Netflix - Why They're Successful

[Music] i couldn't even tell you how much time i've spent watching netflix today we all think of them as this video streaming service but i'm sure many of you remember they actually started out by renting dvds through the mail that was their entire business for nine years that built them up to a billion dollars in revenue and put them in a perfect position to lead the streaming market so today i'm gonna focus more on the dvd years as i talk about how netflix was built and highlight some of the key reasons behind their success there were two guys that started netflix together they were mark randolph and reed hastings now you may have heard this one the popular story is that reid rented a vhs copy of apollo 13 from blockbuster lost it for a while and then when he finally returned it six weeks later he was charged a forty dollar late fee i guess his experience made him upset with their policies and motivated him to create something better from what i can tell that story is not true it's a good story i can see why they would want it to be true it's actually the perfect story it puts down their biggest competitor in a relatable way while highlighting a reason that they themselves are better and that they don't charge late fees it's almost a little too convenient over the years reid has been the main person to promote it but each time he tells it the details are a little inconsistent plus his co-founder mark randolph has come out and said that it's completely fabricated the founding stories are just that they're stories they're constructs that we come up with to take what's a very messy process with input from many many people and condense it into a story which we can get across in a sentence or two he says that's the story that the press chooses to run because that's what people want to hear i think it's pretty clear what's happening here so i'd like to talk about what actually happened i had to piece it together a bit but this is very consistent with randolph's version of it see before netflix they were both working in silicon valley software industry in 1991 reed hastings was a co-founder and partial owner of a company called pure software within five years that company had grown so large that they were involved in a near billion dollar merger with a similar company called atria which formed a new company called pure atria soon after they acquired a much smaller startup company it only had nine people but one of those nine people was mark randall he soon became the head of marketing where he would work with reed the two were also involved in this carpooling thing because they live close together and through all of it they became friends well about a year after the big merger there was even more consolidation when rational software acquired pure atria it was a move that meant that reid and randolph would soon be leaving the company they were caught in this weird transition period where they had to stay for a few months while the deals were finalized so day to day there wasn't too much going on for my first reason for their success i'm gonna say that these were pretty incredible circumstances when it comes to starting a new business it's hard to even imagine better ones they had the time money and experience to think of something and make it happen according to randolph they spent those morning commutes trying to figure out their next big business idea he says that he would even spend a portion of a slow day at work researching those ideas early on they established that an e-commerce company was the way they wanted to go this was 1997 internet sales were growing and they correctly predicted that they would continue to do so but they didn't know what to sell at one point they were gravitating toward the idea of movies but they were all on vhs still and they quickly concluded that shipping vhs tapes would not allow for a profitable business but then dvds that's my second reason behind their success because these two had to be among the first people out there to learn about them take them seriously and actually see their potential in the united states dvds were released in early 1997 and these two were investigating them almost immediately early on they actually wanted to test how a dvd would hold up being sent through the mail but they were so new and obscure that they could not find one and were forced to test it with a cd instead the test went well of course and in april of 1998 they started netflix everything was lining up here it's strange to think that if dvds had not been introduced right at that exact time netflix would likely have never existed i would go so far as to argue that the obscurity of dvds is the biggest reason that they made it through the first couple of years when the service first launched they offered 7 day dvd rentals for the price of four dollars plus two dollar shipping in addition to selling new dvds in fact for their first year they actually brought in more money from selling them rather than renting them we can see their prices were a little steep but considering dvds were still so new and hard to find the customer didn't have many other options which leads me to my next reason moving their focus to the rentals in march of 1999 they completely stopped selling new movies which i would consider to be a bold move to completely cut off their main source of revenue for that year the sales accounted for only three percent of their revenue from those first couple of months and by the year 2000 it was zero percent they did this because they felt that it was necessary they realized that they were getting sales because of that extreme lack of competition but what would happen once that competition started catching up if dvds were in fact the next big thing which they were it meant that they would soon be sold in stores across the country and at that point what good is netflix they knew that they were heading down a bad path and felt that the rentals would be the thing to make them stand out but when you account for shipping they were still six dollars each which leads me into my next reason switching into a subscription model in september of 1999 they announced their first ever monthly subscription plan they called it their marquee program it consisted of four rentals for 15.95 a month including shipping that was quickly adjusted a few months later to 19.95 a month but now it was for unlimited rentals you just couldn't have more than four at a time which was then shifted to three at a time a few months after that it was big for them in that it established all these reoccurring customers and due to the structure of the program there were no due dates or late fees blockbuster had due dates and late fees which people hated so this gave them more reason to switch over to netflix that's how you know that apollo 13 rental story is fake by the way netflix did have due dates and late fees for the first year and a half so that excessive late fee didn't motivate him to start a company without late fees because the company he started did in fact have late fees it just doesn't make sense alright next up and you have to respect this one netflix always thought in the long term meaning that they were never too concerned with making some quick money they were always thinking ahead and trying to build something that would last i think i've already showed this in a couple of ways but my favorite one is internet income i like it because it's a perfect example of sacrificing something now so you can have more later for their first five years netflix made no money over that span they lost over a hundred and fifty million dollars the reason they were able to keep things running was because they did have believers in the beginning it was reid hastings himself investing money that he had from the sale of his previous company in 1999 they had received 30 million dollars in funding from a venture capitalist and the big one in 2002 they raised 82 million dollars through a public stock offering and a big reason that they weren't making any money is their marketing expenses that's my next reason as i just talked about financially they found a way to get away with it but netflix went crazy with their marketing budget they would run advertisements all over the internet they would have traditional tv and radio commercials send people emails prints in their actual mail they would offer free trials of their service that were very effective because something like 90 percent of them would lead to a paid subscription they had all these deals with stores or the companies that made dvd players that put these little inserts in the box or the deal was to run these promotions where people who bought the dvd players would receive free rentals toshiba apple hp best buy they were working with all of them in various ways to get the netflix name out there it was kind of like they were paying to create all these little sparks all over the place that would eventually grow into their own sustainable fire this graph represents their marketing costs as a percentage of their revenue their first few years were just outrageous remember if this is over a hundred percent that means that they're spending more money on marketing than they're making which means even if they had no other expenses they still wouldn't be turning a profit but as time went on they brought that percentage down i want to point out that their marketing expenses are almost always going up it's just that their percentage has dropped because their revenue has gone up more i'm gonna combine the next two and say their selection along with their recommendations i put them together because they're both ways that the customer ends up with a better movie when netflix started there were about one thousand dvd titles in print and they offered 925 of them through those dvd years they always offered a high percentage of what was available much higher than you would find at your typical blockbuster or video rental store in the year 2000 they started these revenue sharing agreements with the studios that allowed them to get discounts when they bought a high volume of dvds and within a couple of years they had these deals in place with over 50 distributors as far as their recommendations cinematch i don't know how it works but it's their computerized system for recommending movie titles they started in the year 2000 and that's proven to be effective it's based on what you watch and the ratings you give it and how those ratings compare to the ratings of others i don't know but considering their biggest competition in this area at the time were the recommendations from the guy who worked at blockbuster i'd say it helped separate them finally we all know where this is headed streaming in 2004 they announced this partnership with tivo saying that they would work together to develop an effective way to stream movies over the internet to people's homes everyone was excited about this being able to watch movies through your tivo device but it actually took four years for anything to happen here in reality the first netflix streaming was offered in 2007 through their watch now service it was provided as more of a bonus to the people who already subscribed to the dvd service i wouldn't say it was a great service it only offered about five percent of the titles available through the mail but it was a start and offering it to their existing customers was an effective way in getting them to make that transition with them from dvds to streaming which was obviously important today streaming accounts for over 98 of their revenue there is too much to say about this so let me know if you want me to talk about it in a separate video possibly detailing the transition the competitors quickstart was a disaster it's helped lead to the production of netflix originals i mean since the introduction of streaming they've raised their revenue from 1 billion to 20 billion but for now i'm gonna leave it at that let me know in the comments do you agree with my reasons it's not a complete list but i found those to be the most significant also what do you think of netflix are you one of their 180 million subscribers and if you are when did you join have you ever received one of those dvds through the mail maybe you were one of the original supporters back in the 90s maybe you're still part of their dvd plan so any thoughts you have about any of it leave them in the comments i'd like to hear what you have to say thank you for watching

Channel: Company Man

Views: 354,602

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Id: YdEp9MK153c

Length: 12min 9sec (729 seconds)

Published: Wed Dec 02 2020