two
through six to view. So if you did not keep
up with it, you would eventually lose the ability to
watch those earlier episodes until maybe much later, when an
(09:09):
entire completed season would join Hulu. So Hulu would later
introduce a subscription service which was also ad supported, which
got a lot of people upset. They thought, if I'm
paying a subscription, why am I also forced to watch commercials?
But that would increase the number of pieces of content
viewers could access. The more recent episodes wouldn't drop off necessarily.
(09:33):
You might be able to stick with a show all
the way through a season and be able to watch
those earlier episodes and later. Still, it would eliminate that
free service entirely, and the only way to view Hulu
content would be to become a subscriber. Now, all that
is to say that Netflix is future, and digital delivery
was not certain. The DVD rental business would eventually decline
(09:57):
as the format itself would fall out of favor, with
more customers shifting to digital alternatives. That writing was on
the wall. Everyone could tell that sooner or later, this
physical medium is going to reach a level where is
no longer profitable to operate this rental business. There will
still be devotees of the medium. There's still gonna be
(10:18):
people who prefer DVDs and blue rays to streaming media.
That makes sense, But there may not be enough of
them to support a business. The debut of the Blu
Ray and the HD DVD formats in the mid two
thousand's shifted things a bit. It extended the life of
(10:38):
physical media. Netflix actually would carry both Blu Ray and
HD DVD until Netflix, like everybody else, realized that Blu
ray was going to win out over h D DVD.
The company would dump the h D DVD format in
early two thousand eight, as did everybody else. So where
did the company go from there? Well, first, it started
(11:01):
a transition to the cloud. In two thousand and eight,
Netflix's servers encountered a massive database corruption problem, and that
messed up Netflix's ability to track and send out DVDs
to customers. Operations had to be suspended for three days
while Netflix engineers frantically tried to fix the problem. That
(11:22):
whole mess decided or lad Netflix's executives to decide that
the best thing to do is to shift away from
operating their own data centers and instead moved to a
really reliable cloud based service, and the one they picked
was run by Amazon Amazon Web Services. That process of
transitioning from their own data centers to Amazon Web Service
(11:45):
would take several years to complete. It's starting in two
thousand eight, it really didn't finish until about so this
was not a quick process. It takes a while to
migrate systems and do so away where you don't interrupt services.
Netflix also signed content licensing deals with various studios, sometimes
(12:07):
at a bargain price. Many executives were skeptical that online
video would be able to survive, which might have contributed
to some negotiations and Netflix's favor So Netflix landed a
distribution deal with the premium channel Stars, for example, to
carry a lot of the movie titles that Stars had
the rights to, and the agreement was for twenty million
(12:29):
dollars for two years, which is a lot of money,
but it's actually not unreasonable for one of these licensing deals,
especially if you compare it to something like the eight
hundred million dollar deal Netflix signed with lions Gate MGM
and Paramount for a five year licensing agreement. That deal
prompted everyone from directors to actors to producers to also
(12:50):
get involved in this process because they had a direct
interest in this. They wanted to know, how are we
going to get compensated for our work being displayed over
this new medium. What what are the rules here? Because
if I get residuals, how is that determined through this
online service? It was a chaotic, messy time. Another thing
that could have worked and may have worked in Netflix's favor,
(13:13):
is that at that time, the big studios were looking
at it as if it were a small cable distributor
rather than a nationwide entity. They weren't. They're kind of
underestimating Netflix in other words, But that changed as the
subscriber base for Netflix would grow each year and by
Netflix nearly had nearly as many subscribers as the cable
(13:34):
company Comcast did, and by then Netflix had landed several
multi year licensing agreements, and at that point the studio said, oh,
we may have contributed to the growth of a real giant.
And now they have clout, they have subscribers, and if
we end up not coming to terms with them, and
(13:56):
then the company turns to their customers and says says,
we would love to bring you X movie, but because
the studio refuses to license their work to us, you
aren't going to get it. Then people might turn against
that studio. And by this time, by the time they
made the realization, it was kind of too late. Well,
(14:16):
I've got a lot more to say about Netflix, but
first let's take a quick break to thank our sponsor. Now,
around this time, there was also a culture shift that
was starting to happen and one we still talk about today,
and this was the growth of the cord cutters and
(14:37):
the emergence of the cord never's. These are populations that
represent people who ended their television service, their pay TV service,
whether it was cable or satellite, or they never bothered
to sign up for one in the first place. Some
of them would still watch television programming, but they did
it through things like over the air antennas, so they're
(14:58):
not paying for the content, They're just getting whatever is
being broadcast over the air, or they were getting it
through digital streaming on a computer or enabled set top box,
so they were getting it delivered through the Internet, but
not through the traditional satellite or cable systems. The growth
in cable subscribers began to slack off, and occasionally they
would actually decline in the number of subscribers, not just
(15:21):
slow growth, but see reverse growth. They'd see people leaving
these subscription services. The trend seemed to validate the Netflix
corporate strategy Another battle Netflix had to wage was directly
related to the popularity of the company's streaming service. As
more customers began to use Netflix to not only rent
(15:43):
DVDs but also stream movies online, the percentage of traffic
on the Internet related to Netflix grew. Netflix was the
source for sixty percent of all the streaming movies online.
All the other services combined would make up the other
four and according to several analysts, Netflix traffic accounted for
(16:05):
twenty of all broadband traffic in the United States. Now,
this was something companies like Comcast didn't care for very much.
For the most part, companies that owned infrastructure on the Internet,
as in like the actual series of tubes, if you prefer,
they had an understanding the They would have these agreements
in place, and the agreement said, all right, I will
(16:27):
carry data that's coming from your side of the Internet,
if you in turn carry data that's coming from my
side of the Internet, and as long as it matches
up with the amounts that we have agreed to, no
one charges anyone any fees. And if it goes beyond that,
then we start talking about metering that data because I'm
(16:49):
going to be carrying more of your stuff. Then you're
carrying a mine. I need to be compensated for that.
So this is called peering agreements. It's a foundational part
of the Internet, and it's also one of the basic
concepts of net neutrality. This idea that these peering agreements
are what allow massive amounts of data to pass across
(17:11):
the Internet without getting throttled or having surcharges put on
top of them. And in two thousand ten that concept
was put to the test and continues to be to
this day. The major players in this matter at the
time were Netflix, Comcast, and a company called Level three Communications.
Now Netflix, I know you guys know because I've been
(17:34):
talking about them for three episodes before this, and if
you have not listened to those, it's odd that you
would listen to a part four. First go back and
listen to parts one through three. Comcast is a cable
company and internet service provider in the United States. But
you may not know what Level three Communications is. A
lot of you probably do know because you're really tech savvy,
(17:55):
but some of you might not. You might be like me,
and it might be one of those things that you
understood later. Well. Level three Communications is one of the
companies that owns and operates the infrastructure that we call
the backbone of the Internet. They own parts of the
Internet connections that other traffic will travel across as it
goes from one network to a network. Because remember the
(18:17):
Internet is a network of networks, so comcasts network which
connects customers to the rest of the Internet. This backbone
we're talking about will send traffic across the backbone and
receives traffic coming from the backbone and then sends that
onto its customers. One way content companies are able to
deliver content to users, no matter where those users might
(18:40):
be within the service area is to build out what
is called a content delivery network. This is a system
of servers that a company distributes in various regions, and
when customers access the online service, they connect to the
server best suited to give them the fastest response. So,
if you've played online video games, you're probably familiar with
(19:02):
logging into a specific server. Those servers are typically organized
via region, and generally speaking, if you log into a
server that's closest to you to wherever you happen to
be geographically, you tend to have things like the fastest
response time, less lag, things that are really important. If
(19:23):
you're playing a game, those same things are really important.
If you want to watch high quality streaming video, you
want there to be as little delay as possible. Customers
hate it when they have to sit there and watch
a buffering logo show up and they wait to see
their video content. That that's not a good experience. So
Netflix would do this. They would use these content delivery
(19:45):
networks in order to make sure that customers would get
a good experience when viewing films and TV shows online.
Before Netflix reached an agreement with Level three Communications to
have Level three take on this task for them, a
different CDN company called a com I did that job
a k A m AI. So in this agreement, Comcast
(20:06):
would actually charge a COMMA to deliver traffic to Comcast network,
and a com I did not own Internet infrastructure. It
was able to set up these content delivery networks, but
it was not appear in the traditional sense of the
peering agreements. So that's why Comcast could charge a coma
(20:26):
I for this. It wasn't like it was this mutual
relationship where Comcast would send data across servers belonging to
a COMMA and vice versa. It was a one way relationship,
which meant that Comcast was metering it it was charging
a comma I. Well, then Netflix, which is over to
Level three Communications, they take over Netflix's delivery, and things
(20:47):
changed because Level three is a peer and had an
existing peering agreement in place with Comcast. Now, the agreement
would actually allow Level three to send twice as much
data to Comcast as Comcast could send to Level three,
So it's a two to one relationship. So if Comcast
can send one units, then Level three could send two
(21:09):
hundred units back and it was considered to be even
in the eyes of the agreement. That means that twice
as much traffic end up being equal traffic. But Comcast
argued that this Netflix deal would mean that Level three
would start sending five times as much traffic to Comcast
and that would exceed this period agreement. So Comcast also
(21:30):
wanted to charge Level three the same way it had
been charging a comma I for sending this Netflix content
to comcasts network, because otherwise it was going to get
cut out of that revenue that was part of the
you know, Comcast revenue plan. Level three argued that Comcast
was trying to wriggle out of net neutrality, and Comcast
argued that Level three was inappropriately claiming that this was
(21:54):
a net neutrality issue when in reality it was appearing issue.
And I'm not a big support of Comcast, but i
do feel like the company had a bit of a
leg to stand on in this particular argument. If the
peering agreement was for a certain amount of traffic and
Level three was going to exceed that, then by my estimation,
(22:14):
Level three should have been expected to pay a meter rate,
and it didn't matter where the data came from. It
wasn't that specifically came from Netflix. It was that the
amount of data was exceeding the agreement. Whether that came
from Netflix or from a spreadsheet doesn't really matter. But
that would also mean Level three would likely have to
(22:35):
pass those expenses onto Netflix, which would then of course
pass those expenses on to customers, and that would have
been a pretty negative experience all around. The fight would
stretch for years with worries that Comcast would end up
throttling Netflix traffic, not because it was Netflix necessarily, though
that service did compete with comcasts own Internet video delivery
(22:56):
services that it provided to its customers, but rather because
as level three would be in violation of that agreement.
Netflix ended up extricating itself out of this problem in
and that's when it was announced that it was going
to pay Comcast for a direct connection from Netflix servers
to Comcasts network, So they were no longer employing anyone
(23:16):
else to become a content delivery network. They were essentially
doing it themselves and paying Comcast for the privilege. But
the bigger dispute reached something of a resolution in two
thousand fifteen, just a short time before the FCC was
to start hearing complaints under some new net neutrality rules,
rules which I should add have since been overturned by
(23:37):
the most recent FCC leadership, So the mess keeps on going. Meanwhile,
on the executive side over at Netflix, read Hastings was
apparently becoming less approachable. According to the book Netflix, which
I have cited several times in these episodes, it was
getting harder to change hastings mind about things. He would
(23:58):
make up his mind on something, and challenging his ideas
was becoming more and more difficult to do. Some of
his top executives would leave around this time. They saw
a very little opportunity to grow at Netflix. They saw
a little indication that they would have a shot at
leading the company themselves, and figured that they pretty much
achieved their goals that they set out to do when
(24:20):
they joined Netflix. Things like fighting off Blockbuster or launching
a digital videos uh you know service. Those things had
happened already, so rather than just sit around, they decided
to leave and take on new challenges or even retire.
On November twenty ten, Netflix really showed off how it
believed the streaming service was going to be the future,
(24:43):
because for the first time, they would offer customers the
option to subscribe to just the streaming part of Netflix's
service without the requirement of having a DVD rental service
on top of it. Because up to that point it
was an add on. There was no just streaming option
for the subscription, but in suddenly there was. This new
(25:05):
service would cost seven dollars nine cents per month when
it launched, and the combined plan of unlimited DVDs and
streaming went from eight dollars and nine nine cents a
month to nine dollars a month at that point. Hastings
even said that the press release that Netflix was now
quote primarily a streaming video company delivering a wide selection
(25:26):
of TV shows and films over the Internet end quote.
Netflix finally began to expand its streaming services internationally. First
they began to offer service in Canada and then later
in Latin America and the Caribbean in late two thousand eleven,
and that was also when Netflix announced what would be
the beginning of its next serious move and changing the
(25:47):
landscape of entertainment. The company announced it would be the
exclusive distributor in the United States of a television series
called Lily Hammer, which originated out of Norway, and perhaps
more import lee, they also announced that they were developing
their own original program. Netflix was playing the part of
a TV studio. They were actually producing a show, not
(26:09):
just streaming a show, and the first original program was
an adaptation of a TV series that had been on
UK television in the nineteen nineties. That adaptation would change
the time and place of the story, switching from the
the days of the nineties over in the UK to
(26:30):
modern day United States, and this series was called House
of Cards. But while new original content from Netflix was exciting,
that wasn't the two thousand eleven story that got customers
talking and shouting and leaving nasty comments and canceling their subscriptions. Nope,
that honor would go to a little scandal or kerfuffle.
(26:55):
I guess is a better word called quick ster. I'll
explain after we take a quick rake to thank our sponsors.
So quick stir well, here's the down in dirty details.
Netflix's business was in two really big categories, and one
(27:18):
was the DVD rental business that was getting more expensive
to operate. Postage fees had gone up, blue rays were
more expensive than DVDs, and so it was getting harder
to make that a cost efficient, profitable business. Meanwhile, there
was the streaming services side of the business, and that
(27:38):
was clearly the future for Netflix. That was where things
were going to ultimately end up. But the DVD format
and blue rays hadn't died. There were still a lot
of people who preferred the experience of watching movies on
that physical media. And there were titles in Netflix's DVD
library that you could not find in the streaming library
due to licensing issues. So Netflix could go out and
(28:01):
buy copies of a movie and then offer them up
for rent, but they couldn't take necessarily those exact same
titles and put them up for streaming because it went
it was the difference between renting a physical format and
broadcasting content. Because of that, you would always find a
much more broad and deep selection of television shows and
(28:24):
films in the DVD side than you would in the
streaming side. So it didn't seem feasible to just kill
the DVD side of the business entirely, but it was
getting more challenging to operate both sides of the business simultaneously.
Netflix had also raised the prices of its joint DVD
and streaming plans to sixteen dollars a month at that point,
(28:46):
and that was a heck of a jump, and this
was in a recession. The decision would affect half of
Netflix's subscribers in the United States who are under this
joint plan, so about of all Netflix customers had both
DVD and streaming subscriptions tied together, But people who subscribed
(29:07):
only to DVDs or only subscribe to the streaming service,
they would have actually seen a price cut in this approach. However,
the focus of this announcement was almost exclusively on the
price jump for the people who had a joint account
like the joint DVD and streaming services and Because of that,
(29:28):
Netflix was getting a lot of bad press and customer complaints.
So there was a new idea, one that a lot
of people inside Netflix did not like, but read Hastings
was very gung ho on going forward with this idea,
and that idea was to split the two businesses apart
(29:50):
and make the DVD side of Netflix its own company
and calling it quick Ster. It would have its own
internal corporate structure, it would have its own CEO, it
would be free from the streaming business of Netflix. But
that also meant it would be a huge change to customers.
It meant that the combined plan of DVDs and streaming
(30:12):
would become more complicated. Each company would have to maintain
its own cues and customer profiles. So if you wanted
to have that that joint service of DVDs and streaming video,
now you were going to have to have two accounts.
You're gonna have a Netflix account and a quick Stot account.
You have two subscriptions to payments, two different cueues. Uh.
(30:35):
If you were let's say that you had a queue
in your streaming service and you had a queue in
the DVD service, and it turns out one of the
movies that's on your DVD list becomes available on streaming,
and you watch it and streaming, and then your next
DVD shows up and it happens to be the same movie.
That would be a really frustrating experience, especially since it
(30:56):
had originally both come from the same company. People were
not happy. Netflix also was not very good at communicating
why it was doing this in the first place, and
the main reason was to allow the DVD side to
focus on delivering rentals with a deep library and do
it efficiently and with a profit in mind, while the
(31:18):
streaming side could dedicate more resources like time, energy, and
effort to building out its library and making new content.
Most coverage at the time criticized how Hastings communicated these changes.
He actually did it by shooting a short video that
the company had produced independently. UH. Against the wishes of
(31:39):
a lot of the folks in his executive team, he
did this, and it became another notch in the argument
that read Hastings was just not very good at communicating
with his customers or understanding where his customers were coming from.
He would eventually reverse this decision, and he would bring
the DVD business back under Netflix and UH and just
abandoned the idea of Quixter, and that took about a month.
(32:02):
They had not yet really spun out Quixter. They had
announced the intention to do this, but they ultimately decided
that that wasn't going to work after they got a
massive negative reaction from customers and a lot of people
lost their jobs in the process because in the preparations
for making this move, there were people who were brought
on or transitioned over to new roles. They were going
(32:24):
to fill new positions under Quickster, but now Quixter was gone,
those positions were gone, and so people found themselves out
of a job they had they had switched over, and
they didn't have a job to go back to over
at Netflix. So it was a really big misstep for
Netflix and for Hastings, but the company was able to recover.
It expanded in two thousand twelve by launching services in Europe,
(32:46):
and in April two thousand twelve, Hastings and Netflix would
fund a political action committee or pack called flix Pack,
and this is a lobbying group. It contributes money to
the campaigns of politicians who would support legislation that was
in favor of net neutrality. For example, or that they
would vote against any legislation that would pose a threat
(33:07):
to Netflix's business. So Netflix became a real political entity
at this point. On December two thousand twelve, Netflix went
dark in North America, and not on purpose, so this
is Christmas Eve, two thousand twelve. The streaming service went
offline for several hours and the root of the problem
was with the elastic load balancer service on Amazon's cloud platform,
(33:29):
so there was really nothing Netflix could do at this point.
There was an error on the Amazon cloud service, and
this was when Netflix was still in the process of
transitioning over to Amazon's platform. In August, Netflix introduced a
concept it had previously implemented in its DVD rental business,
which was profiles. With profiles, a household could have multiple
(33:51):
cues to represent the preferences of each member of the family,
so Dad could have one queue of content, Mom could
have another, you know, etcetera, etcetera. One two fifteen, the
company announced an incredible seven to one stock split that
meant that for every share of stock in Netflix you owned,
(34:13):
you would get six additional shares. The share price would
reduce down to one seventh of their former value. And
I talked about this in an earlier episode, but really quickly.
This approach increases the number of shares, but it decreases
the price per share that maintains the same company value
throughout the process. But it's also a way to encourage
(34:34):
small investors to get on board because the price for
an individual share of stock is lower than it was before.
Netflix also would launch streaming services in Japan, and in
ten at CS Netflix announced it would enter one thirty
new markets across the world, so it was really growing
quickly last year that being seen. At the time of
(34:57):
this recording, the research firm p WC sent out a
survey to learn more about how people were getting their entertainment,
and according to their survey results, seventy three percent of
responded said that they were pay TV customers, so cable
or satellite or something like that responded said they subscribed
to Netflix. So the same number of people not necessarily
(35:20):
exactly the same people, but the same number of people
were now Netflix customers as they were for any sort
of pay TV customers. So this survey suggests that the
US means that streaming is really the direction that we're
moving in. If we've gotten to a point where there's
an equal number of people subscribed to Netflix as there
(35:42):
are for any given pay TV service, or all of
them collected together. That's pretty big news. Meanwhile, there are
these other competing services out there. You've got Hulu, Amazon Video,
You've got the upcoming Disney streaming service. Those are all
muddying the waters and making things more complicated. No service
can boast having all of another services offerings plus more.
(36:06):
So in other words, you're not going to go to
Hulu and see, oh, you have everything Netflix has plus
this other stuff. Where you go to Netflix and say, oh,
you've got everything, Amazon Video has plus this other stuff.
No one has everything. So it's quite possible that if
you want to see certain programming, you're going to have
to subscribe to multiple services that you know, you might say, oh,
(36:26):
I really want that show and I really want this
other show, and unfortunately they're both exclusive to different services. Well,
you have a little option but to subscribe to both
of those services. And this is getting pretty messy as
we're seeing more of these services pop up. It requires
more decisions on the part of the customer, and a
lot of people aren't really thrilled about the idea of
(36:47):
having to sign up to multiple services, so that is
becoming a bit of a complication. And then you also
have premium channels like HBO having their own competing services.
So while there may be a desire to cut the chord,
the alternative seems to be that you're gonna have to
subscribe to two or more services to get what you want,
unless you just happen to except that the limited options
(37:10):
of any one service are exactly what you need. Netflix
is also really big on original programming. There's no surprise there.
They don't have to pay licensing fees and it gives
them an advantage over competing services. So according to indie Wire,
which cited an unnamed source, Netflix is releasing around eighty
two original movies in ten and seven hundred new or
(37:34):
exclusively licensed programs. The content budget for Netflix is an
estimated thirteen billion dollars in and some of that original
programming gets both critical acclaim as well as an eager
reception from Netflix customers. In seventeen, the company garnered nine
one Emmy nominations from its original programming, as well as
(37:58):
eight Academy Award nominations for their original films and even
one an Oscar for Best documentary feature with Icarus, so
not everything on Netflix is fuller house, thank goodness. And
it looks like in the near future, Netflix is going
to focus on sports docuseries as another area to expand in.
(38:21):
So the company continues to pour money into original programming
and to add more to its features. It grows in
more regions, so it's it's opening up more streaming services
across the world, and I expect it will continue to
be a pretty major player in entertainment for at least
the near future. When will we see DVD rentals go away?
(38:45):
Who's to say? I think it's gonna be a while.
Read Hastings actually joked that he would make sure he
would personally deliver the very last DVD that they ever
rent and that would probably be sometime in Whether or
not that prediction remains accurate, that's we got to wait
around see. But that wraps up the story of Netflix
(39:06):
so far. Obviously, the company continues to exist, so I'll
probably have to do more episodes either specifically about Netflix
or related to it in the future. But I think
we've talked about it enough with four episodes back to back, right,
So we're gonna come back in our next episode about
a totally different topic, and I look forward to chatting
with you guys. Then, if you have any suggestions for
(39:27):
future episodes, maybe it's a company or a technology or
a person in tech. Maybe there's someone I should interview,
send me a message, let me know. The email address
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h s W go check out our merchandise or at
t public dot com slash tech stuff that's t e
(39:49):
public dot com slash tech stuff. Every purchase goes to
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again really soon for more on this and thousands of
other topics. Is it how stuff works dot com m
Get in touch with technology with tech Stuff from how
stuff Works dot com. Hey there, and welcome to tech Stuff.
I'm your host, Jonathan Strickland. I'm an executive producer with
how Stuff Works in the love of all things tech,
and we have made it. You and I together, we
have crawled through the history of Netflix, and we are
(00:25):
in the final for now at least chapter of that
history where really I'm looking at the formative experiences and
years of Netflix. Uh, when we get past a certain point,
we'll be doing a lot of skipping forward because it
ends up being sort of the story of they did
(00:46):
more of what they just did, but with more money.
That tends to be the theme of the last few years. However,
in the last episode on the History of Netflix, I
gave a rundown of how Blockbuster had a fighting chance
to catch up to Netflix's model of online DVD rental
after lagging behind, and they had introduced a feature called
(01:09):
total Access, but the new CEO of Blockbuster, the incoming CEO,
changed the direction of the company to focus back on
traditional brick and mortar stores, and as a result, Total
Access was discontinued. In that vacuum, Netflix was able to
flourish in that online DVD rental space. They no longer
(01:30):
had a major competitor. The closest was red Box, which
was on the rise, but they had a totally different
approach to DVD rentals, and they were at least initially
targeting a different demographic, so that wasn't as big of
a concern at least initially. So Netflix was really able
to kind of grow without having to worry about an
(01:51):
opponent taking them down. Now, to start this episode, we're
actually going to backtrack just a little bit. In that
last episode, I got up to two thousand eight, but
for this part to talk about the streaming side of
Netflix's business, because the last time it was mostly about
the DVD side, we have to go back a little
bit to two thousand six because it was September two
(02:14):
thousand six when Amazon launched a service it originally called
Amazon Unboxed. That was the name of a digital video
download service. You could purchase movies and TV shows off
Amazon and then download them to a device to watch.
I would later evolve into Amazon Instant Video, and then
(02:34):
Amazon would eventually transition away from offering video downloads and
then focus instead on delivering streaming videos, so you would
be able to watch that content. It would remain in
your library if you if you actually purchased it as
opposed to rent in it, and you could watch it
whenever you wanted, as long as you were logged into
your Amazon account. But the video would quote unquote live
(02:56):
on Amazon servers, you wouldn't download it to your machine.
Early on, this was not a direct competitor to Netflix's
streaming video service, because again, this was more of a
download a purchase process, and Netflix had already gotten out
of that market in two thousand five. However, it would
become a major competitor later on, and then on March twenty,
(03:19):
two thousand seven, another competitor rose up. That's when NBC
Universal and News Corps held a joint announcement for a
new online service that they were going to call Hulu.
The service would not go into beta testing until the
fall of two thousand seven, so this was a preliminary announcement,
and the official debut of the website to the general
(03:41):
public happened almost a year later, actually, and in March
of two thousand eight. This was a big deal for
Netflix and it's streaming strategy. It was a real alternative
to what Netflix was doing now. For one thing, the
reason why this was a big deal and a potential
threat is that Netflix is an independent company. It is
(04:03):
not part of a larger conglomerate that owns content studios. Hulu, however,
represented a joint venture between lots of different partners, including
NBC Universal, which includes both NBC the broadcast company and
Universal Studios, and also news Core, which includes the company's
(04:23):
Fox Broadcasting and twentieth century Fox. Hulu would have a
huge advantage in that the companies that were making the
content we're also responsible for bringing to life this delivery system.
So it was not a big stretch to guess that
those companies would favor sending their content to Hulu rather
(04:45):
than to Netflix, and that they would leverage this to
make an advantage and take away some of Netflix's power. Well.
Complicating matters was that Disney Studios, through its subsidiary ABC,
would announce that it was going to take a steak
in ownership of Hulu in two thousand nine, and while
News Corporation would transfer its steak to twenty first Century Fox,
(05:09):
the fact Disney then moved to acquire twenty first century
meant that the major players were pretty much the same um.
Some of the ownership was switching, but it wasn't like
a lot of new players were coming in. Also, Comcast
would announce an intention to acquire a majority stake in
NBC Universal in December two thousand nine, which might have
seemed like all these big major players in creating movies
(05:31):
and television, we're starting to align against Netflix and Netflix's
plan for streaming content. Other partners in the venture, at
least initially, would include a O. L. Facebook, my Space,
which was still a thing back in two thousand seven,
and Yahoo, which you could argue was also still a
(05:52):
thing in two thousand seven. Fun side fact, hulu dot
com had actually existed since as a website, but it
wasn't associated with streaming video, so what was going on. Originally,
hulu dot com belonged to a woman named Amy Hung,
who used it as a personal blog site. NBC would
(06:13):
purchase this site sometime in two thousand seven, and it
was Hung who had said that the name Hulu was
her reference to a Chinese word for gourd, and that
people in China would hollow out these kinds of gourds
in order to store precious things inside them, so it
was a container for precious things. When the Hulu dot
(06:33):
com streaming site launched and allowed people to sign up
in October two thousand seven, it included that definition. It
was actually an expanded version of the definition, and it
raids verbatim. Here we go. Quote in Mandarin Hulu has
two interesting meanings, each highly relevant to our mission. The
(06:54):
primary meaning interested us because it is used in an
ancient Chinese proverb that describes the Hulu as the holder
of precious things. It literally translates to gourd, and in
ancient times the Hulu was hollowed out and used to
hold precious things. The secondary meaning is interactive recording. We
saw both definitions as appropriate bookends and highly relevant to
(07:17):
the mission of Hulu. End quote. When Hulu launched, it
worked in a fundamentally different way from Netflix. So Netflix
would offer a digital distribution through a subscription service, and
originally it was an add on to DVD rentals. It
didn't exist as its own individual offering for at least
(07:38):
not at first. Hulu did not offer up a subscription service. Initially,
on Netflix, you could watch films and TV shows commercial free.
On Hulu. The videos were ads supported so you would
get one or two commercials either before, sometimes inserted into
the middle of the content you were watching. Netflix would
(08:00):
offer up entire seasons of shows for whatever available titles
it had, although they tended to be older shows, or
they were older seasons of shows, not the most recent ones.
Sometimes it might be not be the most recent two
or three seasons. Hulu offered up several recent episodes of
currently airing shows, so usually it was five. You get
(08:22):
the five most recent episodes, and then sporadically you might
get access to earlier seasons of those shows. Uh As
new shows would debut, new episodes would debut on television
about a few days maybe a week later, they would
find their way to Hulu and they would knock off
the oldest of the most recent five episodes off the list.
(08:45):
So once you got the episode six of a new
show like It's just airing that year, then when episode
six would move over to Hulu, it would knock off
episode one, and then you would just have episodes two
through six to view. So if you did not keep
up with it, you would eventually lose the ability to
watch those earlier episodes until maybe much later, when an
(09:09):
entire completed season would join Hulu. So Hulu would later
introduce a subscription service which was also ad supported, which
got a lot of people upset. They thought, if I'm
paying a subscription, why am I also forced to watch commercials?
But that would increase the number of pieces of content
viewers could access. The more recent episodes wouldn't drop off necessarily.
(09:33):
You might be able to stick with a show all
the way through a season and be able to watch
those earlier episodes and later. Still, it would eliminate that
free service entirely, and the only way to view Hulu
content would be to become a subscriber. Now, all that
is to say that Netflix is future, and digital delivery
was not certain. The DVD rental business would eventually decline
(09:57):
as the format itself would fall out of favor, with
more customers shifting to digital alternatives. That writing was on
the wall. Everyone could tell that sooner or later, this
physical medium is going to reach a level where is
no longer profitable to operate this rental business. There will
still be devotees of the medium. There's still gonna be
(10:18):
people who prefer DVDs and blue rays to streaming media.
That makes sense, But there may not be enough of
them to support a business. The debut of the Blu
Ray and the HD DVD formats in the mid two
thousand's shifted things a bit. It extended the life of
(10:38):
physical media. Netflix actually would carry both Blu Ray and
HD DVD until Netflix, like everybody else, realized that Blu
ray was going to win out over h D DVD.
The company would dump the h D DVD format in
early two thousand eight, as did everybody else. So where
did the company go from there? Well, first, it started
(11:01):
a transition to the cloud. In two thousand and eight,
Netflix's servers encountered a massive database corruption problem, and that
messed up Netflix's ability to track and send out DVDs
to customers. Operations had to be suspended for three days
while Netflix engineers frantically tried to fix the problem. That
(11:22):
whole mess decided or lad Netflix's executives to decide that
the best thing to do is to shift away from
operating their own data centers and instead moved to a
really reliable cloud based service, and the one they picked
was run by Amazon Amazon Web Services. That process of
transitioning from their own data centers to Amazon Web Service
(11:45):
would take several years to complete. It's starting in two
thousand eight, it really didn't finish until about so this
was not a quick process. It takes a while to
migrate systems and do so away where you don't interrupt services.
Netflix also signed content licensing deals with various studios, sometimes
(12:07):
at a bargain price. Many executives were skeptical that online
video would be able to survive, which might have contributed
to some negotiations and Netflix's favor So Netflix landed a
distribution deal with the premium channel Stars, for example, to
carry a lot of the movie titles that Stars had
the rights to, and the agreement was for twenty million
(12:29):
dollars for two years, which is a lot of money,
but it's actually not unreasonable for one of these licensing deals,
especially if you compare it to something like the eight
hundred million dollar deal Netflix signed with lions Gate MGM
and Paramount for a five year licensing agreement. That deal
prompted everyone from directors to actors to producers to also
(12:50):
get involved in this process because they had a direct
interest in this. They wanted to know, how are we
going to get compensated for our work being displayed over
this new medium. What what are the rules here? Because
if I get residuals, how is that determined through this
online service? It was a chaotic, messy time. Another thing
that could have worked and may have worked in Netflix's favor,
(13:13):
is that at that time, the big studios were looking
at it as if it were a small cable distributor
rather than a nationwide entity. They weren't. They're kind of
underestimating Netflix in other words, But that changed as the
subscriber base for Netflix would grow each year and by
Netflix nearly had nearly as many subscribers as the cable
(13:34):
company Comcast did, and by then Netflix had landed several
multi year licensing agreements, and at that point the studio said, oh,
we may have contributed to the growth of a real giant.
And now they have clout, they have subscribers, and if
we end up not coming to terms with them, and
(13:56):
then the company turns to their customers and says says,
we would love to bring you X movie, but because
the studio refuses to license their work to us, you
aren't going to get it. Then people might turn against
that studio. And by this time, by the time they
made the realization, it was kind of too late. Well,
(14:16):
I've got a lot more to say about Netflix, but
first let's take a quick break to thank our sponsor. Now,
around this time, there was also a culture shift that
was starting to happen and one we still talk about today,
and this was the growth of the cord cutters and
(14:37):
the emergence of the cord never's. These are populations that
represent people who ended their television service, their pay TV service,
whether it was cable or satellite, or they never bothered
to sign up for one in the first place. Some
of them would still watch television programming, but they did
it through things like over the air antennas, so they're
(14:58):
not paying for the content, They're just getting whatever is
being broadcast over the air, or they were getting it
through digital streaming on a computer or enabled set top box,
so they were getting it delivered through the Internet, but
not through the traditional satellite or cable systems. The growth
in cable subscribers began to slack off, and occasionally they
would actually decline in the number of subscribers, not just
(15:21):
slow growth, but see reverse growth. They'd see people leaving
these subscription services. The trend seemed to validate the Netflix
corporate strategy Another battle Netflix had to wage was directly
related to the popularity of the company's streaming service. As
more customers began to use Netflix to not only rent
(15:43):
DVDs but also stream movies online, the percentage of traffic
on the Internet related to Netflix grew. Netflix was the
source for sixty percent of all the streaming movies online.
All the other services combined would make up the other
four and according to several analysts, Netflix traffic accounted for
(16:05):
twenty of all broadband traffic in the United States. Now,
this was something companies like Comcast didn't care for very much.
For the most part, companies that owned infrastructure on the Internet,
as in like the actual series of tubes, if you prefer,
they had an understanding the They would have these agreements
in place, and the agreement said, all right, I will
(16:27):
carry data that's coming from your side of the Internet,
if you in turn carry data that's coming from my
side of the Internet, and as long as it matches
up with the amounts that we have agreed to, no
one charges anyone any fees. And if it goes beyond that,
then we start talking about metering that data because I'm
(16:49):
going to be carrying more of your stuff. Then you're
carrying a mine. I need to be compensated for that.
So this is called peering agreements. It's a foundational part
of the Internet, and it's also one of the basic
concepts of net neutrality. This idea that these peering agreements
are what allow massive amounts of data to pass across
(17:11):
the Internet without getting throttled or having surcharges put on
top of them. And in two thousand ten that concept
was put to the test and continues to be to
this day. The major players in this matter at the
time were Netflix, Comcast, and a company called Level three Communications.
Now Netflix, I know you guys know because I've been
(17:34):
talking about them for three episodes before this, and if
you have not listened to those, it's odd that you
would listen to a part four. First go back and
listen to parts one through three. Comcast is a cable
company and internet service provider in the United States. But
you may not know what Level three Communications is. A
lot of you probably do know because you're really tech savvy,
(17:55):
but some of you might not. You might be like me,
and it might be one of those things that you
understood later. Well. Level three Communications is one of the
companies that owns and operates the infrastructure that we call
the backbone of the Internet. They own parts of the
Internet connections that other traffic will travel across as it
goes from one network to a network. Because remember the
(18:17):
Internet is a network of networks, so comcasts network which
connects customers to the rest of the Internet. This backbone
we're talking about will send traffic across the backbone and
receives traffic coming from the backbone and then sends that
onto its customers. One way content companies are able to
deliver content to users, no matter where those users might
(18:40):
be within the service area is to build out what
is called a content delivery network. This is a system
of servers that a company distributes in various regions, and
when customers access the online service, they connect to the
server best suited to give them the fastest response. So,
if you've played online video games, you're probably familiar with
(19:02):
logging into a specific server. Those servers are typically organized
via region, and generally speaking, if you log into a
server that's closest to you to wherever you happen to
be geographically, you tend to have things like the fastest
response time, less lag, things that are really important. If
(19:23):
you're playing a game, those same things are really important.
If you want to watch high quality streaming video, you
want there to be as little delay as possible. Customers
hate it when they have to sit there and watch
a buffering logo show up and they wait to see
their video content. That that's not a good experience. So
Netflix would do this. They would use these content delivery
(19:45):
networks in order to make sure that customers would get
a good experience when viewing films and TV shows online.
Before Netflix reached an agreement with Level three Communications to
have Level three take on this task for them, a
different CDN company called a com I did that job
a k A m AI. So in this agreement, Comcast
(20:06):
would actually charge a COMMA to deliver traffic to Comcast network,
and a com I did not own Internet infrastructure. It
was able to set up these content delivery networks, but
it was not appear in the traditional sense of the
peering agreements. So that's why Comcast could charge a coma
(20:26):
I for this. It wasn't like it was this mutual
relationship where Comcast would send data across servers belonging to
a COMMA and vice versa. It was a one way relationship,
which meant that Comcast was metering it it was charging
a comma I. Well, then Netflix, which is over to
Level three Communications, they take over Netflix's delivery, and things
(20:47):
changed because Level three is a peer and had an
existing peering agreement in place with Comcast. Now, the agreement
would actually allow Level three to send twice as much
data to Comcast as Comcast could send to Level three,
So it's a two to one relationship. So if Comcast
can send one units, then Level three could send two
(21:09):
hundred units back and it was considered to be even
in the eyes of the agreement. That means that twice
as much traffic end up being equal traffic. But Comcast
argued that this Netflix deal would mean that Level three
would start sending five times as much traffic to Comcast
and that would exceed this period agreement. So Comcast also
(21:30):
wanted to charge Level three the same way it had
been charging a comma I for sending this Netflix content
to comcasts network, because otherwise it was going to get
cut out of that revenue that was part of the
you know, Comcast revenue plan. Level three argued that Comcast
was trying to wriggle out of net neutrality, and Comcast
argued that Level three was inappropriately claiming that this was
(21:54):
a net neutrality issue when in reality it was appearing issue.
And I'm not a big support of Comcast, but i
do feel like the company had a bit of a
leg to stand on in this particular argument. If the
peering agreement was for a certain amount of traffic and
Level three was going to exceed that, then by my estimation,
(22:14):
Level three should have been expected to pay a meter rate,
and it didn't matter where the data came from. It
wasn't that specifically came from Netflix. It was that the
amount of data was exceeding the agreement. Whether that came
from Netflix or from a spreadsheet doesn't really matter. But
that would also mean Level three would likely have to
(22:35):
pass those expenses onto Netflix, which would then of course
pass those expenses on to customers, and that would have
been a pretty negative experience all around. The fight would
stretch for years with worries that Comcast would end up
throttling Netflix traffic, not because it was Netflix necessarily, though
that service did compete with comcasts own Internet video delivery
(22:56):
services that it provided to its customers, but rather because
as level three would be in violation of that agreement.
Netflix ended up extricating itself out of this problem in
and that's when it was announced that it was going
to pay Comcast for a direct connection from Netflix servers
to Comcasts network, So they were no longer employing anyone
(23:16):
else to become a content delivery network. They were essentially
doing it themselves and paying Comcast for the privilege. But
the bigger dispute reached something of a resolution in two
thousand fifteen, just a short time before the FCC was
to start hearing complaints under some new net neutrality rules,
rules which I should add have since been overturned by
(23:37):
the most recent FCC leadership, So the mess keeps on going. Meanwhile,
on the executive side over at Netflix, read Hastings was
apparently becoming less approachable. According to the book Netflix, which
I have cited several times in these episodes, it was
getting harder to change hastings mind about things. He would
(23:58):
make up his mind on something, and challenging his ideas
was becoming more and more difficult to do. Some of
his top executives would leave around this time. They saw
a very little opportunity to grow at Netflix. They saw
a little indication that they would have a shot at
leading the company themselves, and figured that they pretty much
achieved their goals that they set out to do when
(24:20):
they joined Netflix. Things like fighting off Blockbuster or launching
a digital videos uh you know service. Those things had
happened already, so rather than just sit around, they decided
to leave and take on new challenges or even retire.
On November twenty ten, Netflix really showed off how it
believed the streaming service was going to be the future,
(24:43):
because for the first time, they would offer customers the
option to subscribe to just the streaming part of Netflix's
service without the requirement of having a DVD rental service
on top of it. Because up to that point it
was an add on. There was no just streaming option
for the subscription, but in suddenly there was. This new
(25:05):
service would cost seven dollars nine cents per month when
it launched, and the combined plan of unlimited DVDs and
streaming went from eight dollars and nine nine cents a
month to nine dollars a month at that point. Hastings
even said that the press release that Netflix was now
quote primarily a streaming video company delivering a wide selection
(25:26):
of TV shows and films over the Internet end quote.
Netflix finally began to expand its streaming services internationally. First
they began to offer service in Canada and then later
in Latin America and the Caribbean in late two thousand eleven,
and that was also when Netflix announced what would be
the beginning of its next serious move and changing the
(25:47):
landscape of entertainment. The company announced it would be the
exclusive distributor in the United States of a television series
called Lily Hammer, which originated out of Norway, and perhaps
more import lee, they also announced that they were developing
their own original program. Netflix was playing the part of
a TV studio. They were actually producing a show, not
(26:09):
just streaming a show, and the first original program was
an adaptation of a TV series that had been on
UK television in the nineteen nineties. That adaptation would change
the time and place of the story, switching from the
the days of the nineties over in the UK to
(26:30):
modern day United States, and this series was called House
of Cards. But while new original content from Netflix was exciting,
that wasn't the two thousand eleven story that got customers
talking and shouting and leaving nasty comments and canceling their subscriptions. Nope,
that honor would go to a little scandal or kerfuffle.
(26:55):
I guess is a better word called quick ster. I'll
explain after we take a quick rake to thank our sponsors.
So quick stir well, here's the down in dirty details.
Netflix's business was in two really big categories, and one
(27:18):
was the DVD rental business that was getting more expensive
to operate. Postage fees had gone up, blue rays were
more expensive than DVDs, and so it was getting harder
to make that a cost efficient, profitable business. Meanwhile, there
was the streaming services side of the business, and that
(27:38):
was clearly the future for Netflix. That was where things
were going to ultimately end up. But the DVD format
and blue rays hadn't died. There were still a lot
of people who preferred the experience of watching movies on
that physical media. And there were titles in Netflix's DVD
library that you could not find in the streaming library
due to licensing issues. So Netflix could go out and
(28:01):
buy copies of a movie and then offer them up
for rent, but they couldn't take necessarily those exact same
titles and put them up for streaming because it went
it was the difference between renting a physical format and
broadcasting content. Because of that, you would always find a
much more broad and deep selection of television shows and
(28:24):
films in the DVD side than you would in the
streaming side. So it didn't seem feasible to just kill
the DVD side of the business entirely, but it was
getting more challenging to operate both sides of the business simultaneously.
Netflix had also raised the prices of its joint DVD
and streaming plans to sixteen dollars a month at that point,
(28:46):
and that was a heck of a jump, and this
was in a recession. The decision would affect half of
Netflix's subscribers in the United States who are under this
joint plan, so about of all Netflix customers had both
DVD and streaming subscriptions tied together, But people who subscribed
(29:07):
only to DVDs or only subscribe to the streaming service,
they would have actually seen a price cut in this approach. However,
the focus of this announcement was almost exclusively on the
price jump for the people who had a joint account
like the joint DVD and streaming services and Because of that,
(29:28):
Netflix was getting a lot of bad press and customer complaints.
So there was a new idea, one that a lot
of people inside Netflix did not like, but read Hastings
was very gung ho on going forward with this idea,
and that idea was to split the two businesses apart
(29:50):
and make the DVD side of Netflix its own company
and calling it quick Ster. It would have its own
internal corporate structure, it would have its own CEO, it
would be free from the streaming business of Netflix. But
that also meant it would be a huge change to customers.
It meant that the combined plan of DVDs and streaming
(30:12):
would become more complicated. Each company would have to maintain
its own cues and customer profiles. So if you wanted
to have that that joint service of DVDs and streaming video,
now you were going to have to have two accounts.
You're gonna have a Netflix account and a quick Stot account.
You have two subscriptions to payments, two different cueues. Uh.
(30:35):
If you were let's say that you had a queue
in your streaming service and you had a queue in
the DVD service, and it turns out one of the
movies that's on your DVD list becomes available on streaming,
and you watch it and streaming, and then your next
DVD shows up and it happens to be the same movie.
That would be a really frustrating experience, especially since it
(30:56):
had originally both come from the same company. People were
not happy. Netflix also was not very good at communicating
why it was doing this in the first place, and
the main reason was to allow the DVD side to
focus on delivering rentals with a deep library and do
it efficiently and with a profit in mind, while the
(31:18):
streaming side could dedicate more resources like time, energy, and
effort to building out its library and making new content.
Most coverage at the time criticized how Hastings communicated these changes.
He actually did it by shooting a short video that
the company had produced independently. UH. Against the wishes of
(31:39):
a lot of the folks in his executive team, he
did this, and it became another notch in the argument
that read Hastings was just not very good at communicating
with his customers or understanding where his customers were coming from.
He would eventually reverse this decision, and he would bring
the DVD business back under Netflix and UH and just
abandoned the idea of Quixter, and that took about a month.
(32:02):
They had not yet really spun out Quixter. They had
announced the intention to do this, but they ultimately decided
that that wasn't going to work after they got a
massive negative reaction from customers and a lot of people
lost their jobs in the process because in the preparations
for making this move, there were people who were brought
on or transitioned over to new roles. They were going
(32:24):
to fill new positions under Quickster, but now Quixter was gone,
those positions were gone, and so people found themselves out
of a job they had they had switched over, and
they didn't have a job to go back to over
at Netflix. So it was a really big misstep for
Netflix and for Hastings, but the company was able to recover.
It expanded in two thousand twelve by launching services in Europe,
(32:46):
and in April two thousand twelve, Hastings and Netflix would
fund a political action committee or pack called flix Pack,
and this is a lobbying group. It contributes money to
the campaigns of politicians who would support legislation that was
in favor of net neutrality. For example, or that they
would vote against any legislation that would pose a threat
(33:07):
to Netflix's business. So Netflix became a real political entity
at this point. On December two thousand twelve, Netflix went
dark in North America, and not on purpose, so this
is Christmas Eve, two thousand twelve. The streaming service went
offline for several hours and the root of the problem
was with the elastic load balancer service on Amazon's cloud platform,
(33:29):
so there was really nothing Netflix could do at this point.
There was an error on the Amazon cloud service, and
this was when Netflix was still in the process of
transitioning over to Amazon's platform. In August, Netflix introduced a
concept it had previously implemented in its DVD rental business,
which was profiles. With profiles, a household could have multiple
(33:51):
cues to represent the preferences of each member of the family,
so Dad could have one queue of content, Mom could
have another, you know, etcetera, etcetera. One two fifteen, the
company announced an incredible seven to one stock split that
meant that for every share of stock in Netflix you owned,
(34:13):
you would get six additional shares. The share price would
reduce down to one seventh of their former value. And
I talked about this in an earlier episode, but really quickly.
This approach increases the number of shares, but it decreases
the price per share that maintains the same company value
throughout the process. But it's also a way to encourage
(34:34):
small investors to get on board because the price for
an individual share of stock is lower than it was before.
Netflix also would launch streaming services in Japan, and in
ten at CS Netflix announced it would enter one thirty
new markets across the world, so it was really growing
quickly last year that being seen. At the time of
(34:57):
this recording, the research firm p WC sent out a
survey to learn more about how people were getting their entertainment,
and according to their survey results, seventy three percent of
responded said that they were pay TV customers, so cable
or satellite or something like that responded said they subscribed
to Netflix. So the same number of people not necessarily
(35:20):
exactly the same people, but the same number of people
were now Netflix customers as they were for any sort
of pay TV customers. So this survey suggests that the
US means that streaming is really the direction that we're
moving in. If we've gotten to a point where there's
an equal number of people subscribed to Netflix as there
(35:42):
are for any given pay TV service, or all of
them collected together. That's pretty big news. Meanwhile, there are
these other competing services out there. You've got Hulu, Amazon Video,
You've got the upcoming Disney streaming service. Those are all
muddying the waters and making things more complicated. No service
can boast having all of another services offerings plus more.
(36:06):
So in other words, you're not going to go to
Hulu and see, oh, you have everything Netflix has plus
this other stuff. Where you go to Netflix and say, oh,
you've got everything, Amazon Video has plus this other stuff.
No one has everything. So it's quite possible that if
you want to see certain programming, you're going to have
to subscribe to multiple services that you know, you might say, oh,
(36:26):
I really want that show and I really want this
other show, and unfortunately they're both exclusive to different services. Well,
you have a little option but to subscribe to both
of those services. And this is getting pretty messy as
we're seeing more of these services pop up. It requires
more decisions on the part of the customer, and a
lot of people aren't really thrilled about the idea of
(36:47):
having to sign up to multiple services, so that is
becoming a bit of a complication. And then you also
have premium channels like HBO having their own competing services.
So while there may be a desire to cut the chord,
the alternative seems to be that you're gonna have to
subscribe to two or more services to get what you want,
unless you just happen to except that the limited options
(37:10):
of any one service are exactly what you need. Netflix
is also really big on original programming. There's no surprise there.
They don't have to pay licensing fees and it gives
them an advantage over competing services. So according to indie Wire,
which cited an unnamed source, Netflix is releasing around eighty
two original movies in ten and seven hundred new or
(37:34):
exclusively licensed programs. The content budget for Netflix is an
estimated thirteen billion dollars in and some of that original
programming gets both critical acclaim as well as an eager
reception from Netflix customers. In seventeen, the company garnered nine
one Emmy nominations from its original programming, as well as
(37:58):
eight Academy Award nominations for their original films and even
one an Oscar for Best documentary feature with Icarus, so
not everything on Netflix is fuller house, thank goodness. And
it looks like in the near future, Netflix is going
to focus on sports docuseries as another area to expand in.
(38:21):
So the company continues to pour money into original programming
and to add more to its features. It grows in
more regions, so it's it's opening up more streaming services
across the world, and I expect it will continue to
be a pretty major player in entertainment for at least
the near future. When will we see DVD rentals go away?
(38:45):
Who's to say? I think it's gonna be a while.
Read Hastings actually joked that he would make sure he
would personally deliver the very last DVD that they ever
rent and that would probably be sometime in Whether or
not that prediction remains accurate, that's we got to wait
around see. But that wraps up the story of Netflix
(39:06):
so far. Obviously, the company continues to exist, so I'll
probably have to do more episodes either specifically about Netflix
or related to it in the future. But I think
we've talked about it enough with four episodes back to back, right,
So we're gonna come back in our next episode about
a totally different topic, and I look forward to chatting
with you guys. Then, if you have any suggestions for
(39:27):
future episodes, maybe it's a company or a technology or
a person in tech. Maybe there's someone I should interview,
send me a message, let me know. The email address
for the show is tech stuff at how stuff works
dot com, or drop me a line on Facebook or Twitter,
or the handle of both of those is tech stuff
h s W go check out our merchandise or at
t public dot com slash tech stuff that's t e
(39:49):
public dot com slash tech stuff. Every purchase goes to
help the show, and we greatly appreciate it. And don't
forget pollow us on Instagram and I'll talk to you
again really soon for more on this and thousands of
other topics. Is it how stuff works dot com m
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Karah Preiss
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