Meet Netflix: The Company Changing How We Consume Entertainment

Hey Everyone - Harry here 👋

Welcome to Issue #15 of Deep Dive with Inquisition.

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In this issue, we’ll cover the story of Netflix, the world’s largest streaming platform, used by over 277 million people worldwide. We’ll explore everything from its founding to the strategies that have shaped it into the company it is today.

Early Days of Netflix

Netflix is a global subscription-based streaming media service company. It offers a wide variety of distributed films and TV shows alongside its original productions (e.g., Netflix in-house produced content) and provides video games through its division known as Netflix Games. The company was founded by Marc Randolph and Reed Hastings on August 29, 1997, in Scotts Valley, California, as a DVD-by-mail service; however, it later launched its streaming services on January 16, 2007.

Overview of the Global Streaming Service Industry:

1. According to Forbes, the global video streaming market is valued at $544 billion in 2024, with projections suggesting it will reach $1,902 trillion by 2030.

2. A Forbes Home survey ranks Netflix as the best streaming service based on user experience.

3. The United States streaming market's revenue stands at $43.97 billion.

4. According to Exploding Topics, there are approximately 1.8 billion subscriptions to video streaming services.

5. The average revenue per user (ARPU) in the video streaming market is projected to reach $76.58 in 2024.

6. According to a report from Nielsen, Americans streamed 21 million years’ worth of content in 2023.

The Rise of Netflix: How it was first started:

Let's be honest—who doesn't know Netflix? The company is so popular and well-known that it has become the face of the streaming market and is frequently referenced in various memes. The story of Netflix is filled with both big and small challenges, making it all the more special and interesting.

Netflix began as a DVD rental company when Marc Randolph and Reed Hastings decided to start the company after discussing the idea while carpooling to each other's houses. Randolph was the Marketing Director for Pure Software, a company founded by Hastings, Raymond Peck, and Mark Box, which was sold and merged with Atria Software for $750 million in 1996. After the acquisition, Hastings invested $2.5 million and co-founded Netflix with Randolph, following the successful validation of their theory that DVDs could be mailed without being damaged or broken by sending one from Randolph's house to Hastings'.

Thanks to their strong track records and a rapidly growing market, the founders actively expanded the team. They acquired DVDs to rent and sell to customers, and launched the first Netflix website in 1998, allowing customers to rent and buy DVDs online. That same year, Jeff Bezos attempted to buy Netflix for $15 million. However, Hastings rejected the offer, even though the founders knew Amazon would eventually enter the DVD market and offer a similar service. In 1999, Netflix introduced a revolutionary monthly subscription model, offering unlimited DVD rentals without due dates, late fees, or shipping and handling fees. At the time, ordering rental DVDs online without visiting a store was groundbreaking for both the market and consumers. In 2000, Netflix introduced its now-famous movie recommendation algorithm, which allows users to explore a wide variety of films and TV shows tailored to their tastes based on ratings, watch history, and more.

The company continued to grow despite the impact of the dot-com bubble and the 9/11 attacks in 2001, managing to offer an Initial Public Offering (IPO) in 2002 and surpassing 5 million total users by 2005. However, the journey wasn’t without its challenges, particularly between 2000 and 2002. Before the IPO and the user milestone, the founders attempted to sell the company to Blockbuster in 2001. Blockbuster (Netflix’s competitor from 1997 to 2007 and a DVD rental company) rejected the offer, with CEO John Antioco famously stating, "[t]he dot-com hysteria is completely overblown." Additionally, Netflix laid off 120 employees in 2001 due to the economic downturn caused by the dot-com bubble and 9/11, and the company delayed its IPO by a year.

Despite these challenges, Netflix continued its rapid expansion and dominance in the market. In response to the rise of streaming platforms like YouTube and increased competition from companies like Blockbuster, Hulu, and Apple TV, Netflix decided to transition to on-demand streaming services. The company began by allowing its existing and new DVD rental subscribers to access movies and TV shows online from their PCs or Macs. Netflix then expanded its streaming service by partnering with consumer electronics brands such as Xbox 360, Blu-ray players, and TV set-top boxes. These efforts culminated in the discontinuation of used DVD sales and, most importantly, Netflix's streaming service overtaking DVD shipments in 2009—a pivotal moment for the company and the way we consume media.

How did Netflix became the world’s most popular streaming service and ultimately became the global “Icon” inside the industry?

Just like the story of Wiz, despite the impressive track record of the founding team, success is never guaranteed. From uncontrollable events like the dot-com bubble and 9/11 to acquisition offers (such as Amazon attempting to buy Netflix), and even difficult decisions like demoting your co-founder or firing them altogether, challenges arise.

Did the founding members of Netflix know everything despite their successful backgrounds? As a founder, it's clear that sometimes you need to make the toughest decisions for the company's best interest, even if it means letting go of your co-founder, who may also be a close friend, or navigating through external chaos.

Netflix’s growth came from a continuous series of hypotheses, validation, and product improvement. Its explosive growth didn’t begin until the introduction of the subscription model. The founders predicted that demand for DVDs would increase as more people adopted DVD players over VHS, alongside the growing public adoption of the internet. They also identified key pain points, such as late fees, and addressed them head-on. The founders decided to:

• Introduce a new way of renting DVDs: allowing users to order online and pay a monthly subscription fee instead of incurring a range of fees for rentals and late returns.

• Implement a recommendation system on their website to help users discover the next movie or TV show to rent, based on their inputs like ratings.

By addressing customer pain points and offering additional value through features like the recommendation algorithm, Netflix not only attracted early users but also experienced rapid growth. Moreover, the founders’ mindset of constantly hypothesizing, validating, and improving enabled them to recognize the need to transition to an on-demand streaming model—even after the immense success of the DVD rental subscription model.

By 2024, Netflix generated $33.7 billion in revenue for 2023 and was valued at $292.46 billion as of September 12, 2024. It boasted around 277.65 million total paid subscribers across 190 countries and raised $80 million from institutional investors, in addition to the $400 million from its IPO in 2002.

Below are the strategies that contributed to Netflix’s growth:

1. Validate Your Hypotheses Quickly:
   → One of the most crucial tasks for early-stage founders is testing whether their ideas and hypotheses work. For example, the Netflix founders realized that VHS tapes were costly and prone to damage, which could hurt the business. They opted for DVDs instead, which were more compact, cheaper, and higher quality, despite the early and growing market.

2. Solve Customer Pain Points:
   → Reed Hastings, co-founder and chairman of Netflix, stated that he wanted to start Netflix due to an unpleasant experience with Blockbuster, where he paid a $40 late fee for a DVD rental in 1997—a year before Netflix’s launch. Identifying a pain point from his own experience, Hastings decided to address it, knowing others likely faced the same frustration.

3. Make Tough Decisions—Even If It Means Putting Ego Aside:
   → Reed Hastings wasn’t easy on anyone. Even when the co-founder and CEO wasn’t performing well, Hastings wasn’t afraid to demote his co-founder to COO. Hastings even created a PowerPoint outlining the pros and cons of Randolph continuing as CEO. Randolph accepted the demotion without ego, demonstrating that they both prioritized the company over personal feelings. This provides an important lesson for founders: always evaluate situations carefully and make decisions that will benefit the company, not individual egos.

4. Be Open to Innovation and Change:
   → One reason Netflix became the company it is today is its openness to innovation and change. Unlike its competitors, Netflix has always approached challenges differently. For example, instead of maintaining physical stores, it started mailing DVDs and later transitioned to on-demand streaming after recognizing the potential of platforms like YouTube. These trial-and-error approaches allowed the company to thrive.

5. Leverage Partnerships with Companies that Target Your Audience:
   → When Netflix began transitioning to on-demand streaming, it didn’t just rely on its existing customer base; it also partnered with consumer electronics companies (e.g., Samsung, LG, Sony, Blu-ray players, and Xbox 360). These partnerships enabled Netflix to expand its services both locally and globally. The Netflix app was embedded in partner Smart TVs, often accompanied by a dedicated "Netflix" button on remotes, making it easier for users to access the service. These collaborations contributed to Netflix’s global expansion and its increase in streaming service subscribers.

6. Identify and Create Your Company’s “Special Sauce”:
   → One of Netflix’s “special sauces” is its original content, produced under the “Netflix Original Series” brand. Despite recent announcements that the company will reduce investment in its in-house content, the importance of original content cannot be overlooked. Netflix’s original productions not only attract new subscribers but also drive organic growth and expand its global reach:

Original content:

1. Stands out and becomes a reason for specific customers to subscribe to Netflix.

2. Provides exclusivity, enticing new and existing customers to sign up and pay for the service.

3. Encourages “binge-watching” due to a higher volume of content and the popularity of Netflix’s original series.

7. Leverage Data—Data is Key:
   → Netflix doesn’t just use data to recommend films and TV shows to users. The company collects and evaluates data on nearly every aspect of user behavior—such as binge-watching habits, genres, geographic location, and device usage—to better understand what content to produce and how to meet user needs. Leveraging data gives Netflix the confidence to make strategic decisions, and it allows the company to continue satisfying its user base, which is something all companies should strive for.

8. Constant Hypothesis, Validation, and Improvement:
   → Since day one, Netflix has continuously applied the cycle of hypothesis, validation, and improvement to its products. The company’s transition to on-demand streaming, along with its open competition offering a $1 million cash prize (the "Netflix Prize") to improve its rating algorithm, are just two examples of how the company continually innovates to improve the user experience.

Challenges for Netflix:

1. Navigating through noise and competition:
   → The global on-demand streaming service market is packed with players who have substantial resources, such as capital, a large user base, and the ability to film, produce, and stream content. Competitors like Amazon Prime Video, Disney, and Apple TV are rapidly growing and aiming to take the #1 spot from Netflix by heavily investing in producing exclusive content for their platforms and leveraging their other product lines for promotion. For example, Apple offers a promotion where purchasing an Apple product (e.g., MacBook, iPhone, iPad) comes with a free 3-month subscription to Apple TV+. It will be crucial for Netflix to effectively navigate through the noise and competition, which can possibly be achieved by continuing to provide value and entertainment for the subscription price it charges—whether through adding more exclusive content, producing localized content for specific regions, or diversifying its revenue streams by expanding into new markets (e.g., gaming) or introducing ad revenues through displaying ads on its platform.

2. Are we out of content…? Navigating the content challenges:
   → Producing original series content and maintaining a diverse library of films and TV shows on the platform is increasingly challenging for Netflix. The rise in production costs, coupled with studios (e.g., Disney, HBO) removing content to drive users to their own streaming platforms, adds to these difficulties. One way Netflix can mitigate content-related challenges is by expanding into sports entertainment content. Netflix has already begun this transition by establishing a 10-year, $5 billion partnership with the renowned wrestling content "WWE RAW."

Future of Netflix:

1. More Product Diversification
   → For the past couple of years, Netflix has continued to diversify its revenue streams by expanding into new areas such as gaming and sports entertainment, as well as creating physical goods and pop-up stores to foster both online and in-person community engagement for their original series. For example, Netflix opened a Squid Game-themed pop-up store in Seoul in 2021, and the company will open a “Squid Game: The Experience” center in New York on October 11, 2024, allowing viewers and fans of Squid Game to experience the game in real life. These efforts aim to diversify Netflix's product and revenue streams while investing in the platform's future by capturing new audiences and building its global community.
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2. Expanding into the global market by producing more localized content:
    → Creating and distributing localized content is not only a strategy for diversifying revenue and capturing a user base; it also demonstrates the company’s commitment to building a genuine community within specific regions. This is achieved by using local actors, language, and staff, as well as hosting in-person pop-up stores and events. Additionally, producing more localized content enhances the experience for target audiences, as there is a significant difference between reading on-screen translations or watching dubbed content. We can confidently expect Netflix to continue investing in the production and distribution of localized content, aiming to grow its metrics while fostering both local and global communities.

3. Putting the last piece of the puzzle in place—breaking into gaming to become the “one-stop shop for entertainment” or the “all-in-one for entertainment.”
   → Despite briefly mentioning its expansion into the gaming market, it is important to understand that Netflix does not view this move as a “quick and easy way to make money.” The capital and labor investments involved, along with the effort to diversify and scale further, suggest that Netflix is aiming to become the “all-in-one” for entertainment. Currently, Netflix offers entertainment through films, TV shows, award-winning documentaries, and will start sports streaming in 2025. The missing piece in this massive puzzle is gaming. For instance, the global gaming industry is expected to generate $282.30 billion in 2024. This rapidly growing market represents a lucrative opportunity for Netflix to increase its user base, revenue, and product diversity, as well as to enhance engagement on its platform by continuously introducing various genres of games. These efforts reflect the company's ambition to become the “one-stop shop” or “all-in-one” platform for entertainment.

Key Takeaways from the Story of Netflix:

The story of Netflix is marked by continuous hypothesis testing, change, improvements, and adaptation to new developments in the world. From introducing a new way of renting and receiving DVDs to transforming content consumption and aiming to become the “all-in-one for entertainment” platform, the story captures both the highs and lows of running a startup and scaling it into one of the world’s most successful and largest companies while maintaining innovation.

One key lesson for founders and professionals is the importance of having difficult conversations and putting aside ego when necessary. Would Netflix be where it is today if Reed Hastings had not had the tough conversation with Marc Randolph about his effectiveness as CEO? Probably not. Would Netflix exist if Marc Randolph had not set aside his ego when Hastings asked him to step down as CEO? Probably not. Many people tend to ignore issues and hope they will resolve themselves, but in business and the professional world, this approach is ineffective. Taking responsibility for one's actions and setting aside ego for the company's future is crucial, alongside having a great concept, continuous validation, and product improvement.

Finally, in an era where data is increasingly influential, leveraging data for everything—from feature development to decision-making—will be essential. Netflix's story is not only a successful example of effectively leveraging data but also offers important lessons on the significance of data use, the value of continuous innovation and validation, the willingness to make radical transitions with a plan, and the importance of making decisions for the company rather than for individuals.

Below are the key strategies that Netflix used to become the company it is today:

1. Drop the Ego and fear of doing/listening to “Scary Talks”:
    → Never be afraid to have “scary talks” and make decisions related to your company simply because of your ego. For many individuals and companies, ego is a major barrier to growth. One of the most important lessons from the story of Netflix is that every founder needs to prioritize the company’s needs over personal ego. The founders of Netflix exemplified this by making tough decisions and having difficult conversations, demonstrating that putting ego aside is essential for the company’s success.

2. Data is going to eat the world:
    → Netflix has leveraged user data since its early days. Why? Because data enables the company to make better decisions that are beneficial to its user base. One of the many reasons Netflix has become the company it is today is its effective use of user data to understand and meet customer needs and wants. For example, the recommendation algorithm uses a user’s watch history, duration, ratings, and more to suggest movies and TV shows that the user is likely to enjoy. Additionally, Netflix leverages data to predict and create popular content for its exclusive “Netflix Original” series. These examples illustrate how successfully using data can help identify, satisfy, and expand its user base.

3. What is your company’s 'secret sauce'? Identify, develop, and master it:
   → Every company should have its own "secret sauce"—the key factors that drive people to sign up, use, share, and engage with their product. Netflix’s secret sauce includes features such as its recommendation algorithm, original content, and data-driven methods designed to enhance user engagement and encourage binge-watching. These features and strategies didn’t develop overnight; they resulted from Netflix identifying, developing, and mastering its secret sauce over a long period. It is crucial for every founder, business owner, and executive to identify, develop, and master their company’s secret sauce to attract new users, retain existing ones, and scale their user base.

4. Always innovate, even if it means changing everything.
   → When Netflix began its transition to on-demand streaming, its DVD rental service was thriving and growing every year. Despite its success and the fact that competitors were copying its model (e.g., Blockbuster started online DVD rental and mail delivery after Netflix became a prominent player in the industry), nothing stopped the company from continuing to innovate and push forward. The decision to transition was driven by the company's constant quest for innovation that would enable further scaling. Reed Hastings was correct: the rapid rise of streaming services in the mid-to-late 2000s and early 2010s signaled a clear opportunity for the company to pivot. This shift wouldn't have happened if Netflix hadn’t consistently pursued innovation, even if it meant starting from scratch.

5. Leverage partnerships effectively:
   → Netflix provides us with a very important lesson on the value of forming partnerships and leveraging them effectively. By successfully identifying target customers and their locations, Netflix has actively formed partnerships and achieved the following:

   • Easier Access for Existing Users: Netflix made it simpler for existing streaming users to access the platform directly from their consumer electronic devices, reducing friction and leading to increased platform usage.

   • Growth in New Customers: The partnerships have led to an increase in new customers signing up, positively impacting the number of users joining and paying the monthly subscription fee.

   • Building Community: Netflix has used partnerships to build both online and in-person (IRL) community interactions, growing its community for the company itself and for popular Netflix Originals such as Stranger Things and Squid Game.

Through strategic partnerships with companies ranging from consumer electronics to consumer brands, Netflix has established itself as the world’s #1 entertainment streaming platform and continues to scale through its online and in-person community efforts. This approach is something that enterprises, from startups to large companies, should consider: leveraging strategic partnerships with entities that have target customers and offer mutual value.

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Thank you so much for reading!

-Harry